Capital Gains Must Reflect Only Real Consideration Received: ITAT quashes S.263 Revision [Read Order]

The principle that capital gains taxation must be based strictly on the real consideration received, said the Chandigarh Bench of the Income Tax Appellate Tribunal ( ITAT ) while quashing two revision orders passed under Section 263 of the Income Tax Act for Assessment Years 2015-16 and 2017-18.

The Tribunal held that the Principal Commissioner of Income Tax (PCIT), Chandigarh, erred in treating amounts paid by purchasers to a confirming party as part of the assessee’s sale consideration, despite clear evidence that such amounts neither accrued to nor were received by the assessee.

The assessee, Prem Singh Raja, had entered into legally enforceable agreements to sell immovable properties to M/s Hemali Resorts Pvt. Ltd. in both relevant assessment years. Under the terms of these agreements, Hemali Resorts held the contractual right to nominate or assign the purchaser.

Consequently, the final registered sale deeds were executed in favour of M/s APG Intelli Homes Pvt. Ltd., while Hemali Resorts acted as the confirming party. The assessee received sale consideration of ₹81.05 crore in AY 2015-16 and ₹5.81 crore in AY 2017-18 through proper banking channels, with TDS duly reflected in Form 26AS.

In addition to the amounts paid to the assessee, the purchasers had paid substantial sums ₹25.59 crore and ₹4.37 crore respectively to Hemali Resorts under separate obligations arising from the original agreements to sell.

The PCIT sought to treat these payments as part of the assessee’s consideration, alleging that the Assessing Officer (AO) failed to examine the entire transaction and invoking Explanation 2(a) to Section 263 to label the assessments as “erroneous and prejudicial to the interests of the Revenue.”

The assessee argued that Hemali Resorts had acquired enforceable contractual rights by virtue of the agreements to sell, for which it had received earnest money. These rights were later relinquished or compensated by the ultimate purchaser, and the payments were taxed in the hands of Hemali Resorts.

There was thus no accrual of income to the assessee, no diversion of consideration, and no prejudice to the Revenue. The assessee decisions including K.P. Varghese v. ITO and Sanjeev Lal v. CIT to stress that capital gains can be computed only on the real income received by the transferor.

The Tribunal agreed with the contentions of the assessee. It was noted that the AO had already conducted a comprehensive reassessment pursuant to an earlier Section 263 order issued in 2020, during which all relevant facts including the role of the confirming party and the flow of funds were verified.

The reassessment order passed under Section 143(3) read with Section 263 did not lead to any variation in income. The PCIT’s second attempt to reopen the same issue without any fresh material, the Tribunal held, amounted to a mere change of opinion, an approach consistently rejected by courts.

The bench of Manoj Kumar Aggarwal (Accountant member) and Laliet Kumar ( Judicial member) stated that Section 48 mandates computation of capital gains only on the “full value of consideration received or accruing to the assessee.” In this case, the only amounts that accrued to the assessee were those credited directly to his bank accounts with corresponding TDS deductions.

There was no evidence that the sums paid to Hemali Resorts were ever due to the assessee or that the confirming party was a sham entity. The ITAT said the Supreme Court’s opinion in K.P. Varghese that capital gains tax is intended to cover real, not hypothetical, income.

Further, the Tribunal noted that the payments made to Hemali Resorts were not only contractually distinct but were also subjected to tax in the hands of the recipient, eliminating any loss to the Revenue.

When no real income accrued to the assessee, and no prejudice to the exchequer existed, the twin conditions required for invoking Section 263 were not satisfied. Accordingly, the ITAT set aside both revision orders.

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