The Income Tax Appellate Tribunal, Delhi, has clarified that payments made to tenants for vacating a property prior to its sale may be deducted from capital gains if substantiated by credible, contemporaneous evidence - even in the absence of formal surrender deeds. This ruling reinforces the principle that the substance of a transaction prevails over rigid documentary formalities in tax assessment.
Background & Facts
The Dispute
The appellant, Saroj Makan, a housewife with no other income apart from bank interest, was assessed for the Assessment Year 2011-12 after the Income Tax Department flagged her as a non-filer despite a property sale of Rs. 2.52 crore. The Assessing Officer (AO) initiated proceedings under Section 148 of the Income Tax Act, 1961, alleging undisclosed capital gains. The AO disallowed a claim of Rs. 52,08,910 as expenses incurred to evict tenants from the property, resulting in a total addition of Rs. 52,08,910 under the head of capital gains.
Key Facts
- The appellant co-owned a property at XVI/2559/81, Gali No. 6/7, Beedonpura, Karol Bagh, Delhi, with two other co-owners, holding a 1/3rd share.
- The property was purchased in 2002; construction dated before 1959.
- The property was sold on 23.03.2011 to Shri Pradeep Goel for Rs. 2.52 crore.
- The appellant’s 1/3rd share of sale proceeds amounted to Rs. 84,00,000.
- To enable vacant possession, the appellant paid Rs. 31,00,000 to Shri Suraj Prakash Bhola and Rs. 22,00,000 to Shri Gurcharan Kumar Ghai via cheques (Nos. 831278 and 831279) on Union Bank of India.
- Both tenants executed affidavits dated 14.03.2011 and 11.03.2011 respectively, confirming receipt of payment and surrender of tenancy rights.
- Bank passbooks were submitted showing encashment of the cheques by the tenants.
- The sale deed dated 23.03.2011 contained Recital No. 7, stating the vendee would have the right to evict tenants by law or negotiation.
- The appellant submitted water and electricity bills in the names of the tenants, indicating prior occupation.
- The AO and First Appellate Authority rejected the claim due to absence of registered surrender deeds, municipal records, or court eviction orders.
Procedural History
- 28.03.2018: Notice under Section 148 issued by ITO, Ward-40(1), New Delhi.
- 08.05.2018: Assessee filed return declaring capital gain of Rs. 1,55,000.
- 12.12.2018: Notice under Section 143(2) issued.
- 18.12.2018: Assessment order passed under Sections 143(3)/147, adding Rs. 52,08,910 as unexplained capital gain.
- 01.09.2025: Order of the First Appellate Authority (CIT(A)) upholding the addition.
- 19.05.2026: Hearing before ITAT Delhi.
- 03.06.2026: Judgment pronounced.
Relief Sought
The appellant sought deletion of the addition of Rs. 52,08,910, arguing that the payments to tenants were genuine, necessary for transfer, and directly linked to the sale transaction. She requested the capital gain be recomputed after allowing the said amount as cost of acquisition or expense incurred wholly and exclusively in connection with the transfer.
The Legal Issue
The central question was whether payments made to tenants for vacating a property prior to its sale can be deducted from capital gains under Section 48 of the Income Tax Act, 1961, even in the absence of registered surrender deeds or municipal records, provided the payments are substantiated by contemporaneous documentary evidence.
Arguments Presented
For the Appellant
The appellant argued that the payments to tenants were not fabricated but were essential to deliver vacant possession as required by the sale deed. She submitted cheques, bank passbooks, affidavits, and the sale deed itself, all contemporaneous to the transaction. She relied on Kaushalya Devi (deceased) through LRs v. CIT (Delhi HC, 2018) and CIT v. Shakuntala Rejeshwar (1986) 160 ITR 840 (Del), which recognize such payments as deductible if made to clear encumbrances and enable transfer. She emphasized that the burden of proof lies on the department to disprove genuineness, not on the assessee to prove it beyond all doubt.
For the Respondent
The Revenue contended that the absence of registered surrender deeds, rent records, or court orders rendered the claim speculative. It argued that the tenants’ own income tax returns showed artificial loss computation, suggesting collusion. The AO and CIT(A) held that the lack of recitals in the sale deed and absence of corroborative evidence made the claim unreliable and potentially a tax evasion device.
The Court's Analysis
The Tribunal examined the sale deed and found Recital No. 7 explicitly granted the vendee the right to evict tenants either by law or by negotiation. This indicated that the vendor’s obligation to deliver vacant possession was contractual and integral to the transaction. The Tribunal noted that the payments were made via bank cheques, with corresponding encashment records, and supported by sworn affidavits from the tenants - evidence contemporaneous to the sale.
"Thus, in the given facts and circumstances the plea raised does not appear to be an afterthought story."
The Tribunal rejected the notion that only registered documents can establish genuineness. It held that the law does not require formal surrender deeds for eviction payments to qualify as deductible expenses under Section 48. The key test is whether the payment was made wholly and exclusively for the purpose of transferring a clear title. The Tribunal distinguished CIT v. Eagle Theatres and other cases cited by the Revenue, noting those involved lack of any supporting evidence, unlike the present case where multiple corroborative documents existed.
The Tribunal further observed that the tenants’ subsequent income tax filings, even if flawed, could not invalidate the contemporaneous transaction between the appellant and the tenants. The department’s failure to cross-examine the tenants or conduct independent verification weakened its position.
The Tribunal emphasized that the principle of natural justice requires the AO to investigate credible claims before rejecting them outright. The mere suspicion of tax avoidance, without rebuttal evidence, cannot override documented transactions.
The Verdict
The appeal was allowed. The ITAT Delhi set aside the order of the First Appellate Authority dated 01.09.2025 and directed the Assessing Officer to recompute the capital gain by allowing the sum of Rs. 52,08,910 as expenditure incurred wholly and exclusively in connection with the transfer of the property. The reassessment must be completed within 8 weeks from the date of the order.
What This Means For Similar Cases
Eviction Payments Are Legally Recognized Costs
- Practitioners may now confidently claim eviction payments to tenants as deductible under Section 48 if supported by bank records, affidavits, and sale deed recitals.
- The absence of a registered surrender deed is not fatal if other contemporaneous evidence is credible.
Documentary Evidence Must Be Timely and Corroborative
- Bank cheques with encashment proof, affidavits executed at the time of transaction, and sale deed clauses acknowledging tenancy are sufficient to establish genuineness.
- Water/electricity bills showing prior occupation strengthen the claim of tenancy.
Department Cannot Rely on Suspicion Alone
- The burden shifts to the Revenue to disprove the transaction through independent inquiry or rebuttal evidence.
- Mere reliance on tenants’ later income tax returns to discredit payments is insufficient and violates principles of natural justice.
Practical Takeaway
- In property sales involving tenanted premises, draft sale deeds to include explicit recitals about tenant eviction obligations.
- Always use bank transfers for tenant payments and obtain signed, notarized affidavits at the time of payment.
- Retain all supporting documents for at least 8 years, as such claims may be challenged years after the sale.
