Trident Automobiles (P) Ltd Vs DCIT (ITAT Bangalore)
Sale Deed for ₹6 Crore, Seller Retains ₹3 Crore: Bengaluru ITAT Allows Deduction for Payment to Agreement Holder
Summary: When a property is sold for ₹6 crore, but the seller is bound under an earlier arrangement to pay ₹3 crore to an agreement holder, how should the capital gains be computed? Can the seller simply show ₹3 crore as the sale consideration, or must the full ₹6 crore be recognised and the payment examined as a deduction? The Bengaluru ITAT considered this issue in the case of Trident Automobiles (P) Ltd.
The Earlier Agreement and the Eventual Sale
The assessee company owned land measuring 2 acres and 5 guntas at Tumkur Amanikere Village. It had initially agreed to sell the property to Mr N. Radhakrishna for ₹3 crore, and had received an advance of ₹11 lakh. Mr Radhakrishna could not pay the balance consideration. The parties therefore entered into a further arrangement under which he would find another buyer. The assessee would receive the originally agreed sum of ₹3 crore, while any amount realised above that figure would go to him.
A buyer was subsequently found, and the property was sold under a registered deed dated 31 August 2016 for ₹6 crore. Of this amount, ₹3 crore was paid to Mr Radhakrishna. The assessee stated that the payment was made through banking channels. He had also joined as a consenting witness in the arrangements concerning the sale.
While filing its return for AY 2017–18, the assessee adopted only ₹3 crore as the sale consideration, being the amount it ultimately retained. On that basis, it declared long-term capital gains of ₹75,18,067.
Why the Assessing Officer Added ₹3 Crore
The Assessing Officer noticed that the registered sale deed recorded consideration of ₹6 crore, whereas the capital gains computation proceeded on ₹3 crore. He rejected the explanation that the other ₹3 crore belonged to the intermediary and, referring to section 50C, recomputed the gains by taking ₹6 crore as the full value of consideration. This resulted in an addition of ₹3 crore. The CIT(A) upheld the assessment.
The assessee’s case before the Tribunal was that Mr Radhakrishna was not merely an agent receiving a share of the sale proceeds. He was an earlier agreement holder whose rights had to be settled for the transaction to be completed. The assessee argued that its obligation to pay him arose from the prior arrangement. It relied on the principle of diversion of income by overriding title and also claimed that the payment was deductible under section 48 because it was connected with clearing the agreement holder’s rights.
Tribunal’s Finding: Payment Was Linked to Extinguishing Rights
The Tribunal examined the sequence of agreements and the payment trail. It noted Mr Radhakrishna’s position as the earlier agreement holder, his participation in the subsequent sale arrangements, and the fact that the ₹3 crore payment was made through the bank. The payment was treated as one made to extinguish rights arising from the earlier agreement, including the agreement holder’s right to seek specific performance.
For this conclusion, the Bench followed the Chennai ITAT decision in T. T. Krishnamachari and Co. v. ACIT, where payment to an agreement holder for giving up rights connected with a property transfer was allowed under section 48. That decision had relied on the Madras High Court ruling in CIT v. A. Venkataraman & Ors., concerning a payment made to an existing tenant to vacate premises.
Applying that reasoning, the Bengaluru ITAT held that the assessee was entitled to deduct ₹3 crore under section 48 while computing capital gains. The assessee’s appeal was accordingly allowed.
Author’s Comments
The important feature of this decision is how the Tribunal granted relief. The registered sale deed recorded ₹6 crore, and the Tribunal itself noted that the assessee received that consideration and paid ₹3 crore to the agreement holder. Its conclusion was that the payment was deductible in computing capital gains. The case should therefore not be read as a general permission to replace the consideration shown in a sale deed with the net sum retained by the seller.
Although the assessee referred to diversion of income by overriding title, the Tribunal’s operative finding rests on section 48 and the extinguishment of the agreement holder’s rights. That distinction is useful when preparing a return or defending an assessment. A computation showing the full consideration and separately identifying the claimed deduction would make the issue clearer than simply showing the net amount as sale consideration. Indeed, the assessee’s own grounds described its original computation as structurally faulty, while maintaining that the final taxable gain was unaffected.
The ruling also turns on the substance of the earlier agreement. Every payment to an intermediary cannot automatically be described as a payment for clearing title. Here, the recipient had first entered into an agreement to purchase the property; a later arrangement governed how a new buyer would be found and how the proceeds would be divided. His participation in the sale documents and the banking trail supported the connection between the payment and the transfer.
