Cancellation Agreement and Fresh Additional Evidence Warrant

Cancellation Agreement and Fresh Additional Evidence Warrant Re-evaluation of Section 54F Capital Gain Exemption

Issue

Whether an order denying exemption under section 54F based on a development agreement should be set aside and remanded to the Assessing Officer when crucial additional evidence—including a cancellation agreement—was admitted under Rule 29 of the ITAT Rules.

Facts

Return of Income: The assessee filed the return of income for Assessment Year 2017-18, claiming capital gains exemption under section 54F of the Income-tax Act, 1961.
AO’s Findings: The Assessing Officer (AO) noted a joint development agreement for transfer of development rights in exchange for 6 residential flats and 6 covered car parks. Treating this as a “transfer” under section 2(47), the AO denied the section 54F exemption and computed long-term capital gains.
CIT(A) Decision: The Commissioner (Appeals) sustained the AO’s action and dismissed the assessee’s appeal.
Admission of Additional Evidence: Before the Tribunal, the assessee submitted additional evidence under Rule 29 of the ITAT Rules (including the project commencement certificate, completion/occupancy certificate, advance tax challans, and proof of a cancellation agreement).
Omission by Appellate Authority: It was noted that while the assessee substantiated its claims with material evidence regarding the cancellation agreement, the lower appellate authority failed to consider it.

Decision

The Tribunal held that the additional evidence plays a vital role in determining whether a valid transfer took place and if the exemption holds.
Accepting the additional evidence under Rule 29, the ITAT set aside the order of the Commissioner (Appeals).
To meet the ends of justice, the disputed issues along with all submitted evidence were restored to the file of the Assessing Officer for fresh verification and adjudication on merits.

Key Takeaways

Impact of Cancellation Agreements: A development agreement treated as a “transfer” under section 2(47) can be legally re-evaluated if backed by valid material evidence showing a subsequent cancellation of the transaction.
Rule 29 of ITAT Rules: Essential documents going to the root of the matter—even if not fully considered by lower authorities—can be admitted as additional evidence before the ITAT to prevent a miscarriage of justice.
Procedural Fairness via Remand: When crucial evidence is admitted at the Tribunal level without prior evaluation by the Assessing Officer, remanding the matter back for de novo assessment ensures both sides get a fair opportunity to present their case.

IN THE ITAT PUNE BENCH ‘B’

Sanjay Baburao Parab

Income-tax officer

Pavan Kumar Gadale, Judicial Member
and Dr. Manish Borad, Accountant Member

IT Appeal No. 1820 (Pune) of 2026
[Assessment year 2017-18]

JULY 3, 2026

Parikshit Aurangabadkar, AR for the Appellant. Smt. Shilpa N.C., Addl. CIT Sr. DR for the Respondent.

ORDER

Pavan Kumar Gadale, Judicial Member. – The assessee has filed the appeal against the order of the CIT(A))/NFAC passed u/sec 143(3) and u/sec250 of the Income Tax Act. The assessee has raised the fallowing grounds of appeal as under:

“On the facts and in the prevailing circumstances of the case, the learned Commissioner (Appeals) erred in confirming the addition under the head capital gains without first adjudicating the foundational issue whether any “transfer” within the meaning of section 2(47), particularly section 2(47)(v). arose in the relevant previous year. The leamed Commissioner (Appeals) failed to appreciate that section 2(47)(v) is attracted only if the transaction is of the nature referred to in section 53A of the Transfer of Property Act, 1882 which requires, inter alia, legally relevant possession and willingness of the transferee to perform the contract, both of which were absent in the present case

2. On the facts and in the prevailing circumstances of the case the learned Commissioner Appeal has ignored the principle of Substance over form. It is a well-settled judicial doctrine in income tax jurisprudence, holding that the real economic effect and intention of a transaction governs its tax treatment, rather than its legal form or nomenclature. It prevents artificial structuring solely for tax avoidance while protecting genuine commercial arrangements.

This Doctrine strongly favors assesses:

Form of Transaction Registered Development Agreement(17:09:2016)

Substance of Transaction No performance by developer, vacant plot no consideration received cancelled (09.07.2020) prior stay granted (11.03.2020)

Precedent Fit. Fardeen Khan (annulled agreement not taxable) and Balbir Singh Maini align hypothetical gain lacks substance. Revenue cannot tax based solely on agreement execution when economic reality shows no transfer/no accrual.

3. On the facts and in the prevailing circumstances of the case the learned Commissioner (Appeals) erred in law and on facts in ignoring that no monetary consideration, no built-up area, and no enforceable right to receive consideration accrued to the assessee during the year, hence no real income or chargeable capital gain arose.

