2025 (5) TMI 1795 - AT - Income Tax

Addition u/s 56(vii)(b) - Purchase of property - Amount paid to the seller as well as to others for cancellation of prior deeds of this property is more than the market valuation - HELD THAT - Admittedly the assessee has paid some extra amount to consenting parties apart from the consideration to the seller of the property for cancellation of deed and the same fact has not been considered either by the AO or by CIT(A)/NFAC though the same fact was brought in the knowledge of the AO as well as before Ld. CIT(A)/NFAC Revenue has not brought any evidence on record that the assessee has actually handed over the possession of the property to the purchaser and that the purchaser has started using the same therefore under these circumstances we find force in the arguments of assessee that the property was not sold and therefore there is no question of any short term capital gain. AO as well as CIT(A)/NFAC erred in treating the unregistered agreement on stamp paper of Rs. 100/- as the sale deed. We further find that the assessee has paid Rs. 5, 00, 20, 000/- in all to the seller and consenting parties for cancellation of deed and therefore the question of purchasing the property at less than the fair market value does not arise since the market value of Rs. 4, 74, 00, 000/- is less than the total cost of acquisition i.e. Rs. 5, 00, 20, 000/-. Accordingly we deem it appropriate to set-aside the order passed by CIT(A)/NFAC and direct the AO to delete both the additions made i.e. as per the provisions of section 56(vii)(b). Appeal filed by the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the addition of Rs. 30,50,000/- under section 56(vii)(b) of the Income Tax Act, representing the difference between the fair market value and the consideration paid for the purchase of land, was justified when the assessee had paid amounts exceeding the market value including payments for cancellation of prior deeds.

(b) Whether the addition of short-term capital gain on the basis of an unregistered agreement of sale executed on a Rs. 100 stamp paper, without transfer of possession or registration, was valid, i.e., whether the land transaction could be treated as complete for capital gains taxation.

(c) The applicability and interpretation of relevant legal precedents concerning transfer of ownership and capital gains arising from unregistered agreements and possession status.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of addition under section 56(vii)(b) regarding difference between market value and consideration paid

Relevant legal framework and precedents: Section 56(vii)(b) of the Income Tax Act provides for taxation of income arising from receipt of property for consideration less than the fair market value, treating the difference as income. The principle is to tax unaccounted income arising from undervalued transactions.

Court's interpretation and reasoning: The Tribunal noted that the Assessing Officer (AO) made an addition of Rs. 30,50,000/- as 50% of the difference between the market value (Rs. 4.74 crores) and the actual consideration paid (Rs. 4.15 crores) for the land. However, the assessee contended that, in addition to the registered sale consideration, he had paid Rs. 4.84 crores to consenting parties for cancellation of prior deeds, which effectively increased the total cost of acquisition to over Rs. 5 crores.

Key evidence and findings: The Tribunal observed that the AO and the first appellate authority did not consider these additional payments for cancellation of deeds. The assessee's contention was supported by the fact that the total payments exceeded the market value, negating the basis for addition under section 56(vii)(b).

Application of law to facts: Since the total amount paid by the assessee exceeded the fair market value, the premise for addition under section 56(vii)(b) did not hold. The Tribunal found that the AO and CIT(A) erred in ignoring the additional payments and making the addition solely on the basis of registered sale deed consideration.

Treatment of competing arguments: The Revenue did not provide evidence contradicting the assessee's claim of additional payments. The Tribunal gave weight to the assessee's submissions and the absence of contrary proof from the Revenue.

Conclusion: The addition under section 56(vii)(b) was unsustainable and was set aside.

Issue (b): Legitimacy of addition of short-term capital gain on sale of property based on unregistered agreement and absence of possession

Relevant legal framework and precedents: Capital gains tax arises on transfer of capital asset as defined under the Income Tax Act. Transfer includes sale, exchange or relinquishment of asset. However, transfer of ownership generally requires a registered deed under the Registration Act. The Supreme Court's ruling in Sanjay Sharma vs. Kotak Mahindra Bank Ltd. (2025) was cited, which held that ownership does not pass until registration, even if possession is transferred and consideration paid.

Court's interpretation and reasoning: The AO treated the unregistered agreement on Rs. 100 stamp paper as a sale deed and taxed the short-term capital gain arising from the difference between sale consideration (Rs. 10 crores) and purchase price (Rs. 2.20 crores share). The assessee contended that no sale occurred as the agreement was unregistered, no stamp duty was paid, and possession was not delivered despite a clause stating peaceful possession was given.

Key evidence and findings: The Tribunal noted that the Revenue failed to produce evidence that possession was actually handed over or that the purchaser had started using the property. The unregistered agreement was insufficient to constitute a valid transfer of ownership for capital gains purposes.

Application of law to facts: Applying the Supreme Court precedent, the Tribunal held that the transaction was incomplete without registration and possession transfer. Thus, no capital gain could arise on the basis of the unregistered agreement.

Treatment of competing arguments: The Revenue relied on the agreement and receipt of advance payments, but failed to prove transfer of ownership or possession. The Tribunal favored the assessee's argument supported by authoritative case law.

Conclusion: The addition of short-term capital gain was erroneous and was deleted.

Additional observations:

The Tribunal also noted procedural irregularities such as non-acknowledgment of written submissions by the CIT(A), and the assessee's absence at the video conferencing hearing before the CIT(A). Despite this, the Tribunal considered the assessee's contentions and material on record.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Considering the totality of the facts of the case & in the light of the fact that the Revenue has not brought any evidence on record that the assessee has actually handed over the possession of the property to the purchaser and that the purchaser has started using the same, therefore, under these circumstances we find force in the arguments of learned counsel of the assessee that the property was not sold and therefore, there is no question of any short term capital gain. The Assessing Officer as well as Ld. CIT(A)/NFAC erred in treating the unregistered agreement on stamp paper of Rs. 100/- as the sale deed."

Further, the Tribunal stated:

"We further find that the assessee has paid Rs. 5,00,20,000/- in all to the seller and consenting parties for cancellation of deed and therefore the question of purchasing the property at less than the fair market value does not arise since the market value of Rs. 4,74,00,000/-, is less than the total cost of acquisition i.e. Rs. 5,00,20,000/-. Accordingly, we deem it appropriate to set-aside the order passed by Ld. CIT(A)/NFAC and direct the Assessing Officer to delete both the additions made i.e. as per the provisions of section 56(vii)(b) of the IT Act as well as of short-term capital gain calculated on the basis of so-called sale of immovable property."

The core principles established include:

• The total consideration for acquisition must include all payments made, including those for cancellation of prior deeds, to determine fair market value comparison under section 56(vii)(b).
• An unregistered agreement of sale without payment of stamp duty and without actual transfer of possession does not constitute a valid transfer of ownership for capital gains taxation.
• Possession and registration are critical elements for recognizing transfer of immovable property under the Income Tax Act and Registration Act.
• Revenue bears the burden of proving completion of transfer for capital gains assessment.

Final determinations on each issue were in favor of the assessee, with both additions under section 56(vii)(b) and short-term capital gains being deleted and the appeal allowed accordingly.