The Income Tax Appellate Tribunal, Jabalpur, delivered a significant ruling clarifying the computation of long-term capital gains when agricultural land is converted and partially sold. The Tribunal held that the cost of acquisition must be calculated on the entire land acquired by the assessee, not merely the portion converted and sold. It further ruled that interest under Sections 234A and 234B cannot be levied when the tax liability is fully covered by cash seized by authorities and held in their possession.
Background & Facts
The Dispute
The appellant, Chaitram Alonkar, an individual and non-filer, sold agricultural land that had been legally converted into residential plots. The Income Tax Officer (Ld. AO) assessed his income under Section 143(3) read with Section 153A after a search and seizure operation under Section 132A. The Ld. AO computed long-term capital gain (LTCG) by reducing the cost of acquisition to only the area of the converted plots sold, ignoring the total area of the original agricultural land. The Ld. AO also invoked Section 50C to substitute the sale consideration with stamp duty valuation (SDV), and imposed interest under Sections 234A, 234B, and 234C.
Key Facts
- The appellant owned 1290.45 sq.mtr of agricultural land acquired at a total cost of ₹1,10,979/-
- On 24.02.2016, the Sub-Divisional Officer (SDO) converted 936.26 sq.mtr of this land into plots for sale
- The remaining 354.19 sq.mtr was reserved for roads and drainage as per conversion rules
- Four separate sale deeds were executed on 30.07.2016 for the converted plots, showing total sale consideration of ₹15,85,000/-
- Stamp duty valuation (SDV) of the four plots was ₹85,97,712/- (later corrected to ₹89,87,712/- by CIT(A))
- On 22.11.2016, Mohgaon Police seized ₹46,80,500/- in cash from the appellant, later requisitioned by the Revenue under Section 132A
- The appellant filed his return on 12.12.2018 declaring LTCG of ₹44,01,486/- and agricultural income of ₹1,22,400/-
- The Ld. AO made an addition of ₹32,90,398/- as differential LTCG by applying SDV and reduced cost of acquisition to ₹80,518/- (based on converted area only)
- The Ld. CIT(A) upheld the addition but reduced the FMV to ₹69,49,000/- based on departmental valuer’s report
Procedural History
- 22.11.2016: Cash of ₹46,80,500/- seized by Mohgaon Police and requisitioned by Revenue under Section 132A
- 08.12.2016: Statement of assessee recorded under Section 132A admitting ownership of seized cash as sale proceeds
- 04.07.2018: Notice under Section 142(1) issued by Ld. AO calling for return
- 15.11.2018: Second opportunity granted via notice
- 12.12.2018: Assessee filed return declaring LTCG of ₹44,01,486/-
- 27.12.2018: Ld. AO passed assessment order under Section 143(3) read with Section 153A, adding ₹32,90,398/- and invoking Section 269SS
- 30.10.2023: Ld. CIT(A) passed order partly allowing appeal, reducing FMV but upholding addition and interest
- 14.05.2026: Conclusive hearing held before ITAT Jabalpur
- 03.06.2026: Judgment pronounced
The Parties' Positions
For the Appellant
- Argued that cost of acquisition must be computed on the entire 1290.45 sq.mtr land, not just the 936.26 sq.mtr sold
- Contended that the seized cash of ₹46,80,500/- was in Revenue’s possession since 22.11.2016 and should have been adjusted against tax liability
- Asserted that interest under Sections 234A, 234B, and 234C should be deleted as the tax was effectively paid through seized cash
- Relied on Nitin Kumar v. ACIT and CIT v. Pranoy Roy to support non-leviability of interest
For the Respondent
- Maintained that cost of acquisition must be restricted to the area sold, as the reserved land was never sold
- Argued that Section 50C was correctly applied using SDV and later FMV
- Contended that interest under Sections 234A, 234B, and 234C is mandatory under law and cannot be waived
- Relied on CIT v. Anjum MH Ghaswala to argue that interest is statutory and non-discretionary
Relief Sought
The appellant sought:
- Inclusion of full cost of acquisition of ₹1,10,979/- for the entire 1290.45 sq.mtr land
- Deletion of the addition of ₹32,90,398/- based on incorrect cost computation
- Deletion of interest under Sections 234A, 234B, and 234C
- Rectification of FMV computation to reflect actual on-money received
The Legal Issue
The central questions were: (1) Whether the cost of acquisition for LTCG must be computed on the total area of land acquired prior to conversion, or only on the area converted and sold; and (2) Whether interest under Sections 234A and 234B can be levied when the tax liability is fully covered by cash seized by the Revenue and held in its possession since before the due date of filing.
