Only Registered Sale Agreements Eligible of Capital Gain Exemption u/s 54: ITAT says Unregistered Agreement Lacks Evidentiary Value
The Tribunal ruled that an unregistered sale agreement for the purchase of property does not constitute a valid transfer for claiming exemption under Section 54 of the Income Tax Act, 1961.
The Hyderabad Bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that purchase of property via unregistered sale agreement is not a valid transfer to claim exemption under Section 54 of the Income Tax Act, 1961.
Anand Boddapaty (assessee) filed his income tax return for the assessment year 2021-22, declaring a total income of Rs. 2,07,55,350. The case was selected for scrutiny under CASS, and the AO issued notices to verify the large capital gains exemption claimed under Section 54 of the Act.
The assessee had purchased a property for Rs. 4,40,00,000 from his wife, Smt. Radha Kumari Boddapaty through an unregistered agreement of sale and claimed a deduction of Rs. 4,26,28,194 under Section 54F of the Act. The AO accepted the return and allowed the exemption.
The PCIT issued a show-cause notice stating that the unregistered agreement did not constitute a valid transfer, rendering the exemption claim invalid. The assessee argued that the agreement included possession and that registration was not possible.
The assessee submitted that it was due to the property which was listed in the "Prohibited Properties in Rural Prohibited Register" by the Telangana Registration and Stamps Department, as per court orders.
The assessee further contended that the AO had verified all documents and that the PCIT’s action amounted to a change of opinion. The PCIT set aside the AO’s order and directed a fresh assessment, stating that the order was erroneous and prejudicial to the revenue’s interest.
Aggrieved by the PCIT’s order, the assessee appealed to the ITAT. The counsel for the assessee, argued that the AO’s order was neither erroneous nor prejudicial, as the AO had examined all evidence, including the agreement of sale.
The counsel submitted the judicial precedents, including Malabar Industrial Co. Ltd. vs. CIT and CIT vs. Max India Ltd., and submitted that the PCIT lacked jurisdiction to revise a valid order. The counsel also relied on Sanjeev Lal vs. CIT and ITO vs. DG Housing Projects Ltd. and argued that registration is not mandatory for Section 54 exemptions if consideration is paid in full.
On the other hand, the counsel argued that the AO failed to verify the claim in light of the Registration Act, 1908, and the related-party transaction. The counsel submitted that there was lack of evidence for attempts to register the property.
The two-member bench, comprising Vijay Pal Rao (Vice President) and Manjunatha G (Accountant Member) observed that the AO’s failure to verify the unregistered agreement with a related party that was assessee’s wife in light of relevant provisions constituted an error.
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The bench observed that the assessee provided no evidence of efforts to register the property, and the unregistered agreement lacked evidentiary value. The tribunal held that the AO’s order was erroneous and prejudicial due to inadequate inquiry into the exemption claim.
The tribunal rejected the assessee’s reliance on judicial precedents and stated that the cases did not apply due to the reason that transaction’s validity was questionable without registration or evidence of bona fide reasons for non-registration. The appeal of the assessee was dismissed.
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