Section 54F IT Act | Payment Under Agreement to Sell with Possession Transfer Suffices for Capital Gains Exemption : ITAT Pune

The Income Tax Appellate Tribunal, Pune, has clarified that an assessee is entitled to claim exemption under Section 54F of the Income Tax Act upon payment of substantial consideration and transfer of possession under an agreement to sell, even if the registered sale deed is executed beyond the statutory two-year period. This ruling reinforces a purposive interpretation of the law favoring reinvestment intent over technical compliance.

Background & Facts

The Dispute

The appellant, Jui Narayan Salgaonkar, sold an immovable property in Sindhudurg, Maharashtra, for a total consideration of Rs. 1,30,00,000 during the financial year 2015-16 (assessment year 2016-17). The sale was reported to the Income Tax Department through the Risk Management System (RMS) due to non-filing of return. The Assessing Officer (AO) treated the entire sale consideration as escaped income and initiated proceedings under Section 148A(d) and issued a notice under Section 148 on 20.03.2023.

Key Facts

• The assessee sold a plot of land valued at Rs. 30,00,000 but received Rs. 1,30,00,000 as sale consideration.
• On 31.03.2016, the assessee paid Rs. 90,00,000 as advance towards the purchase of a residential property from Shri Rajan Sarmalkar.
• An agreement to sell dated 04.05.2016 was executed, specifying the payment of Rs. 90,00,000 on 31.03.2016 and the balance upon obtaining NOC from the Sindhudurg District Co-operative Bank.
• The property was mortgaged with the bank, delaying the execution of the registered sale deed.
• The sale deed was finally executed on 28.02.2025, which explicitly referenced the agreement dated 04.05.2016 and acknowledged receipt of Rs. 90,00,000 on 31.03.2016.
• Possession of the property was handed over to the assessee in 2016.
• The assessee claimed exemption under Section 54F for Rs. 1,15,00,000, the full amount invested in the new residential property.
• The assessee also claimed Rs. 33,00,000 as expenditure on road construction for access to the plot, which was disallowed for lack of documentary evidence.

Procedural History

• 20.03.2023: Notice under Section 148 issued after income escapement determination under Section 148A(d).
• 05.05.2023: Assessee filed return declaring Nil income, with detailed computation of long-term capital gain.
• 2023-24: AO issued notice under Section 142(1) and questionnaire; rejected claim for exemption under Section 54F and disallowed Rs. 33,00,000 as road construction cost.
• 30.03.2025: Ld. CIT(A)/NFAC upheld AO’s order, rejecting Section 54F exemption on grounds that no registered sale deed existed within two years.
• 08.04.2026: Hearing before ITAT Pune.
• 12.06.2026: Judgment pronounced.

The Parties' Positions

For the Appellant

The assessee contended that:

• The payment of Rs. 90,00,000 on 31.03.2016 and execution of the agreement on 04.05.2016 constituted sufficient investment under Section 54F.
• The delay in executing the sale deed was due to the bank’s mortgage, not any intent to evade tax.
• The sale deed dated 28.02.2025 explicitly recorded the prior payment and agreement, confirming the continuity of transaction.
• Relied on DCIT v. Kruti Lalitkumar Jain (2025) 170 taxmann.com 465 (Pune-Trib.), CIT v. Dr. Laxmichand Narpal Nagda, CIT v. Mrs. Shakuntala Devi, and Fibre Boards (P) Ltd. v. CIT to argue that possession and payment, not registration, determine purchase.

For the Respondent

The Department contended that:

• Section 54F requires a registered sale deed to be executed within two years of the sale of the original asset.
• The agreement to sell is not a transfer under the Transfer of Property Act and cannot substitute a registered sale deed.
• The delay of nearly nine years in executing the sale deed raised suspicion of tax evasion.
• The Rs. 33,00,000 road construction cost lacked invoices, bills, or material records and was therefore disallowable.

Relief Sought

The appellant sought:

• Allowance of exemption under Section 54F for Rs. 1,15,00,000.
• Allowance of Rs. 33,00,000 as expenditure under Section 48.
• Cancellation of interest under Sections 234A, 234B, and 234C.
• Cancellation of penalty under Sections 271A(1)(c) and 271F.

The Legal Issue

The central question was whether Section 54F of the Income Tax Act permits exemption for capital gains when the assessee has paid substantial consideration and taken possession of a residential property under an unregistered agreement to sell, but the registered sale deed is executed after the statutory two-year period.

Arguments Presented

For the Appellant

The appellant’s counsel relied on multiple judicial precedents to argue that the term "purchase" under Section 54F must be interpreted liberally to reflect economic reality, not mere legal formalities. The payment of Rs. 90,00,000 on 31.03.2016, coupled with possession transferred in 2016 and explicit recital of these facts in the final sale deed, demonstrated genuine reinvestment intent. The delay in registration was attributable to third-party impediments (bank mortgage), not the assessee’s conduct. The Tribunal in Kruti Lalitkumar Jain had held that where the final sale deed acknowledges prior payment and agreement, the exemption cannot be denied. The Supreme Court in Fibre Boards further supported that advance payments constitute "utilization" of capital gains. The assessee had fulfilled the legislative intent of encouraging reinvestment in residential property.

