Commercial Label in Sale Deed Not Enough to Deny Section 54 Relief: ITAT Delhi

Raj Krishan Gupta Vs ACIT (ITAT Delhi)

The Income Tax Appellate Tribunal (ITAT), Delhi, partly allowed the assessee’s appeal against the order of the Commissioner of Income Tax (Appeals) for Assessment Year 2015-16. The appeal involved denial of deduction under Sections 54/54F, addition under Section 56(2)(vii), and disallowance of indexed cost of acquisition.

The assessee had filed his return declaring income of ₹91.58 lakh. The case was selected for limited scrutiny due to a mismatch relating to capital gains on the sale of land or building and increase in capital. During assessment, the Assessing Officer (AO) made an addition under Section 50C, disallowed the exemption claimed under Sections 54/54F amounting to ₹88.41 lakh, made an addition of ₹24 lakh under Section 56(2)(vii), and disallowed portions of the indexed cost of acquisition relating to two properties. The Commissioner (Appeals) upheld these additions.

The principal dispute concerned the deduction under Sections 54/54F claimed on the sale of property at M-21, Greater Kailash Part II, New Delhi. The AO denied the deduction on the ground that the sale deed described the property as “commercial” and that the assessee owned more than one residential house, thereby making him ineligible for exemption under Section 54F.

Before the Tribunal, the assessee submitted that although the property was described as commercial in the sale deed, only the ground floor consisted of shops, while the basement and upper floors were residential and were occupied by the assessee and his brothers. To support this contention, the assessee relied upon the completion certificate, building plans, municipal records, house tax receipts, passport, voter identity card, LIC policy, electricity bills showing domestic tariff, valuation reports describing the property as commercial-cum-residential, and the assessment order of his brother, a co-owner of the same property, where deduction under Section 54 had been allowed. The assessee also argued that the Kalkaji basement property was commercial and not residential, and therefore he did not own more than one residential house for the purposes of Section 54F.

The Tribunal observed that although the sale deed described the property as commercial, the completion certificate, maps, house tax receipts, and valuation reports demonstrated that the upper floors were residential and were occupied by the assessee and his brothers. It noted that the property was commercial-cum-residential, that the assessee had invested the sale consideration in another residential property, and that in the case of the assessee’s brother, involving the same property, deduction under Section 54 had already been accepted by the Assessing Officer. The Tribunal held that the ground floor could be treated as commercial while the remaining floors were residential. It directed that the sale consideration attributable to the residential portion should be determined and treated as the sale consideration for the purposes of Section 54. Accordingly, Grounds 1 and 2 were allowed.

Regarding the addition of ₹24 lakh under Section 56(2)(vii), the Tribunal noted that the assessee had purchased a property for ₹78 lakh whereas the stamp duty value was ₹1.02 crore. Since the assessee had disputed the stamp valuation before the AO and the Commissioner (Appeals), the Tribunal held that the AO ought to have referred the valuation to the Departmental Valuation Officer (DVO) instead of directly making the addition. Relying on an earlier coordinate bench decision, the Tribunal restored the matter to the AO with directions to obtain a DVO valuation and thereafter decide the issue in accordance with law. Grounds 3 and 4 were allowed for statistical purposes.

No submissions were made on Grounds 5 and 6 relating to the indexed cost of acquisition, and these grounds were dismissed. Ground 9, being general in nature, was not adjudicated, while Ground 10 relating to interest was held to be consequential. The appeal was accordingly partly allowed.

FULL TEXT OF THE ORDER OF ITAT DELHI

1. This appeal is filed by the assessee against the order of the Ld. Commissioner of Income-tax (Appeals)-27, New Delhi [hereinafter referred to as ‘ld. CIT (A)]dated 28.05.2025 for the Assessment Year 2015-16.