Finally, the reference to section 50C requires care. The order does not identify a dispute in which the stamp duty value exceeded the ₹6 crore recorded in the deed. The real controversy was whether the assessee could obtain relief for the ₹3 crore paid to the agreement holder. The Tribunal answered that question in the affirmative under section 48. For similar cases, the earlier agreement, subsequent memorandum, sale documents and proof of payment will be central to establishing why the amount was paid and whether it is deductible in computing capital gains.
Cases Discussed
- CIT v. Sitaldas Tirthaldas (1961) 41 ITR 367 (SC)
- T T Krishnamachari and Co. Vs. ACIT (ITAT Chennai)
- CIT v A Venkataraman & Ors. 137 ITR 846 (Madras High Court)
FULL TEXT OF THE ORDER OF ITAT, BANGALORE BENCH
This appeal is filed by the assessee against the order of learned CIT(A), NFAC, Delhi vide DIN: ITBA/NFAC/S/250/2025-26/1077060932(1) dated 16.06.2025 for the Assessment Year 2017-18, arising out of the Order passed under section 143(3) of the Act dated 26.12.2019.
2. Briefly stated, the facts of the case are assessee company filed its return of income for the Assessment Year 2017-18 on 30.10.2017 declaring a total income of Rs.19,60,85,180/-. Subsequently, notice under section 143(2) of the Act dated 24.09.2018 was issued and served on the assessee. Thereafter, notices under section 142(1) of the Act dated 13.08.2019, 19.09.2019 and 04.11.2019 were issued and served on the assessee calling for details in connection with the reasons for selection of case for scrutiny. Further, a show cause notice dated 04.12.2019 was also issued to the assessee. In response, assessee furnished details as required in the notice issued. After examining the details furnished by the assessee, the learned AO noticed that assessee has made long term investments in quoted and unquoted shares amounting to Rs.2,96,09,541/-. The learned AO, by invoking the provisions of section 14A of the Act, computing the disallowance @ 1% of Rs.2,96,09,541/- amounting to Rs.2,96,096/- and added it to the total income of the assessee. Further, the learned AO also noticed that assessee during the Financial Year 2016-17 sold one of the properties admeasuring 2 acres and 5 guntas situated at Tumkur Amanikere Village. The assessee computed the long-term capital gain at Rs.75,18,067/- from the sale of above property. The learned AO, on perusal of sale deed dated 31.08.2016, found that the assessee has sold the land at Rs.6 Crores, however, has declared only Rs.3 Crores as sale consideration received while filing the return of income. Assessee submitted that the land was sold through intermediary agent who is also an agreement holder and the land being a litigated property, an MoU was entered with the intermediary that the sale price be shared between them pursuant to the sale of the land. Accordingly, the assessee submitted that it has received net consideration of Rs.3 Crores out of the sale price and the remaining Rs.3 Crores was paid to the intermediary. The learned AO did not accept the contention of the assessee and invoked section 50C of the Act while reworking the long term capital gains by adopting the full value of consideration at Rs.6 Crores and added an amount of Rs.3 Crores to the income of the assessee under capital gain.
3. On being aggrieved by the Order of the learned AO, assessee carried the matter before the learned CIT(A). Similar submissions were made before the learned CIT(A). The learned CIT(A) found the submissions as not tenable and upheld the Order of the learned AO by dismissing the appeal of the assessee.
4. On being aggrieved by the Order of the learned CIT(A), assessee is in appeal before us by raising the following grounds:
1) The impugned order passed by the Ld PClT is opposed to law, facts and circumstances of the case, and is liable to be quashed.
2) The Ld. ClT(A) erred in confirming the action of the Ld. AO in adding an additional Rs. 3,00,00,000/- to the chargeable capital gain without appreciating the fact that the amount due to the intermediary was a clear instance of diversion of income at source by an overriding title.
3) The Ld. CIT(A) and Ld, AO erred in failing to appreciate that the appellant’s computation of capital gains in the return of lncome, though structurally faulty did not impact the final taxable capital gains and resulted in no revenue loss to the Department.
4) The Ld. CIT(A) erred in confirming the action of the Ld. AO in invoking the provisions of section 50C and in doing so he failed to appreciate that the sale deed in question was registered at the Fair Market Value and the sale consideration recorded in the sale deed also reflects the same
The appellant prays for leave to add, delete, modify and/or adduce additional ground at any time before the appeal is disposed off.
For these and such other grounds that may be adduced or removed in time to time’ it is requested that the Hon’ble ITAT may be pleased to examine the case in the light of justice and grant the relief sought for.
