Chandra Shekar Muni Reddy Kannelli Vs ACIT (ITAT, Bangalore Bench)
Harvesting Exemption Before the Sale Deed: Advance Sale Consideration Invested in New Agricultural Land Qualifies U/s 54B
Summary: The assessee was an agriculturist who also earned a small amount of business income & income from house property. He filed his return of income for AY 2018-19 on 29.08.2018.
The return was selected for limited scrutiny to examine the assessee’s claim for capital-gains exemption. Notices u/ss 143(2) & 142(1) were issued, calling for details of the capital asset sold & the new asset acquired.
In the return, the assessee had claimed deduction u/s. 54F. During assessment proceedings, however, he furnished the computation of long-term capital gains & revised the legal basis of the claim to s.54B, contending that both the original asset sold & the new asset purchased were agricultural lands.
AO Rejects Both Sections 54F & 54B
The AO first rejected the deduction originally claimed u/s. 54F. He thereafter examined the alternative claim u/s. 54B but rejected it on two grounds:
First, according to the AO, the assessee had not established that the land sold had been used for agricultural purposes during the two years immediately preceding its transfer.
Secondly, the AO held that the new agricultural land had not been purchased within two years after the date of sale of the original land.
The assessee relied upon CBDT Circular No. 359 dated 10.03.1983, which clarified that capital-gains exemption should not be denied merely because the investment was made out of advance or earnest money received before execution of the final conveyance.
The AO declined to apply the Circular, observing that it concerned s.54E & not s.54B or s.54F.
CIT(A) Accepts Agricultural Use but Rejects Timing
In appeal, the CIT(A) recorded a categorical finding that the original land sold by the assessee had been used for agricultural purposes during the preceding two years. Thus, the first objection raised by the AO was decided in the assessee’s favour.
However, the CIT(A) sustained the disallowance on the ground that the new agricultural land was purchased before execution of the final sale deed. According to the CIT(A), s.54B contemplated acquisition of the new agricultural land within two years after the date of transfer.
The CIT(A) also held that CBDT Circular No. 359, having been issued specifically in the context of s.54E, could not govern a claim u/s 54B.
Entire ₹3 Crore Received Under Registered Sale Agreement
Before the ITAT, the assessee explained the actual sequence of transactions.
He entered into a registered agreement of sale dated 27.04.2016 with the intending purchasers for sale of his agricultural land for a total consideration of ₹3 crore. On the very date of the agreement, the purchasers paid the entire sale consideration through demand drafts dated 27.04.2016.
Immediately thereafter, on 28.04.2016, the assessee utilised ₹2.86 crore from the consideration received for purchasing another agricultural land.
The final sale deed relating to the original land was executed later in 2017. That deed specifically recorded the prior receipt of the entire consideration and incorporated the numbers & dates of the demand drafts issued on 27.04.2016.
Thus, the purchase of the new agricultural land was not made from some unrelated source. There was a clear & direct nexus between the sale consideration received under the registered agreement & the amount invested in the new agricultural land on the following day.
Revenue Relies on the Date of Registered Sale Deed
The Department argued that the new agricultural land was purchased on 28.04.2016, whereas the registered sale deed transferring the original land was executed much later in 2017.
Since s.54B permits purchase of new agricultural land within two years after transfer of the original land, the Department contended that a purchase made before the final transfer could not qualify.
It was further argued that the CBDT Circular issued in the context of s.54E could not be extended to s.54B.
Substance of Reinvestment Prevails Over Sequence of Documents
The ITAT noted that there was no surviving dispute regarding the nature of either property. The CIT(A) had already found that the land sold & the land purchased were agricultural lands and that the assessee was an agriculturist.
The sole question was whether the exemption could be denied merely because the new agricultural land was purchased after receiving the entire sale consideration under the agreement but before execution of the final sale deed.
On examining the registered agreement, demand drafts & final sale deed, the Tribunal found that the assessee had received the whole consideration of ₹3 crore on 27.04.2016. Out of that identifiable consideration, he purchased the new agricultural land for ₹2.86 crore on 28.04.2016.
The final sale deed acknowledged the earlier receipt & recorded the relevant demand-draft particulars. Therefore, the source & nexus of the investment stood conclusively established.