2. Brief facts of the case are, assessee filed his return of income for Assessment Year 2015-16 on 19.09.2015 declaring an incomeofRs.91,58,530/-. The case was selected for limited scrutiny through CASS for the reason of mismatch in income/capital gains on sale of land or building and increase in capital. Accordingly, notices under section 143(2) were issued and served on the assessee. In response, ld. AR of the assessee attended and submitted the relevant information as called for.

3. The assessee is engaged in the business of trading of shares and mutual funds. Apart from that, assessee is also engaged as insurance advisory and maintains mercantile system of accounting. The AO observed that assessee has calculated capital gains as under:-

4. After verifying consideration mentioned in the sale agreement, he noticed that stamp duty mentioned in the agreement is Rs.12.95 crores whereas final consideration declared in the agreement is Rs. 12.31 crores. Assessee being one of the co-owner of the property, he made an addition of Rs.12,80,000/-u/s 50C of the Act in the hands of the assessee.

5. Further the AO observed that assessee has claimed deduction u/s 54F of the Act to the extent of Rs.88,41,618/- against the sale of property, M-21, Greater Kailash Part II, New Delhi. After considering the sale deed, the AO issued a show-cause notice to the assessee why deduction claimed u/s 54F should not be disallowed.

6. In response, ld. AR of the assessee submitted the reply and AO found it not acceptable for the following reasons :-

i. The plan of the property clearly shows that basement and the ground floor were used for commercial purposes and the registration of the property also describes the type of property as “Commercial”. The Act specifically allows the deduction u/s 54 for a residential house which is not the case here. Hence, the deduction cannot be allowed. Further, the assessee has another property E-492, Greater Kailash Part-II, New Delhi, which is his self-occupied residential property. The assessee has also shown this as a self-occupied residential property in his computation of income. Further, the sale deed of M-2 1, GK Part-II, New Delhi clearly mentions the property as commercial. Hence deduction u/s 54 cannot be claimed by the assessee.

ii. Further the assessee has claimed that if not u/s 54 the deduction is clearly allowable u/s 54F. The benefits of section 54F cannot be allowed to an assessee, if the assessee owns more than one residential house, other than the new asset on the date of transfer of the original asset. Here in our case we can see that the assessee has purchased another asset purchased another asset F-24, Basement Kalkaji, New Delhi on 25.09.2014. He already owned another house property B­492, Greater Kailash Part-II, New Delhi which was his self occupied property. The date of sale of the original asset is 26.09,2014. Hence he was owner of more than one residential property other than the new asset on the date of transfer of the original asset. This is evident from the computation of income from house property submitted by the assessee himself.

7. Accordingly, he disallowed the exemption claimed u/s 54/54F of the Act.

8. Further the AO observed from the documents submitted by the assessee that the assessee has paid a consideration of Rs.78,00,000/- for the purchase of Property, E-383, Basement, Greater Kailash Part 2, New Delhi although consideration amount of stamp duty is Rs.1,02,00,000/-. Accordingly, he invoked the provisions of section 56(2)(vii) of the Act and treated the difference as income of the assessee to the extent of Rs.24 lakhs.

9. Further the AO made addition of Rs.37,74,283/- and Rs.54,89,032/-disallowing the index cost of acquisition for the properties at S-330, GK Part I, New Delhi and M-21, GK Part 2, New Delhi respectively.

10. Aggrieved, assessee preferred an appeal before the ld. CIT (A) who sustained the additions

11. Aggrieved against the aforesaid order, assessee is in appeal before us raising following grounds of appeal :-

1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in not allowing the benefit of deduction of Rs.88,41,618/- u/s 54/54F and more so when claim has been made by the assessee as per law and the said deduction has been denied by recording incorrect facts and findings and without observing the principles of natural justice.

2. That in any case and in any view of the matter, action of Ld. CIT(A) n confirming the action of Ld. AO in not allowing the benefit of deduction of Rs.88,41,618/- u/s 54/54F, is bad in law and against the facts and circumstances of the case.

