Sanjay Baburao Parab Vs ITO (ITAT Pune)
The assessee appealed against the order of the Commissioner of Income Tax (Appeals)/NFAC confirming the addition of long-term capital gains of ₹2,31,79,498 and the denial of exemption under Section 54F of the Income Tax Act arising from a development agreement executed on 17.09.2016. The assessee contended that the Commissioner (Appeals) failed to determine the foundational issue of whether any “transfer” had taken place within the meaning of Section 2(47), particularly Section 2(47)(v), read with Section 53A of the Transfer of Property Act, 1882. The assessee further argued that no monetary consideration, built-up area, or enforceable right to receive consideration had accrued, that the development agreement was cancelled on 09.07.2020 after the developer failed to perform, and that the cancellation deed and stay order under Section 220(6) were not considered. The assessee also challenged the denial of exemption under Section 54F and the addition of capital gains, relying upon judicial authorities referred to in the grounds of appeal.
For Assessment Year 2017-18, the assessee filed the return declaring total income of ₹4,32,740 after claiming exemption under Section 54F. The case was selected for limited scrutiny relating to large deductions/exemptions and large investment in property. During assessment proceedings, the Assessing Officer examined the development agreement entered into with M/s Gokhale Construction under which the developer was to construct six residential flats together with terraces and six covered car parking spaces in exchange for development rights. The assessee had adopted the stamp duty valuation as the sale consideration while computing capital gains and claimed exemption under Section 54F. Upon issuing a show-cause notice, the Assessing Officer considered the assessee’s explanation that the project had been delayed due to legal issues and that no flats had been received because development had not commenced.
The Assessing Officer was not satisfied with the explanation. After considering Section 53A of the Transfer of Property Act, 1882, Section 2(47)(v) of the Income Tax Act, the development agreement, the claim under Section 54F, and the legal disputes, the Assessing Officer held that the transaction constituted a transfer under Section 2(47)(v) read with Section 53A. Since no flats had been received by the assessee, the Assessing Officer denied exemption under Section 54F. The Assessing Officer also restricted the cost of acquisition after considering the assessee’s admission regarding the purchase price of the land and recomputed the long-term capital gain at ₹2,31,79,498, making the corresponding addition and assessing the total income at ₹2,36,12,240 under Section 143(3). Penalty proceedings for under-reporting of income were also initiated.
The Commissioner (Appeals) considered the grounds of appeal, statement of facts, submissions of the assessee, and the findings of the Assessing Officer but upheld the assessment order and dismissed the appeal.
Before the Tribunal, the assessee submitted that the Commissioner (Appeals) had overlooked the factual circumstances, ignored the cancellation of the development agreement dated 09.07.2020, and failed to consider material evidence showing that the developer had not constructed the flats because of unforeseen circumstances and legal disputes. The assessee also submitted that the real income had been offered to tax in the subsequent year and that an application under Rule 29 of the ITAT Rules had been filed seeking admission of additional evidence, including the project commencement certificate, completion/occupancy certificate, acknowledgment of filing of evidence before the appellate authority, computation of income for Assessment Year 2026-27, and advance tax challans. The Revenue contended that the additional evidence had not been examined by the lower authorities and that the genuineness of the transactions had not been established.
The Tribunal considered the rival submissions and the material on record. It noted the assessee’s contention that the cancellation agreement and other supporting evidence had not been considered by the appellate authority. The Tribunal observed that the additional evidence sought to be produced under Rule 29 was relevant and played an important role in adjudicating the dispute. Holding that the assessee should not suffer for non-filing of material information before the lower authorities, the Tribunal admitted the additional evidence. It set aside the order of the Commissioner (Appeals) and restored the disputed issues, along with the additional evidence, to the file of the Assessing Officer for fresh verification and adjudication on merits. The Tribunal directed that the assessee be provided adequate opportunity of hearing and cooperate in furnishing the required information. The appeal was accordingly allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT PUNE
The assessee has filed the appeal against the order of the CIT(A))/NFAC passed u/sec 143(3) and u/sec250 of the Income Tax Act. The assessee has raised the fallowing grounds of appeal as under:
2. “On the facts and in the prevailing circumstances of the case, the learned Commissioner (Appeals) erred in confirming the addition under the head capital gains without first adjudicating the foundational issue whether any “transfer” within the meaning of section 2(47), particularly section 2(47)(v). arose in the relevant previous year. The leamed Commissioner (Appeals) failed to appreciate that section 2(47)(v) is attracted only if the transaction is of the nature referred to in section 53A of the Transfer of Property Act, 1882 which requires, inter alia, legally relevant possession and willingness of the transferee to perform the contract, both of which were absent in the present case
2. On the facts and in the prevailing circumstances of the case the learned Commissioner Appeal has ignored the principle of Substance over form. It is a well-settled judicial doctrine in income tax jurisprudence, holding that the real economic effect and intention of a transaction governs its tax treatment, rather than its legal form or nomenclature. It prevents artificial structuring solely for tax avoidance while protecting genuine commercial arrangements.
