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2025 (6) TMI 721 - AT - Income TaxRevision u/s 263 - exemption u/sec.54F - as per CIT AO failed to properly verify the claim of exemption and the transaction was not a valid transfer due to non-registration of the sale agreement - HELD THAT - In the present case going by the facts on record it is undisputedly clear that the claim of assessee towards deduction u/sec.54F of the Act is not based on relevant evidences which is evident from the claim made by the assessee and allowed by the AO on the basis of an un-registered sale agreement with related party. Although the assessee claims that it is a bonafide transaction between the two parties and the assessee has invested entire consideration received towards sale of original asset for purchase of new asset and because of certain disputes including prohibitory orders issued by the VAT Authorities on the impugned property registration could not be done but in our considered view except stating this fact in the purported sale agreement the assessee could not file any evidence to prove that he has made any effort to register the property by presenting document to the registration authorities. Therefore the averment of Assessee on the basis of an un-registered agreement and it s contents can only be treated as self-serving document and on that basis the claim of the assessee cannot be accepted. Assessment order passed by the AO without examining the claim by conducting relevant enquiries which ought to have been carried-out in terms of Explanation-2 to Sec.263 of the Act is definitely an erroneous order which caused prejudicial to the interest of the Revenue. In the present case an unregistered agreement claimed to have been entered into by the assessee with his wife is between the two related parties and further the assessee is also failed to file relevant evidences to prove that he has made a honest effort to register the property by presenting the document before the registering authority and in absence of any evidence the averments made by the assessee on the basis of the recitals of an un-registered sale agreement cannot be considered as evidentiary value. Therefore we reject the various case laws relied upon by for the Assessee on this issue. Thus we are of the considered view that the assessment order passed by the AO u/sec.143(3) r.w.s.144B of the Act is not only erroneous but also prejudicial to the interest of the Revenue. PCIT after considering the relevant facts has rightly set-aside the assessment order in terms of provisions of sec.263. Decided against assessee.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this appeal are: (a) Whether the assessment order passed by the Assessing Officer (AO) under section 143(3) read with section 144B of the Income Tax Act, 1961, allowing exemption claimed under section 54F on the basis of an un-registered agreement of sale for purchase of immovable property from a related party (wife), is erroneous and prejudicial to the interest of Revenue. (b) Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking revisional powers under section 263 of the Income Tax Act to set aside the assessment order on the ground that the AO failed to properly verify the claim of exemption and the transaction was not a valid transfer due to non-registration of the sale agreement. (c) Whether the exemption under section 54F of the Act can be allowed on the basis of an un-registered agreement of sale, particularly when the transaction is between related parties and the title has not been transferred by a registered deed. (d) The applicability and interpretation of relevant provisions of the Income Tax Act, 1961, the Registration Act, 1908, and judicial precedents regarding the validity of un-registered agreements of sale for claiming capital gains exemption. 2. ISSUE-WISE DETAILED ANALYSIS Issue (a) and (b): Validity of the assessment order and exercise of revisional powers under section 263 The legal framework under section 263 of the Income Tax Act empowers the PCIT to revise any order passed by the AO if it is found to be erroneous and prejudicial to the interest of the Revenue. Explanation 2 to section 263 clarifies that an order is deemed erroneous and prejudicial if the AO has passed it without making enquiries or verification which ought to have been made or allowed any relief without enquiry into the claim. In the present case, the AO had issued notices under section 142(1) and called for details regarding the capital gains exemption claimed under section 54F. The assessee furnished the un-registered agreement of sale dated 15.05.2021 for purchase of immovable property from his wife and other relevant documents. The AO accepted the claim and allowed the exemption. The PCIT, however, held that the assessment order was erroneous and prejudicial because the AO failed to properly verify the claim in light of the Registration Act, 1908, and the fact that the sale agreement was un-registered. The PCIT noted that the agreement was between related parties and that the property was included in a "Prohibited Properties in Rural Prohibited Register" with court stay orders, which prevented registration. The PCIT considered the AO's order as a case of lack of enquiry and verification and therefore set aside the assessment order directing a fresh assessment. The Tribunal examined the PCIT's reasons and found that the AO had not conducted adequate enquiries regarding the validity of the un-registered agreement and the implications of non-registration under the Registration Act. The Tribunal emphasized that under Explanation 2 to section 263, such failure to verify the claim properly renders the order erroneous and prejudicial. The Tribunal held that