3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making addition u/s 56(2)(vii) of Rs.24,00,000/- (i.e. Rs.1,02,00,000 – Rs.78,00,000) on the ground that assessee has purchased the property allegedly at less than the stamp value and that too by recording incorrect facts and findings and without observing the principles of natural justice.

4. That in any case and in any view of the matter, action of Ld. CITA) in confirming the action of Ld. AO in making addition of Rs.24,00,000/-(i.e. Rs.l,02,00,000 – Rs.78,00,000) u/s 56(2)(vi), is bad in law and against the facts and circumstances of the case and without jurisdiction and without complying with mandatory conditions as per law.

5. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making disallowance of Rs.37,74,283/- out of the indexed cost of acquisition for the property S-330, Greater Kailash. Part-1. New Delhi on the basis of alleged difference between the valuation done by the department and the assessee and that too by recording incorrect facts and findings and without providing entire adverse material on record and without providing the opportunity of cross examination and without observing the principles of natural justice and without complying with mandatory conditions as per law.

6. That in any case and in any view of the matter, action of Ld. CITA) in confirming the action of Ld. AO in making disallowance of Rs.37,74,283/- to the indexed cost of acquisition for the property S-330, Greater Kailash, Part- 1, New Delhi, is bad in law and against the facts and circumstances of the case.

7. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in conforming the action of Ld. AO in making disallowance of Rs.54,89,034/- out of the indexed cost of acquisition for the property M-21, Greater Kailash, Part-II, New Delhi on the basis of alleged difference between the valuation done by the department and the assessee and that too by recording incorrect facts and findings and without providing entire adverse material on record and without providing the opportunity of cross examination and without observing the principles of natural justice and without complying with mandatory conditions as per law.

8. That in any case and in any view of the matter, action of Ld. CIT(A) in confirming the action of Ld. AO in making disallowance of Rs.54,89,034/- to the indexed cost of acquisition for the property M-21, Greater Kailash, Part- II, New Delhi, is bad in law and against the facts and circumstances of the case.

9. That in any case and in any view of the matter, action of Ld. CT(A) in confirming the action of Ld. AO in making additions/disallowances in the Impugned assessment order is illegal, void ab initio, contrary to law and facts, beyond jurisdiction and without observing the principles of natural justice and deserves to be quashed.

10. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not reversing the action of Ld. AO in charging interest u/s 234A and 234B of the Income Tax Act, 1961.”

12. At the time of hearing ld. AR of the assessee submitted as under :-

1. Grounds No. 1 & 2 relate to not allowing an exemption/deduction of Rs. 88,41,618/- u/s 54 or alternatively u/s 54F on the following grounds:

i. If deduction has been claimed u/s 54, the allegation is that the property sold (M-21, GK-II) was not residential butwas commercial.

ii. If deduction has been claimed u/s 54F, then the allegation is that the assessee owns more than one residential house as on the date of transfer of property, disentitling him from the exemption u/s 54F.

Ld. AO has discussed this issue at pg. 5-7 of the Assessment Order. Ld. CIT (A) has discussed this issue at pg. 42-45 of the Appeal Order.

(i) Capital Gains arose on the transfer of property situated at M-21, GK-II, New Delhi, which has been alleged to be a commercial property and not a residential house.

In fact, the said property was SCF i.e. Shop at ground floor and Flats on all other floors.

Following would prove that the basement, 1^st floor, 2^nd floor & 3^rd floor of the said property were residential, and merely because the property was categorized as ‘commercial’ in revenue records, would not mean that such property was not used for residential purpose and the assessee be disentitled for exemption u/s 54.

PB 58-75 (59) is the copy of the sale deed of property situated at M-21, GK-II, New Delhi, owned by 5 brothers (one of whom was Ashok Kumar Gupta), showing this property as ‘commercial’, though we would prove that the basement, 1st floor, 2nd floor & 3rd floor were actually used as residential property.

