Facts of the Case

The case was reopened by the Assessing Officer on the basis that the assessee had deposited cash of ₹37,70,000 in his bank account during Financial Year 2013-14 relevant to Assessment Year 2014-15.

During assessment proceedings, the assessee explained that the amount represented advance received against an agreement to sell ancestral agricultural land jointly owned with other co-owners.

However, the Assessing Officer treated the amount as sale consideration of land and made an addition of ₹37,70,000 as Long-Term Capital Gain, assessing the total income at ₹39,66,360.

The appeal filed before the CIT(A), NFAC was dismissed. Aggrieved, the assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT), Delhi Bench.

Issues Involved

  1. Whether advance received against an agreement to sell agricultural land can be treated as sale consideration and taxed as capital gains.
  2. Whether capital gains can arise in absence of transfer of possession of the property under Section 2(47) of the Income Tax Act.

Petitioner’s Arguments (Assessee)

The assessee submitted the following:

  • The amount of ₹37,70,000 was merely advance received against agreement to sell, not sale consideration.
  • The agreement to sell was executed in 2013, but the actual transfer and possession of the land took place in 2020 after settlement with the purchaser.
  • The Assessing Officer wrongly interpreted Section 2(47) of the Income Tax Act relating to transfer of capital asset.
  • Under Section 53A of the Transfer of Property Act, transfer requires handing over possession in part performance of contract.
  • Neither the Assessing Officer nor the CIT(A) brought any evidence showing transfer of possession during the relevant year.
  • It is against human probability that possession of land would be transferred when only about 42% of the agreed consideration was received.
  • The addition was made without any adverse material on record and only on presumptions.
  • Suspicion cannot replace evidence, as held in several judicial precedents.

The assessee relied on the following case laws:

  • Sumati Dayal vs CIT (214 ITR 101, SC)
  • CIT vs Durga Prasad More (82 ITR 540, SC)
  • CIT vs Sethia Plastic Industries (206 CTR 484, Delhi)
  • Madnani Construction vs CIT (296 ITR 45, Gauhati)
  • Rajeev G. Kalathil vs DCIT (ITAT Mumbai)
  • New Plaza Restaurant vs ITO (309 ITR 259, HP) 

Respondent’s Arguments (Income Tax Department)

The Departmental Representative supported the orders of the lower authorities and argued that:

  • There was a gap of more than six years between agreement to sell and execution of the sale deed.
  • The Assessing Officer had rightly treated the amount received as sale consideration and taxed it accordingly.

Court Findings / Tribunal Decision

The ITAT examined the provisions of Section 2(47) of the Income Tax Act, which defines “transfer” in relation to a capital asset.

The Tribunal observed:

  • The assessee had received the amount only as advance against agreement to sell agricultural land.
  • The possession of land was actually handed over on 15.02.2020, as per the sale deed and settlement agreement produced before the Tribunal.
  • Since possession was not transferred during the relevant assessment year, the transaction did not qualify as transfer under Section 2(47).
  • Therefore, the amount received during the year could not be treated as taxable sale consideration.

Accordingly, the Tribunal directed the Assessing Officer to delete the addition of ₹37,70,000.

However, the Tribunal clarified that the Assessing Officer is free to tax the capital gains in the year in which the actual transfer took place, i.e., when possession was handed over.

Important Clarification by ITAT

The Tribunal clarified an important principle:

  • Advance received under an agreement to sell does not constitute transfer of capital asset unless possession of property is handed over in part performance of contract.
  • Capital gains can be taxed only in the year in which transfer is completed under Section 2(47). 

Sections Involved

  • Section 2(47) – Definition of Transfer (Income Tax Act, 1961)
  • Section 53A – Transfer of Property Act, 1882
  • Section 271(1)(c) – Penalty for concealment (initiated by AO)

 Link to download the order -  https://itat.gov.in/public/files/upload/1703231613-ITA%202134%20of%202023%20Mahesh%20Kumar.pdf

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