1. This Doctrine strongly favors assesses:
2. Form of Transaction Registered Development Agreement(17:09:2016)
3. Substance of Transaction No performance by developer, vacant plot no consideration received cancelled (09.07.2020) prior stay granted (11.03.2020)
3. Precedent Fit. Fardeen Khan (annulled agreement not taxable) and Balbir Singh Maini align hypothetical gain lacks substance. Revenue cannot tax based solely on agreement execution when economic reality shows no transfer/no accrual.
4. On the facts and in the prevailing circumstances of the case the learned Commissioner (Appeals) erred in law and on facts in ignoring that no monetary consideration, no built-up area, and no enforceable right to receive consideration accrued to the assessee during the year, hence no real income or chargeable capital gain arose.
5. On the facts and in the prevailing circumstances of the case the learned Commissioner (Appeals) erred in refusing to consider the Deed of Cancellation dated 09.07.2020 and the stay order under section 220(6) though süch subsequent events directly evidenced the true legal character of the transaction and demonstrated that the agreement was never acted upon.
6. On the facts and in the prevailing circumstances of the case the learned Commissioner (Appeals) erred in holding that the assessee should have filed a revised retun and, failing that, could not contest taxability There isno estoppel against statute, and income not chargeable to tax cannot be assessed merely because the assessee mistakenly offered it in the return.
7. On the facts and in the prevailing circumstances of the case the learned Commissioner (Appeals) grossly erred in treating section 54F as the core issue, whereas the primary and antecedent issue was the existence of a taxable transfer itself; once no transfer arose, the question of exemption under section 54F became academic.
8. On the facts and in the prevailing circumstances of the case without prejudice, the leamed Commissioner (Appeals) erred in sustaining denial of section 54F on grounds not properly examined in the context of a development agreement where no completed transfer and no actual receipt of flats had occurred
9. On the facts and in the prevailing circumstances of the case and in law, the learned Commissioner (Appeals) (NFAC) erred in confirming the addition of Rs 2,31,79,498/ under the head-capital gains made by the AO. The impugned order is contrary to the binding ratio of the Supreme Court in Balbir Singh Maini and the judicial line represented by Fardeen Khan, G. Saroja and allied authorities dealing with unacted, unenforceable, or cancelled development agreements.”
2. The brief facts of the case are that, the assessee has filed return income for A.Y. 2017-18 on 30.07.2017 disclosing a total income of Rs. 4,32,740/-after claiming exemption u/sec54F of the Act. The case was selected for Limited Scrutiny under CASS for the reasons “(i) Large Deduction/ exemption u/sec 11(1A), 54, 54B, 54C, 54D, 54EC, 54F, 54G, 54GB, 115F etc and (ii) Large Investment in property (form26 QB) as compared to total income”.
3. Subsequently the Assessing Officer (AO) has issued notice u/sec143(2) and U/sec142(1) of the Act along with questionnaire calling for the information details in respect of the return of income filed. The assessee has submitted copy of return of income filed along with computation of income, sale deed of land, development agreement, form 26QB and bank statements. The A.O on verification of the data, found that the assessee has entered into Development Agreement with M/s Gokhale Construction on 17.09.2016 for developing plot at Baner and in lieu of acquisition of development rights, the developer was to construct 6 residential flats having total area admeasuring about 326.64 sq. mtrs. Carpet, along with attached terraces total admeasuring about 75.78 Sq. mtrs, Further with right to use six covered car parking spaces for vendor/owner at its entire cost. Whereas the assessee has adopted the value as stamp valuation as sale consideration and after deducting the indexed cost of acquisition from the sale consideration and balance capital gains was claimed exempt due to investment in the residential property. The A.O has issued show cause notice on 8.11.2019 on the disallowance of claim of exemption. In compliance, to show cause notice, the assessee has filed submissions vide letter dated 25.11.2019 mentioning the delay in project due to legal issues and builder has not started the development works and the assessee was not provided residential flats as per development agreement.
4. Whereas the A,O was not satisfied with the explanations and dealt on the provisions of section53A of the Transfer of property Act 1882 , development agreement, provisions of section 2(47) of the Act , applicability of claim of exemption u/sec54F of the Act and legal disputes. Finally denied the claim of the assessee and recomputed long term capital gains as under:
“6.4. In view of the above discussion, it is held that the transaction entered into by the assessee is ‘transfer’ within the meaning of Section 2(47)(v) of the I.T. Act, 1961 r.w.s. 53A of the Transfer of Property Act. Therefore, the capital gains are chargeable to tax in the Assessment year under consideration. Further, since no flats have been received by the assessee in lieu of the transfer of development rights, no deduction u/sec 54F on reinvestment in residential property is allowable to misreporting of income.