PB 19-23(22,23) is our submission dated 19.12.2017 to Ld. AO that the basement, I^st, II^nd& III^rd floors were being used as residential property by the assessee and his brothers.

PB 130is communication from MCD for adjacent property namely M22, which also shows that the ground floor on such properties in GKII constituted commercial property, whereas the basement and the three upper floors were residential property and if such residential property was being used as commercial, violation charges were required to be paid.

PB 136-137, 138-140 are the copy of the Completion Certificate and maps showing upper floors as residential property.

PB 226 is the copy of passport showing this as the address.

PB 224is the copy of the Voters’ ID card showing this as the address.

PB 225is the copy of the LIC policy showing this as the address.

PB 227is the copy of the house tax receipt showing this as the address.

PB 89-94 (90,94)is the valuation report of registered valuer dated 15.10.2024 (made by Upadhye And Associates), showing this property as commercial cum residential.

PB 95-103 is another valuation report from registered valuer (made by KCA Pal & Associates), which describes this property as commercial cum residential.

PB 187-188 are the electricity bills, showing electric tariff category as ‘domestic’.

CLC 96-106 is the copy of the assessment order for AY 2015-16 of the assessee’s brother & Co-owner Sh. Ashok Kumar Gupta, which also shows that he was residing in this very property, and this very issue of the commercial nature of the property was raised in this case, and based on the inspector’s report, the deduction u/s 54 was allowed to him in respect of upper floors and 54F was allowed to him qua ground floor.

PB 189-223 (205-210) is the submission before Ld. CIT(A) on this very issue, and also on alternative plea (PB 210) is that if the ground floor is treated as commercial, then also qua other floors, capital gains would come to Rs. 1,02,49,137/- against which deduction u/s 54 of Rs. 88,41,896/- would be allowable.

(ii) If M-21, GK-II, New Delhi property is taken as commercial, then also the assessee is entitled for exemption w/s 54F and the allegation that the assessee was owner of more than one residential property (another being F-24, Basement, Kalkaji, New Delhi) is not correct.

PB 104-129 is the purchase deed of the property situated at 383, Block E, GK-II, which has been categorized as a residential property, purchased to claim the said deduction.

PB 54-57 (57) is the submission before Ld. AO, that the property F-24, Basement, Kalkaji, New Delhi is a COMMERCIAL property, and NOT A RESIDENTIAL property, and municipal tax is also paid as a commercial property, and there is only one other residential property owned by the assessee E-492, Ground Floor, GK-II, New Delhi.

PB 131-135 are the copies of municipal tax receipts, showing that the property F-24, Basement, Kalkaji, New Delhi was commercial.

Therefore, viewed from only angle, the assessee was entitled for deduction u/s 54/54F.

Adverse Observations of CIT(A) order:

1. In paragraph no. 6.5,at pg. 44, it is mentioned that the claim u/s 54 cannot be based on the ground that the property was used for residential purposes. There should be some legal basis to support the claim as sale deed describes the property as commercial property.

It is submitted that Section 54 regarding “Profit from Sale of Property used for Residence” uses the words “being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head ‘Income from House Property’. From the heading as well as from the words used as aforesaid, it can be fairly interpreted that a property used for residence will be a residential house.

Merely categorisation of the property in sale deed as commercial will not deprive the assessee to get benefit u/s 54 as seen from actual user point of view.

In this connection, reliance is placed on following judicial precedents:

• Sanjeev Puri vs. Deputy Commissioner of Income-tax, Circle 37(1), New Delhi, [2016] 72 com 147 (Delhi-Trib.) (CLC 1-8, para 8.7)
• Rasiklal Satra, [2006] 98 ITD 335 (Mum) (CLC 9-12, para 6)
• CIT vs. Ouseph Chacko [2004] 271 ITR 29 (Ker) (CLC 13-14),

2. In paragraph no. 6.6,at pg. no.44 CIT(A) has mentioned that it cannot be ascertained whether electricity bill pertains to this very property.

