The Income Tax Appellate Tribunal, Jabalpur Bench, has clarified that the retrospective application of the proviso to Section 50C of the Income Tax Act applies when part consideration for immovable property is received via account payee cheque, even if the registered sale deed is executed later. This ruling resolves a long-standing ambiguity in capital gains computation and reinforces the primacy of transactional substance over formal documentation.
Background & Facts
The Dispute
The dispute centers on the computation of long-term capital gains (LTCG) arising from the sale of two immovable properties by Shri Surendra Singh for Assessment Year 2015-16. The assessee sold Property P1 (52,747 sq.ft.) on 31.03.2015 for ₹10 crore and Property P2 (28,428 sq.ft.) on 14.08.2014 for ₹6 crore. He claimed exemption under Section 54 for ₹2.59 crore, comprising ₹60.78 lakh for a purchased flat and ₹1.98 crore for construction of a new house on a plot purchased on 17.03.2011. The Assessing Officer (AO) rejected the cost of acquisition claimed by the assessee and adopted valuations from the District Valuation Officer (DVO), while also rejecting the exemption for construction on the ground of time-bar.
Key Facts
- The assessee inherited the properties from his father via a registered gift deed dated 24.10.1962.
- An unregistered agreement to sell dated 29.03.2011 was executed, with part consideration received via account payee cheques: ₹25 lakh on 07.08.2010, ₹50 lakh on 14.01.2011, and ₹50 lakh on 23.04.2011.
- The registered sale deeds for both properties were executed on 14.08.2014 and 31.03.2015.
- The assessee’s registered valuer valued the properties as on 01.04.1981 at ₹3.29 crore, while the Sub-Registrar’s office reported a combined assessable value of ₹1.10 lakh for the same period.
- The DVO, on reference under Section 142A, valued the properties as on 01.04.1981 at ₹51.04 lakh (P1: ₹33.81 lakh, P2: ₹17.23 lakh).
- The assessee initially declared stamp duty value (SDV) of ₹34.69 crore as full value of consideration but later withdrew it upon rejection of his cost of acquisition.
- Construction of the new house commenced on 21.10.2013 and was completed on 30.04.2015.
Procedural History
- 20.08.2016: Assessee filed ITR declaring taxable income of ₹1.22 crore, claiming LTCG exemption of ₹2.59 crore under Section 54.
- 02.08.2018: AO framed assessment under Section 143(3), rejecting the cost of acquisition and SDV, adopting DVO’s FMV for both acquisition and sale consideration, and disallowing construction exemption.
- 13.05.2019: Ld. CIT(A) partially allowed the appeal: adopted registered sale deed value as sale consideration and averaged DVO and assessee’s cost of acquisition; upheld denial of construction exemption on time-bar grounds.
- 12.05.2026: Final hearing before ITAT Jabalpur.
- 03.06.2026: Judgment pronounced.
The Parties' Positions
For the Assessee
- Argued that the DVO’s valuation was arbitrary and not based on market data.
- Contended that the agreement to sell dated 29.03.2011, coupled with receipt of part consideration via account payee cheques, triggered capital gains in AY 2011-12 under Section 2(47)(v) read with Section 53A of the Transfer of Property Act.
- Asserted that the cost of construction of the new house, completed within three years of sale, qualified for Section 54 exemption, irrespective of when the plot was purchased.
- Challenged the averaging method adopted by CIT(A) as mathematically unsound and legally invalid.
For the Revenue
- Maintained that the DVO’s valuation was the most reliable and was properly communicated.
- Argued that the agreement to sell was unregistered and non-binding, and thus could not trigger transfer under Section 2(47).
- Contended that the proviso to Section 50C, inserted w.e.f. 01.04.2017, could not apply retrospectively.
- Supported the denial of Section 54 exemption on the ground that the plot was purchased in 2011, more than three years before the sale, making the entire investment ineligible.
Relief Sought
- Assessee sought: (i) adoption of his cost of acquisition, (ii) recognition of construction cost as eligible for Section 54 exemption, (iii) taxation of capital gains in AY 2011-12.
- Revenue sought: (i) upholding DVO’s valuation for both cost and sale consideration, (ii) rejection of retrospective application of Section 50C proviso, (iii) confirmation of denial of Section 54 exemption.
The Legal Issue
The central questions were: (1) Whether the proviso to Section 50C of the Income Tax Act, inserted w.e.f. 01.04.2017, applies retrospectively to agreements executed before its insertion where part consideration is received via account payee cheque? (2) Whether the cost of construction of a new house on a plot purchased prior to the sale qualifies for exemption under Section 54, if the construction is completed within three years of the sale? (3) Whether averaging the cost of acquisition between the assessee’s valuation and the DVO’s valuation is a legally permissible method?
Arguments Presented
For the Appellant/Petitioner
The assessee relied on CIT v. Calcutta Export Co. (2018) and CIT v. Vummudi Amarendran (2020) to argue that the proviso to Section 50C was clarificatory and retrospective in nature, meant to correct an unintended gap in the law. He submitted that the receipt of ₹1.25 crore via account payee cheques under the 2011 agreement satisfied the conditions of the proviso. He further cited CIT v. Dr Arvind Phadke (2018) to argue that possession, not registration, determines transfer. Regarding Section 54, he emphasized that the law permits exemption for construction cost even if the land was acquired earlier, provided construction is completed within three years of sale, as held in CIT v. Smt. S. R. Ramanathan (2009).