4. On the facts and in the prevailing circumstances of the case the learned Commissioner (Appeals) erred in refusing to consider the Deed of Cancellation dated 09.07.2020 and the stay order under section 220(6) though such subsequent events directly evidenced the true legal character of the transaction and demonstrated that the agreement was never acted upon.

5. On the facts and in the prevailing circumstances of the case the learned Commissioner (Appeals) erred in holding that the assessee should have filed a revised retum and, failing that, could not contest taxability There isno estoppel against statute, and income not chargeable to tax cannot be assessed merely because the assessee mistakenly offered it in the return.

6. On the facts and in the prevailing circumstances of the case the learned Commissioner (Appeals) grossly erred in treating section 54F as the core issue, whereas the primary and antecedent issue was the existence of a taxable transfer itself; once no transfer arose, the question of exemption under section 54F became academic.

7. On the facts and in the prevailing circumstances of the case without prejudice, the leamed Commissioner (Appeals) erred in sustaining denial of section 54F on grounds not properly examined in the context of a development agreement where no completed transfer and no actual receipt of flats had occurred

8. On the facts and in the prevailing circumstances of the case and in law, the learned Commissioner (Appeals) (NFAC) erred in confirming the addition of Rs 2,31,79,498/ under the headcapital gains made by the AO. The impugned order is contrary to the binding ratio of the Supreme Court in Balbir Singh Maini and the judicial line represented by Fardeen Khan, G. Saroja and allied authorities dealing with unacted, unenforceable, or cancelled development agreements.”

2. The brief facts of the case are that, the assessee has filed return income for A.Y. 2017-18 on 30.07.2017 disclosing a total income of Rs. 4,32,740/-after claiming exemption u/sec54F of the Act. The case was selected for Limited Scrutiny under CASS for the reasons “(i) Large Deduction/ exemption u/sec 11(1A), 54, 54B, 54C, 54D, 54EC, 54F, 54G, 54GB, 115F etc and (ii) Large Investment in property (form26 QB) as compared to total income”. Subsequently the Assessing Officer (AO) has issued notice u/sec143(2) and U/sec142(1) of the Act along with questionnaire calling for the information details in respect of the return of income filed. The assessee has submitted copy of return of income filed along with computation of income, sale deed of land, development agreement, form 26QB and bank statements. The A.O on verification of the data, found that the assessee has entered into Development Agreement with M/s Gokhale Construction on 17.09.2016 for developing plot at Baner and in lieu of acquisition of development rights, the developer was to construct 6 residential flats having total area admeasuring about 326.64 sq. mtrs. Carpet, along with attached terraces total admeasuring about 75.78 Sq. mtrs, Further with right to use six covered car parking spaces for vendor/owner at its entire cost. Whereas the assessee has adopted the value as stamp valuation as sale consideration and after deducting the indexed cost of acquisition from the sale consideration and balance capital gains was claimed exempt due to investment in the residential property. The A.O has issued show cause notice on 8.11.2019 on the disallowance of claim of exemption. In compliance, to show cause notice, the assessee has filed submissions vide letter dated 25.11.2019 mentioning the delay in project due to legal issues and builder has not started the development works and the assessee was not provided residential flats as per development agreement.

3. Whereas the A,O was not satisfied with the explanations and dealt on the provisions of section53A of the Transfer of property Act 1882 , development agreement, provisions of section 2(47) of the Act , applicability of claim of exemption u/sec54F of the Act and legal disputes. Finally denied the claim of the assessee and recomputed long term capital gains as under:

“6.4. In view of the above discussion, it is held that the transaction entered into by the assessee is ‘transfer’ within the meaning of Section 2(47)(v) of the I.T. Act, 1961 r.w.s. 53A of the Transfer of Property Act. Therefore, the capital gains are chargeable to tax in the Assessment year under consideration. Further, since no flats have been received by the assessee in lieu of the transfer of development rights, no deduction u/sec 54F on reinvestment in residential property is allowable to misreporting of income.

6.5 On the issues of Cost of Acquisition claimed by the assessee in respect of Plot sold at Baner, the assessee has admitted vide Point no. 3 of the letter dated 25.11.2019 that the purchase price of Baner Plot is in fact Rs.1,10,000/- only and not Rs. 1,60,000/- claimed in the I.T. return. The acquisition cost of Rs. 1,61,106/- is the Ready Reckoner cost which has been used for Stamp duty purpose only. Accordingly, the claim of purchase price of Baner Plot is restricted to Rs. 1,10,000/- and cost of acquisition is worked to be Rs. 1,10,000/- + Stamp duty Rs. 6900/-). Penalty proceedings are initiated for underreporting of income.