In this connection, it is submitted that the bill pertains to the same property as there is no Barsati Market in Greater Kailash-II. The details in the bill refers to the Barsati Floor, i.e. Second floor. Further, ‘MS’ stands for refers M BLOCK, Shopping Complex. Therefore, the bill is in respect of second floor of the same property.

3. CIT(A) has made reference to assessee’s submission in paragraphs no. 6.7 and 6.8 at pg. no.44, that valuation reports mention the property as commercial cum residential property time and again. This is not a legal declaration and cannot be considered as documentary evidence for categorisation of the property.

In this connection, it is submitted that the report of K.C.A. Pal & Associates (PB 95-103) specifically mentions that the report is made on the basis of inspection and survey of the building on 10.12.2017. Thus, categorisation as commercial cum residential building cannot be negated.

CLC 96-106 is the copy of the assessment order for AY 2015-16 of the assessee’s brother, Sh. Ashok Kumar Gupta, which also shows that he was residing in this very property, and this very issue of the commercial nature of the property was raised in this case, and based on the inspection report, the deduction u/s 54 was allowed to him.

4. In paragraph no. 6.10at pg. 45, alternative claim u/s 54F has been denied on the ground that the assessee owned more than one residential house, other than new asset on the date of transfer of original asset.

Ld. CIT(A) has not made a mention of residential property owned by the assessee other than property situated at E-492, Ground Floor, Greater Kailash Part – II, New Delhi. Presumably, he is considering property situated at F-24, Basement, Kalkaji, New Delhi as residential property. However, he did not take into account the fact that this property F24, Basement was converted into commercial property on 15.06.2010 (PB 131-135). Thus, it is reiterated that at the time of sale, the assessee owned only one more residential property other than the new property.

Thus, Ground nos. 1 and 2 may be allowed.

Grounds No. 3 & 4 relate to the addition u/s 56(2)(vii) of Rs. 24,00,000/- on the ground that the assessee purchased this property at Rs. 78.00 lakh whereas its circle rate was Rs. 102.00 lakh.

Findings of Ld. AO are contained in page nos. 7 to 10 of the assessment order.

Findings of Ld. CIT (A) are contained in page nos. 45-46 of the appeal order.

Argument of the appellant is that it was incumbent on the Ld. AO to refer the matter to DVO as a result of dispute raised by the appellant in terms of section 56(2)(vii).

PB 104 to 129 contain the Sale Deed dt. 31.10 2014, which shows purchase consideration at Rs.78.00 lakh and Value as per circle rate at Rs.102.00 lakh.

PB 19-23 are submissions dt. 19.12.2017 before Ld. AO, disputing the valuation.

PB 189-223 (210-213) are the submissions before Ld. CIT (A), disputing the valuation.

Following judicial decisions are relied upon, which say that where valuation is disputed, it is mandatory for Ld. AO to refer the matter to DVO.

• RC Kannan and Smt. Kannan Manonmani vs. The principal Commissioner of Income Tax, WP No 5763 and 5764 of 2020 dated 21.12.2024 (CLC 15-44)
• ITO vs. Aditya Narain Verma (HUF) (2017) 57 ITR (Trib) 0449 (Delhi ITAT) (CLC 45-55)
• ITO,114 TTJ841(JD),ITAT, Jodhpur Bench (CLC 56­58)
• Shoib vs.Dy.CIT,29 DTR306(ITAT Lucknow ‘B’)(CLC 59-75)
• CIT(2015)372ITR0083(Cal HC) (CLC 76-80),

In view of these cases, it requested that addition made u/s 56(2)(vii) may be deleted, and grounds no 3 and 4 may be allowed.