For the Respondent/State
The Revenue contended that the proviso to Section 50C was substantive and not clarificatory, and therefore could not be applied retrospectively, relying on Allied Motors (P.) Ltd. v. CIT (1997). It argued that the unregistered agreement lacked legal enforceability and could not override the registered sale deed. On Section 54, it maintained that the entire investment, including the plot cost, must be within the stipulated period, and since the plot was purchased in 2011, the exemption was time-barred. It further challenged the averaging method as arbitrary and unsupported by any statutory provision.
The Court's Analysis
The Tribunal undertook a detailed analysis of the statutory framework under Sections 2(47), 45, 50C, and 54, and the judicial precedents cited.
"The date of transfer of a capital asset is determined by the date of registration of the sale deed, not by the date of agreement or receipt of part consideration, unless the conditions of Section 53A of the Transfer of Property Act are satisfied."
The Court held that the agreement dated 29.03.2011 did not satisfy Section 53A because it did not provide for immediate possession and was not registered. The actual transfer occurred only upon execution of the registered sale deeds in 2014 and 2015. Hence, the year of chargeability was AY 2015-16.
Regarding Section 50C, the Tribunal examined the Supreme Court’s rulings in CIT v. Calcutta Export Co. and CIT v. Amrit Banaspati Co. Ltd., concluding that the proviso was inserted to remedy an obvious omission - the disparity between agreement value and sale deed value when part payment is made via traceable banking channels. The Court held:
"The proviso to Section 50C(1) is clarificatory and retrospective in effect, as it merely supplies an omission in the original provision and does not alter the legal character of the transaction."
Since the part consideration was received via account payee cheques, the proviso applied, and the agreement value of ₹16 crore (₹10 crore + ₹6 crore) was to be taken as the full value of consideration, not the DVO’s FMV.
On the cost of acquisition, the Tribunal found the averaging method adopted by the CIT(A) to be legally untenable:
"Averaging two disparate valuations - one based on subjective opinion and the other on official reference - lacks any legal or rational basis. The law requires either acceptance of the assessee’s valuation if substantiated, or the DVO’s valuation if properly communicated and considered."
The Tribunal noted that the DVO’s report was not properly considered because the assessee’s objection, raised on 02.07.2018, was not adjudicated, violating principles of natural justice as held in Classic Builders & Developers v. UOI (2001). The matter was remanded to the DVO to reconsider the objection.
On Section 54, the Court clarified:
"The exemption under Section 54 is available for the cost of construction of a new house, even if the land was acquired prior to the sale, provided the construction is completed within three years of the transfer. The cost of the land itself is not eligible, but the construction cost is."
The Tribunal found that the Ld. CIT(A) had wrongly denied the exemption solely on the basis of the plot’s purchase date, without examining whether the construction cost was incurred within the stipulated period. Further, the documents supporting construction expenses were not placed before the AO, violating Rule 46A of the Income Tax Rules. The issue was remanded to the AO for fresh adjudication.
The Verdict
The cross appeals were partly allowed. The Tribunal set aside the CIT(A)’s order on cost of acquisition and sale consideration. The sale consideration was held to be ₹16 crore as per the registered agreement, under the retrospective application of the proviso to Section 50C. The cost of acquisition was remanded to the DVO for fresh determination after considering the assessee’s objection. The denial of Section 54 exemption for construction cost was set aside and remanded to the AO for verification of construction expenses under Rule 46A. The year of chargeability was confirmed as AY 2015-16. No monetary relief was granted directly, but the computation was directed to be redone in accordance with the judgment.
What This Means For Similar Cases
Retrospective Application of Section 50C Proviso Is Now Clear
- Practitioners can now confidently argue that the proviso to Section 50C applies to agreements executed before 01.04.2017 if part consideration was received via account payee cheque, bank draft, or electronic clearing system.
- The burden shifts to the Revenue to prove that the agreement was not genuine or that the payment was not traceable.
Construction Cost Under Section 54 Is Eligible Even If Land Was Bought Earlier
- The cost of construction qualifies for exemption under Section 54 if completed within three years of the sale, regardless of when the land was purchased.
- Taxpayers must maintain detailed records of construction expenses - bills, contractor agreements, payment vouchers - to substantiate claims.
Averaging Valuations Is Not Permissible
- The Tribunal has unequivocally rejected averaging as a method for determining cost of acquisition.
- Practitioners must now argue for either the assessee’s valuation (if supported by documentary evidence) or the DVO’s valuation (if properly communicated and objections considered).
- Failure to consider objections to DVO reports will result in remand, as per Classic Builders.
Procedural Compliance Under Rule 46A Is Mandatory
- Any new documents submitted in appeal must be placed before the AO for consideration.
- Failure to do so renders the appellate order defective and liable to be set aside.
- Tax authorities must issue notices or remand cases for verification rather than deciding on documents never seen by the AO.