the PCIT had validly exercised jurisdiction under section 263 as the AO's order was based on self-serving documents without sufficient evidentiary support and failed to consider the legal effect of non-registration, especially in a related party transaction. Issue (c): Allowability of exemption under section 54F on the basis of un-registered agreement of sale Section 54F of the Income Tax Act provides exemption from capital gains tax if the net consideration from the sale of a long-term capital asset is invested in the purchase of a residential house property. The legal question is whether such exemption can be allowed when the purchase is evidenced only by an un-registered agreement of sale, particularly from a related party. The assessee contended that the entire consideration was paid, possession was taken, and registration could not be completed due to prohibitory orders by the VAT authorities and court stay. The assessee relied on judicial precedents including decisions of the Hon'ble Supreme Court and various High Courts, which held that registration is not mandatory for claiming exemption under section 54 if the entire consideration is invested and possession is taken, invoking section 53A of the Transfer of Property Act, 1882, which protects possession rights under an agreement of sale. The Tribunal acknowledged the legal position that exemption under section 54F can be allowed on the basis of an agreement of sale if possession is delivered and entire consideration is paid, even if registration is pending due to bona fide reasons. However, the Tribunal distinguished the present facts on the ground that the transaction was between related parties (assessee and his wife) and the assessee failed to produce any independent evidence to prove that registration was not possible due to bona fide reasons or that any attempt was made to register the property. The un-registered agreement was treated as a self-serving document without evidentiary value. The Tribunal emphasized that under the Registration Act, 1908, transfer of immovable property requires registration to effectuate transfer of title. Without registration, the transfer is not valid in law, and the purchaser does not acquire title. Thus, in absence of registration and independent proof of bona fide reasons for non-registration, the transaction cannot be considered a valid transfer for the purpose of claiming exemption under section 54F. Issue (d): Applicability of judicial precedents and interpretation of legal provisions The assessee relied on several judicial precedents to support the claim that exemption under section 54F can be allowed on the basis of an un-registered agreement of sale where possession is delivered and consideration paid, including:
The Tribunal rejected the applicability of the first two decisions relied upon by the assessee, stating that those cases dealt with the general scope of revisional powers under section 263 but did not apply to the facts where the AO failed to make necessary enquiries. The Tribunal also rejected reliance on the cases permitting exemption on un-registered agreements in the absence of registration, as those decisions are distinguishable on facts because in the present case the transaction was between related parties and no evidence was produced to show bona fide reasons for non-registration or efforts to register. The Tribunal held that the transaction without registration between related parties, without sufficient evidence, cannot be treated as a valid transfer under the Registration Act, and thus the exemption under section 54F cannot be allowed on such basis. 3. SIGNIFICANT HOLDINGS "In order to invoke his revisionary powers, the PCIT must bring on record with relevant reasons, as how the assessment order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue." "Although the claim of exemption u/sec.54F is based on an un-registered agreement with the related party, the Assessing Officer has failed to verify the issue in light of relevant provisions of the Act including provisions of Registration Act, 1908 which render the assessment order erroneous and prejudicial to the interest of the Revenue." "As per the provisions of Explanation-2 to sec.263 of the Act, an assessment order shall be deemed to be erroneous in so far as it is prejudicial to the interest of the Revenue, if, in the opinion of the PCIT, the order is passed without making enquiries or verification which should have been made and the order is passed allowing any relief without enquiring into the claim." "Unless a property is conveyed by a registered deed in terms of the Registration Act, 1908, the title of the property will not be transferred to the purchaser and, therefore, it cannot be said that, the said transfer is a 'valid transfer' and the person who purchased the property has got a valid title and right over the property." "In the present case, an unregistered agreement claimed to have been entered into by the assessee with his wife is between the two related parties and further, the assessee is also failed to file relevant evidences to prove that he has made a honest effort to register the property by presenting the document before the registering authority and in absence of any evidence, the averments made by the assessee on the basis of the recitals of an un-registered sale agreement, cannot be considered as evidentiary value." "The assessment order passed by the Assessing Officer u/sec.143(3) r.w.s.144B of the Act is not only erroneous but also prejudicial to the interest of the Revenue. The learned PCIT after considering the relevant facts has rightly set-aside the assessment order in terms of provisions of sec.263 of the Act."
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