5. The only issue contested by the assessee is with respect to the addition made with respect to capital gain amounting to Rs.3 Crores. On this issue, the learned AR submitted that the assessee has entered into an agreement to sell the property with Mr. N. Radhakrishna for a consideration of Rs.3 Crores, by paying an advance of Rs 11 lakhs. He further submitted that since Mr. N. Radhakrishna was unable to make the balance payment in accordance with agreement, entered into an MoU with the assessee by stating that he would find another buyer, subject to the condition that the assessee would receive Rs.3 Crores as already agreed, and any amount realized in excess of that would be given to the intermediary. Accordingly, the property was sold for an amount of Rs.6 Crores wherein the assessee received Rs.3 Crores and the intermediary received Rs.3 Crores. The assessee therefore declared Rs.3 Crores as sale consideration while computing the long-term capital gain. He further submitted that Rs.3 Crores amount paid to the intermediary is an obligation entered into under a prior agreement with the intermediary. He also submitted that the assessee received Rs.6 Crores and has remitted amount of Rs.3 Crores to the intermediary through banking channels. The learned AR relied on the decision of the Hon’ble Supreme Court in the case of CIT v. Sitaldas Tirthaldas (1961) 41 ITR 367 (SC). He submitted that the Hon’ble Apex Court held that where an assessee is under a legal obligation to pass a part of the income to another person it constitutes diversion of income by overriding title and cannot be taxed under assessee’s hand. He therefore prayed that the amount paid to the intermediary amounting to Rs.3 Crores shall be considered as expenditure incurred for the purpose of acquiring valid title to the assessee and hence deductible as cost of acquisition under section 48 of the Act.
6. Per contra, the learned DR relied on the orders of the lower authorities.
7. We have heard the rival contentions and perused the material available on record including the written submissions furnished by the assessee. It is an undisputed fact that assessee received a sale consideration of Rs.3 Crores on sale of property on 31.08.2016 as his share of income. The balance of Rs.3 Crores was transferred to the intermediary Mr. N. Radhakrishna being an agreement holder and also instrumental in effecting the sale of the property. We also find that Mr. N. Radhakrishna joined as a consenting witness in the memorandum of sale agreement entered into with the third-party Sree Venkateshwara Switchgear Pvt. Ltd. We also notice that the agreement with Sree Venkateshwara Switchgear Pvt. Ltd., was subsequently cancelled on 31.08.2016 while registering the property in the name of Managing Director of Sree Venkateshwara Switchgear Pvt. Ltd. The sale consideration was recorded in the books of accounts and the amount pertaining to Shri. N. Radhakrishna was made through the bank account. It was also submitted that the expenditure incurred wholly and exclusively in connection with the transfer for removing / extinguish agreement holders’ enforceable rights. The assessee has received the consideration under the original agreement and subsequently the property was conveyed to the nominee of the agreement holder. The Chennai Co-ordinate Bench of Tribunal in the case of T T Krishnamachari and Co. Vs. ACIT held that the amount payable to the agreement holder had to be allowed as expenditure under section 48 of the Act because payment was necessary for clearing / extinguishing the agreement holders’ rights who had acquired a right of specific performance. The Chennai Co-ordinate Bench of Tribunal relied on the decision of Hon’ble Madras High Court in the case of CIT v A Venkataraman & Ors. 137 ITR 846 (Mad) which has also held that amount paid to the existing tenant to vacate the premises should be allowed as deduction under section 48 of the Act in computing the capital gains. The Chennai Co-ordinate Bench of Tribunal applied the same ratio to the amount paid to the agreement holder for giving up its rights for specific performance in connection with the transfer for the purpose of improving the title of the assessee and hence should be allowed as a deduction in computing the capital gains. In the instant case, assessee has received consideration of Rs.6 Crores and has paid an amount of Rs.3 Crores to the agreement holder for improving the title of the assessee. The learned AO erred in adopting the sale consideration as per Section 50C of the Act when the sale deed was executed as per the capital / market value of the property. The issue before us is whether the payment of Rs.3 Crores to the intermediary being the agreement holder should be allowed as a deduction under section 48 of the Act as expenditure for improvement of the title of the assessee in a transferred property. Respectfully following the decision of the Chennai Co-ordinate Bench of Tribunal, we are of the opinion that assessee is entitled to claim amount of Rs.3 Crores as expenditure under section 48 of the Act which was incurred to extinguish the rights of the agreement holder in specific performance of the contract. Thus, the grounds raised by the assessee are allowed.
8. In the result, appeal of the assessee is allowed.
Pronounced in the open court on the date mentioned on the caption page.