6.5 On the issues of Cost of Acquisition claimed by the assessee in respect of Plot sold at Baner, the assessee has admitted vide Point no. 3 of the letter dated 25.11.2019 that the purchase price of Baner Plot is in fact Rs.1,10,000/- only and not Rs. 1,60,000/- claimed in the I.T. return. The acquisition cost of Rs. 1,61,106/- is the Ready Reckoner cost which has been used for Stamp duty purpose only. Accordingly, the claim of purchase price of Baner Plot is restricted to Rs. 1,10,000/- and cost of acquisition is worked to be Rs. 1,10,000/- + Stamp duty Rs. 6900/-). Penalty proceedings are initiated for underreporting of income.
6.6 Accordingly, the income from Capital Gain is re- worked out as under :
Working of Long Term Capital Gain
Sale of Land at Baner Date of Sale 31/03/2017
Consideration received by the assessee Rs. 1,63,03,382/-
Value as per Stamp Duty Authority. Rs. 2,36,47 514/-
Value (as adopted by the assessee) for working out Capital Gain Rs. 2,36,47,514/-
Less Indexed Cost of acquisition (as discussed in para 6.5)-
(FY 1995-96 Cost Rs. 1,16:900/-)
[Rs.1,16,900/-x1125/281] Rs. 4,68,016/-Capital GainRs.2.31,79,498/-
Less. Exemption u/s 54F (As discussed in para 6.1 to 6.4) Rs. NIL
Taxable Capital Gain Rs.2.31.79.498/-
In view of the above discussion, addition of Rs.2.31. 79.498/- is made to the total income of the assessee on account of Long Term Capital Gains”
Finally, the assessing officer has assessed the total income of Rs.2,36,12,240/- and passed the order u/sec143(3) of the Act dated 14.02.2019.
4. Aggrieved by the order, the assessee has filed an appeal before the CIT(A), whereas the CIT(A) has considered grounds of appeal, statement of facts, submissions of the assessee, finding of A.O. but sustained the action of the assessing officer and dismissed the assessee’s appeal. Aggrieved by the order of the CIT(A), the assesse has filed the appeal with the Hon’ble Tribunal.
5. At the time of hearing, the Ld. AR submitted that, the CIT(A) has erred in confirming the action of the A.O overlooking the facts, circumstances , submissions and provisions of claim of exemption. The Ld.AR mentioned that the transaction entered into by the assessee is a transfer within the meaning of section 2(47)(v) of the Act r.w.s 53A of the Transfer of the Property Act. Further the CIT(A) has ignored the vital details and various documents in respect of the genuineness of the transactions. The Ld.AR explained that subsequent to the entering of development agreement on 17.09.2016 due to unforeseen circumstances and legal disputes, the developer has not constructed the flats and the development agreement was cancelled on 9.07.2020. The CIT(A) has erred in not considering the factual aspects of cancellation of development agreement. The Ld.AR mentioned that the CIT(A) has erred in not allowing the claim of exemption u/sec 54F of the Act. The Ld.AR explained that the assessee has substantiated with the material evidences on the cancellation agreement but was not considered.
Further the assessee has offered the real income in the subsequent year and paid the taxes and has good case on merits with supporting evidences. Further the assessee has filed an application for the admission of Additional evidence under Rule 29 of the ITAT Rules and the Ld.AR substantiated the submissions with the factual paper book and judicial decisions and prayed for allowing the appeal. Per contra, the Ld.DR submitted that the additional evidences were not examined by the lower authorities and genuineness of transactions were not proved and the Ld. DR supported the order of the CIT(A).
6. We heard the rival submissions and perused the material on record. The sole crux of the disputed issues envisaged by the Ld AR that the CIT(A) has erred in confirming the action of the assessing officer denying the claim. The CIT(A) has erred in not considering the factual aspects of cancellation of development agreement and has erred in not allowing the claim of exemption u/sec 54F of the Act. The Ld.AR explained that the assessee has substantiated with the material evidences on the cancellation agreement but was not considered by appellate authority. The Ld.AR demonstrated the various factual aspects of development agreement and the legal dispute with supporting paper book and the assessee has offered the real income/ capital gains in the subsequent year and paid the taxes.. Further the assessee has filed an application for admission of addition evidences under Rule 29 of the ITAT Rules i.e. Project commencement certificate, completion/occupancy certificate, acknowledgement of filling of evidences with appellate authority, computation of income for A.Y.2026-27 and Advance tax challlans paid placed at page 78 to108 of the paperbook which could not be submitted before the lower authorities. Further, the evidences play a very important role in decision making in the adjudicating proceedings, Therefore considering the facts, circumstances and additional evidences, the assessee should not suffer for non filing of material information, as the evidences play a vital role in decision making and admit the additional evidence. Accordingly, we set-aside the order of the CIT(A) and to meet the ends of justice, we restore the disputed issues along with the evidences to the file of the Assessing Officer to verify and adjudicate afresh on merits and the assessee should be provided adequate opportunity of hearing and shall cooperate in submitting the information for early disposal of appeal. And, we allow the grounds of appeal of the assessee for statistical purposes.
7. In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced on the open Court on 03rd July 2026.