The Tribunal held that the assessee had substantially satisfied the statutory condition of reinvesting the sale consideration in another agricultural land within the prescribed period. The benefit could not be denied merely because the formal conveyance of the original land occurred subsequently.
Principle of CBDT Circular No. 359 Extended to s.54B
CBDT Circular No. 359 clarified that where earnest money or advance received towards transfer of an asset is invested in the specified asset before the date of transfer, the investment qualifies for exemption u/s 54E.
Although the Circular referred expressly to s.54E, the ITAT held that its underlying principle was equally applicable to s.54B. The Circular sought to prevent beneficial capital-gains exemptions from being defeated through an unduly technical interpretation.
Accordingly, the Tribunal allowed the deduction u/s 54B & deleted the addition.
Legal Principle
Where the assessee receives the entire consideration under a genuine registered sale agreement & directly invests that amount in purchasing new agricultural land, deduction u/s 54B cannot be denied merely because the investment precedes execution of the final sale deed. The investment trail matters more than the ceremonial order of registration—advance consideration reinvested in the eligible asset retains its exemption character.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BANGALORE BENCH
This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 10/09/2025 in respect of the A.Y. 2018-19.
2. The brief facts of the case are that the assessee is an agriculturist and also derives small income from business and income from house property. The assessee filed his return of income on 29/08/2018. Thereafter, his case was selected for limited scrutiny and notices u/s. 143(2) and 142(1) were issued. While filing his return of income, the assessee had claimed a deduction u/s. 54F of the Act and therefore the AO had sought for the details about the capital asset sold and the capital asset purchased by him. The assessee submitted his reply and also filed the working of calculation of LTCG. In the said submission, the assessee had changed the claim of deduction u/s. 54B of the Act. The AO considered the original claim made in the return of income and denied the claim of deduction made u/s. 54F of the Act. The AO subsequently considered the claim made u/s. 54B of the Act. The AO by relying on section 54B had denied the deduction on two grounds. One of the reason is that the assessee had not established that the lands sold by him are used for agricultural purposes in the preceding two years and the another reason is that the assessee had not purchased the agricultural lands out of the capital gain received by him within a period of two years from the date of such sale. Finally, the AO had confirmed the disallowance both u/s. 54F as well as u/s. 54B of the Act. The AO had also not accepted the circular issued by the CBDT in which it was clearly mentioned that the benefits granted under the provisions are not to be denied on technicalities. The AO had alleged that the said circular is for section 54E and not relevant for section 54B or 54F deduction.
3. As against the said assessment order, the assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A) had accepted that the lands sold by the assessee were used for agricultural purposes in the preceding two years as required u/s. 54B of the Act. Insofar as the another condition that the assessee should acquire another agricultural land within two years from the sale of the old capital asset, the Ld.CIT(A) had held that the new property has been purchased not within the period of two years from the date of sale of the old land and therefore, the assessee is not entitled for the deduction u/s. 54B of the Act. The Ld.CIT(A) also held that the Circular No. 359 dated 10/03/1983 issued by the CBDT pertains to section 54E of the Act and the same would not be applicable to the facts of the present case.
4. As against the said order, the assessee filed this appeal before this Tribunal.
5. At the time of hearing, the Ld.AR submitted that both the authorities had failed to consider the fact that the old agricultural land was sold on 27/07/2017 pursuant to the agreement of sale executed on 27/04/2016 and submitted that on the date of the execution of the sale agreement, the assessee had received the entire sale consideration of Rs. 3 crores and out of the said sale consideration received by him, the assessee had purchased the new agricultural land vide sale deed dated 28/04/2016 for a consideration of Rs. 2,86,00,000/- and therefore, the assessee is entitled for deduction u/s. 54B of the Act. The Ld.AR further submitted that the sale consideration received by the assessee were received by way of demand drafts dated 27/04/2016 and therefore, the said amount was invested in purchasing the new capital asset which is an agricultural land and therefore the second condition that the assessee has to invest the sale consideration within a period of two years from the date of sale of the original asset has been satisfied and therefore, the assessee is eligible for deduction u/s. 54B of the Act. Insofar as the applicability of Circular No. 359 dated 10/03/1983, the Ld.AR submitted that even though the Circular was issued in respect of the applicability of section 54E of the Act, the principle underlying in the said Circular would equally apply to the facts of the present case since on technicalities, the benefits should not be denied to the assessee. The Ld.AR submitted that all the documents enclosed in the paper book were filed before the AO as well as before the Ld.CIT(A) but the authorities had not properly appreciated the facts and therefore prayed that the said documents may be considered and the benefit granted u/s. 54B may be granted.