6.6 Accordingly, the income from Capital Gain is re-worked out as under :

Working of Long Term Capital Gain

Sale of Land at Baner Date of Sale	31/03/2017
Consideration received by the assessee	Rs. 1,63,03,382/-
Value as per Stamp Duty Authority.	Rs. 2,36,47 514/-
Value (as adopted by the assessee) for working out Capital Gain	Rs. 2,36,47,514/-

Less Indexed Cost of acquisition (as discussed in para 6.5)-

(FY 1995-96

Cost	Rs. 1,16:900/-)
[Rs.1,16,900/-x1125/281]	Rs. 4,68,016/-
Capital Gain	Rs.2.31,79,498/-
Less. Exemption u/s 54F (As discussed in para 6.1 to 6.4)	Rs. NIL
Taxable Capital Gain	Rs.2.31.79.498/-

In view of the above discussion, addition of Rs.2.31. 79.498/- is made to the total income of the assessee on account of Long Term Capital Gains”

Finally, the assessing officer has assessed the total income of Rs.2,36,12,240/- and passed the order u/sec143(3) of the Act dated 14.02.2019.

4. Aggrieved by the order, the assessee has filed an appeal before the CIT(A), whereas the CIT(A) has considered grounds of appeal, statement of facts, submissions of the assessee, finding of A.O. but sustained the action of the assessing officer and dismissed the assessee’s appeal. Aggrieved by the order of the CIT(A), the assesse has filed the appeal with the Hon’ble Tribunal.

5. At the time of hearing, the Ld. AR submitted that, the CIT(A) has erred in confirming the action of the A.O overlooking the facts, circumstances , submissions and provisions of claim of exemption. The Ld.AR mentioned that the transaction entered into by the assessee is a transfer within the meaning of section 2(47)(v) of the Act r.w.s 53A of the Transfer of the Property Act. Further the CIT(A) has ignored the vital details and various documents in respect of the genuineness of the transactions. The Ld.AR explained that subsequent to the entering of development agreement on 17.09.2016 due to unforeseen circumstances and legal disputes, the developer has not constructed the flats and the development agreement was cancelled on 9.07.2020. The CIT(A) has erred in not considering the factual aspects of cancellation of development agreement. The Ld.AR mentioned that the CIT(A) has erred in not allowing the claim of exemption u/sec 54F of the Act. The Ld.AR explained that the assessee has substantiated with the material evidences on the cancellation agreement but was not considered. Further the assessee has offered the real income in the subsequent year and paid the taxes and has good case on merits with supporting evidences. Further the assessee has filed an application for the admission of Additional evidence under Rule 29 of the ITAT Rules and the Ld.AR substantiated the submissions with the factual paper book and judicial decisions and prayed for allowing the appeal. Per contra, the Ld.DR submitted that the additional evidences were not examined by the lower authorities and genuineness of transactions were not proved and the Ld. DR supported the order of the CIT(A).

6. We heard the rival submissions and perused the material on record. The sole crux of the disputed issues envisaged by the Ld AR that the CIT(A) has erred in confirming the action of the assessing officer denying the claim. The CIT(A) has erred in not considering the factual aspects of cancellation of development agreement and has erred in not allowing the claim of exemption u/sec 54F of the Act. The Ld.AR explained that the assessee has substantiated with the material evidences on the cancellation agreement but was not considered by appellate authority.The Ld.AR demonstrated the various factual aspects of development agreement and the legal dispute with supporting paper book and the assessee has offered the real income/ capital gains in the subsequent year and paid the taxes. Further the assessee has filed an application for admission of addition evidences under Rule 29 of the ITAT Rules i.e. Project commencement certificate, completion/occupancy certificate, acknowledgement of filling of evidences with appellate authority, computation of income for A.Y.2026-27 and Advance tax challlans paid placed at page 78 to108 of the paperbook which could not be submitted before the lower authorities. Further, the evidences play a very important role in decision making in the adjudicating proceedings, Therefore considering the facts, circumstances and additional evidences, the assessee should not suffer for non filing of material information, as the evidences play a vital role in decision making and admit the additional evidence. Accordingly, we set-aside the order of the CIT(A) and to meet the ends of justice, we restore the disputed issues along with the evidences to the file of the Assessing Officer to verify and adjudicate afresh on merits and the assessee should be provided adequate opportunity of hearing and shall cooperate in submitting the information for early disposal of appeal. And, we allow the grounds of appeal of the assessee for statistical purposes.

7. In the result, the appeal filed by the assessee is allowed for statistical purposes.