For the Respondent

The Department maintained that Section 54F requires a completed transfer through a registered sale deed within two years. An agreement to sell, even if notarized, does not convey title under the Transfer of Property Act and cannot satisfy the statutory condition. The Department emphasized that the assessee had nearly nine years to complete the transaction and failed to do so, raising doubts about the genuineness of the transaction. The absence of bills, invoices, or material records for the Rs. 33,00,000 road construction cost rendered it ineligible for deduction under Section 48.

The Court's Analysis

The Tribunal undertook a comprehensive review of judicial interpretations of the term "purchase" under Section 54F. It noted that the Supreme Court in Fibre Boards (P) Ltd. v. CIT had held that "utilization" of capital gains includes advance payments made towards acquisition of land or building, rejecting a narrow interpretation that required physical possession or title transfer.

"Advances paid for the purpose of purchase and/or acquisition of the aforesaid assets would certainly amount to utilization by the assessee of the capital gains made by him for the purpose of purchasing and/or acquiring the aforesaid assets."

The Tribunal further relied on the Karnataka High Court in CIT v. Mrs. Shakuntala Devi, which held that the essence of Section 54F is the investment of capital gains in a residential house, not the completion of legal formalities. The Bombay High Court in CIT v. Dr. Laxmichand Narpal Nagda had similarly ruled that "purchase" does not require legal title to be transferred within the stipulated period, provided the whole consideration is paid and possession is taken.

The Tribunal emphasized that the sale deed dated 28.02.2025, though delayed, explicitly recorded the prior agreement of 04.05.2016 and the payment of Rs. 90,00,000 on 31.03.2016. The bank’s mortgage, which prevented timely registration, was an external impediment beyond the assessee’s control. The fact that possession was handed over in 2016 confirmed the assessee’s dominion and control over the property, aligning with the spirit of Section 54F.

The Tribunal distinguished the facts from Fibre Boards, where the issue was about utilization of capital gains for industrial relocation, and found the reasoning directly applicable to residential property reinvestment. The decision in DCIT v. Kruti Lalitkumar Jain was directly on point: an unregistered MOU, followed by a delayed sale deed acknowledging prior payment, was held sufficient for exemption.

Regarding the Rs. 33,00,000 road construction cost, the Tribunal noted that the assessee had not provided invoices, material bills, or labor records. The AO’s disallowance on this ground was upheld as the burden of proof for expenses under Section 48 lies with the assessee.

The Verdict

The appeal was allowed. The Tribunal set aside the order of the Ld. CIT(A)/NFAC dated 30.03.2025 and held that the assessee is entitled to exemption under Section 54F for Rs. 1,15,00,000. The disallowance of Rs. 33,00,000 as road construction cost was upheld due to lack of substantiation. Consequently, interest under Sections 234A, 234B, and 234C, and penalties under Sections 271A(1)(c) and 271F, were cancelled as they arose from the erroneous disallowance of the exemption. The case was remanded to the Assessing Officer for recalculation of tax liability consistent with this order.

What This Means For Similar Cases

Payment and Possession Trump Registration

• Practitioners can now argue that payment of substantial consideration and transfer of possession under an agreement to sell, even if unregistered, satisfy the intent of Section 54F.
• The final sale deed’s recital of prior payment and agreement serves as conclusive evidence of reinvestment.

External Delays Are Not Fatal

• Delays caused by third-party impediments (e.g., bank mortgage, pending litigation, municipal approvals) will not disentitle an assessee from claiming exemption if the transaction is otherwise genuine.
• Documentation showing the cause of delay (e.g., bank correspondence, legal notices) should be preserved and submitted.

Documentation Remains Critical for Expenses

• While exemption under Section 54F is protected by judicial precedent, expenses under Section 48 require documentary proof.
• Claimants must maintain bills, invoices, payment records, and contractor agreements for any improvement or development costs.

Burden of Proof Shifts to Revenue for Suspicion

• The Revenue cannot deny exemption merely on suspicion of tax evasion without concrete evidence of fraud or fabrication.
• The Tribunal’s reliance on recitals in the sale deed reinforces that documentary consistency, not perfection, is sufficient.

Liberal Interpretation of "Purchase"

• Courts are increasingly interpreting "purchase" in Section 54F as economic acquisition, not legal title transfer.
• This aligns with the Supreme Court’s view in Fibre Boards and the Bombay and Karnataka High Courts, creating a uniform national standard.

Practical Takeaway

• For clients selling property and reinvesting in residential property, execute a detailed agreement to sell with payment receipts and possession acknowledgment.
• If registration is delayed, obtain written confirmation from the seller and third parties (e.g., banks) explaining the reason.
• File the sale deed as soon as possible and ensure it explicitly references the prior agreement and payment.