6. The Ld.DR submitted that the assessee had executed the sale deed on 27/12/2017 whereas purchased the property on 28/04/2016 and therefore, he is not entitled for the benefit granted u/s. 54B of the Act. The Ld.DR also submitted that the Circular of the CBDT does not pertains to the deduction claimed u/s. 54B of the Act and therefore, the authorities had rightly not considered the said Circular in the facts of the present case and prayed to dismiss the appeal.
7. We have heard the arguments of both sides and perused the materials available on record.
8. In the present appeal, the only dispute is with regard to the applicability of deduction u/s. 54B of the Act. The assessee is an agriculturist and he intended to sell his agricultural land and therefore entered into an agreement for sale on 27/04/2016 with one Mrs. Shahazad Bi @ Shahazad Begum and another for a total sale consideration of Rs. 3 crores. On the date of the execution of the said agreement, the intending purchasers had paid the entire sale consideration by way of DDs dated 27/04/2016. The said sale consideration received by the assessee was utilized for purchasing a new agricultural land for a sum of Rs. 2,86,00,000/- on 28/04/2016. Later on, the assessee on 25/09/2017 had executed a sale deed through which the sale agreement property was sold to one Mr. Gulam Mustafa. In the said sale deed, the fact of receipt of the total sale consideration has been mentioned and the Demand Draft numbers and the date of the Demand Drafts were duly incorporated in the sale deed dated 25/09/2017. The original sale agreement which is dated 27/04/2016 (mistakenly the date has been mentioned as 27/04/2015) has been duly registered with the office of the Sub-Registrar, Indira Nagar, Bangalore. After receipt of the sale consideration on 27/04/2016 by way of Demand Drafts, the assessee had purchased the new agricultural lands on 28/04/2016. There is no dispute with regard to the classification of the lands are concerned since the Ld.CIT(A) had given a clear finding that the lands sold and purchased are agricultural lands and the assessee is also an agriculturist.
9. The main controversy is that the assessee had executed the sale deed on 27/12/2017 whereas purchased the agricultural lands on 28/04/2016 and therefore, the benefit granted u/s. 54B could not be extended to the assessee. From the perusal of the various documents including the sale agreement, we found that the assessee had entered into a sale agreement on 27/04/2016 and received the entire sale consideration and utilized the said sale consideration received by him for purchasing another agricultural land which was effected on 28/04/2016. No doubt, the sale deed was executed on 27/12/2017 but before executing such sale deed, the entire consideration has been received by the assessee on 27/04/2016 and therefore, it should be taken as the assessee had effected the purchase of new agricultural lands out of the sale consideration received by him on 27/04/2016 and therefore, the assessee had satisfied the condition that the sale consideration should be invested within a period of two years from the date of sale. The documents furnished by the assessee before the authorities as well as before us would support the view taken by us.
10. Insofar as the applicability of the Circular issued by the CBDT in respect of section 54E of the Act, the said Circular had made it clear that if the assessee invest the earnest money or the advance received in specified assets before the date of transfer of asset, the amount so invested will qualify for exemption u/s. 54E of the Act. The said Circular has also speaks about the denial of the deductions on technical interpretation by the officers. We have gone through the said Circular and we are accepting the principles laid down in the said Circular would equally applicable to the facts of the present case and therefore the sale consideration received by the assessee based on the sale agreement which was invested for purchasing a new capital asset would be eligible for deduction u/s. 54B of the Act.
11. We therefore, accept the contention of the assessee that they are eligible for deduction u/s. 54B of the Act and therefore we delete this addition made by the AO.
12. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 28th August, 2026.