13. On the other hand, ld. DR of the Revenue relied on the orders of the lower authorities.

14. Considered the rival submissions and material placed on record. With regard to Ground no 1 and 2, we observed that the assessee had sold the property situated at M-21. GK-II, New Delhi, which has shops at the ground floor and flats on one to four floors were residential, where the assessee along with his brothers were residing. As per the agreement, it was shown as commercial property however, the other documents like completion certificate and maps indicate that the upper floors were residential property, resided by the brothers and the assessee. Even the house tax receipt shows that it is residential property, the relevant receipts are part of the paper book. Further the registered valuer namely Upadhye and Associates had valued the property as commercial cum residential and also by KCA Pal & Associates. All these documents clearly indicate that the property sold by the assessee along with his other brothers is commercial cum residential property. The assessee had invested the sale consideration in the another residential property at 383, Block E, GK II. Since the assessee alongwith his brothers was residing in the commercial cum residential property, the assessee had 1/5^th share in the property, what is relevant is that the assessee had invested the sales consideration received from the commercial cum residential property, the ground floor may be considered as commercial however, the other floors were utilized as residential, the benefit of sale of residential property should be given to the assessee, the property was sold for 12.95 crores, the same may be apportioned and sale consideration relating to the residential property may be determined, the same may be treated as sale consideration for the purpose of section 54 of the Act.

15. Further we observed that in the case of Mr. Ashok Kumar Gupta, another brother of the assessee, in whose case, the deduction u/s 54 was accepted by the AO, the relevant assessment order is placed on record, relating to the exact same property. Therefore, there is merit in the submissions of the assessee, therefore, we are inclined to allow the grounds 1 and 2 raised by the assessee.

16. With regard to ground no 3 and 4, we observed that the assessee had purchased property at E-383 Basement, GK Part II, New Delhi at the actual consideration of Rs.78 lakhs whereas the stamp duty value was determined at Rs. 1.02 crores and the assessee had paid the relevant stamp duty. It is fact on record that the assessee had disputed the above valuation, which was filed before AO/CIT(A). In the scenario, the AO should have referred the matter to the DVO, however, he proceeded to treat the same as income u/s 56(2)(vii) of the Act. We observed that in the case of Aditya Narain Verma (HUF), the coordinate bench had held that the AO should have referred to the DVO by observing as under:

“4.1 On the very perusal of the provisions laid down under section 50C of the Act reproduced hereinabove, we fully concur with the finding of the ld. CIT (Appeals) that when the assessee in the present case had claimed before Assessing Officer that the value adopted or assessed by the stamp valuation authority under sub section (1) exceeds the fair market value of the property as on the date of transfer, the Assessing Officer should have referred the valuation of the capital asset to a valuation officer instead of adopting the value taken by the state authority for the purpose of stamp duty. The very purpose of the Legislature behind the provisions laid down under sub section (2) to section SOC of the Act is that a valuation officer is an expert of the subject for such valuation and is certainly in a better position than the Assessing Officer to determine the valuation. Thus, non-compliance of the provisions laid down under sub section (2) by the Assessing Officer cannot be held valid and justified. The Hon’ble jurisdictional High Court of Allahabad in the case of Shashi Kant Garg (supra) has been pleased to hold that it is well settled that if under the provisions of the Act an authority is required to exercise powers or to do an act in a particular manner, then that power has to be exercised and the act has to be performed in that manner alone and not in any other manner. Similar view has been expressed by the other decisions cited by the ld. AR in this regard hereinabove. The first appellate order on the issue is thus upheld. The grounds are accordingly rejected.”

In this case, the addition was made u/s 56(2)(vii), we are inclined to remit this issue back to the file of AO with the direction to refer this case to the DVO and determine the proper valuation and then decide the issue as per law. In the result, grounds 3 and 4 raised by the assessee are allowed for statistical purpose.

17. With regard to Grounds No.5 and 6, no submissions were made at the time of hearing, hence the same are dismissed as such.

18. Ground No.9 is general in nature, hence not adjudicated and Ground No.10 is consequential in nature.

19. In the result, appeal filed by the assessee is partly allowed on the above terms.

Order pronounced in the open court on this 17^th day of April, 2026.