Arguments Presented
For the Appellant
The appellant relied on the principle that cost of acquisition is the actual expenditure incurred to acquire the capital asset, irrespective of subsequent division or use. He argued that the reserved portion (354.19 sq.mtr) was an integral part of the original acquisition and its cost must be apportioned proportionately. He cited Nitin Kumar v. ACIT and CIT v. Pranoy Roy to show that when tax is effectively paid through seized funds, interest under Section 234A and 234B cannot be imposed. He emphasized that the Revenue’s delay in adjusting the seized cash could not be attributed to the assessee.
For the Respondent
The Revenue contended that since only the converted portion was sold, the cost of acquisition must be restricted to that portion. It argued that the reserved land was not part of the capital asset sold and therefore its cost was irrelevant. On interest, it relied on CIT v. Anjum MH Ghaswala to assert that Sections 234A, 234B, and 234C impose mandatory liability, and no discretion exists to waive interest even in exceptional circumstances.
The Court's Analysis
The Tribunal first addressed the jurisdictional objections under Grounds 5 and 6, admitting them as legal grounds under CIT v. National Thermal Power Company Ltd. and Jaora Sugar Mills Pvt. Ltd. v. CIT, but ultimately dismissed them on merits. It held that the assessee had participated in proceedings without timely objection under Section 124(3), thereby waiving jurisdictional challenge.
On the cost of acquisition, the Tribunal found the Ld. AO’s and CIT(A)’s approach legally flawed. It observed that the entire land was acquired as a single capital asset, and the conversion into plots was a regulatory requirement, not a voluntary division. The Tribunal stated:
"The total cost incurred by the appellant towards acquisition of capital asset is attributable to both (i) area of land sold and (ii) area of land foregone for conversion or diversion etc., owning to rules/regulation of conversion/diversion. Therefore, such cost of acquisition cannot be reduced on the premise that such area never been sold but reserved for utilities."
It set aside the order and directed the Ld. AO to recompute LTCG using the full cost of ₹1,10,979/-.
On interest under Section 234A, the Tribunal held that since the seized cash was in Revenue’s possession since 22.11.2016 - well before the due date of filing (31.07.2017) - the tax liability on the returned income was effectively discharged. Citing CIT v. Pranoy Roy, it ruled:
"The non-payment of taxes on returned income was beyond appellant's control. Hence, it could be safely concluded that the Revenue was in possession of the seized cash for adjustment tax on returned income, so is the position with assessed tax."
Thus, no interest under Section 234A was leviable.
For Section 234B, the Tribunal held that the Revenue suffered no loss as it held cash exceeding the assessed tax liability. It cited CIT v. Anand Prakash to affirm that interest is compensatory and cannot be levied where the Revenue has already secured the funds. The entire interest under Section 234B was deleted.
For Section 234C, the Tribunal permitted partial levy only for the period before seizure (i.e., for instalments due on 15.06.2016 and 15.09.2016), but held that no default occurred after 22.11.2016. The Ld. AO was directed to recompute this interest accordingly.
The Verdict
The appeal was partly allowed. The Tribunal set aside the order of the Ld. CIT(A) and directed the Ld. AO to:
- Recompute LTCG using the full cost of acquisition of ₹1,10,979/- for the entire 1290.45 sq.mtr land, with applicable indexation
- Delete interest under Section 234A in its entirety
- Delete interest under Section 234B in its entirety
- Recompute interest under Section 234C only for the period up to 22.11.2016, excluding the period after seizure
- Maintain the FMV of ₹69,49,000/- as adopted by the Ld. CIT(A)
What This Means For Similar Cases
Cost of Acquisition Must Reflect Total Capital Asset Acquired
- Practitioners must argue that cost of acquisition is determined at the time of acquisition of the original asset, not at the time of its subdivision or conversion
- Any reduction in cost based on partial sale is legally unsustainable unless the reserved portion was separately disposed of
- Tax authorities cannot arbitrarily apportion cost based on area sold; the entire asset’s cost must be considered
Interest Cannot Be Levied When Revenue Holds Equivalent Funds
- When cash is seized and held by the Revenue before the due date of tax payment, interest under Sections 234A and 234B is not leviable
- The burden shifts to the Revenue to justify why it did not adjust seized funds against tax liability
- This principle applies equally to search cases under Section 132A and other seizure proceedings
- Practitioners should immediately raise this argument in any case where seized cash exceeds tax liability
Procedural Compliance in FMV Determination Is Critical
- While the Tribunal upheld the FMV under Section 50C, it emphasized that departmental valuer’s report must be formally obtained
- Any assessment based on SDV without referral to a DVO is vulnerable to challenge
- This reinforces the need for strict procedural compliance in valuation-based assessments
