Full sale consideration and possession transfer extinguish property

Full sale consideration and possession transfer extinguish property rights, making capital gains taxable in AY 2018-19.

Issue

Whether capital gains are taxable in the assessment year when the sale consideration was paid and possession transferred, or in the subsequent year when the registered sale deed was executed.
Whether the assessee is entitled to a deduction under Section 54 for an investment made on November 3, 2016, based on the actual transfer of property rights in October 2017.

Facts

The assessee entered into an agreement to sell an immovable property on October 21, 2017.
The purchaser already had physical possession of the property and paid the entire sale consideration by October 31, 2017.
The execution of the registered sale deed was scheduled for October 31, 2017, but faced delays due to a red-entry/lien in the revenue records, resulting in registration on April 6, 2018.
The assessee claimed a Section 54 deduction for the assessment year 2018-19 based on a new residential property investment made on November 3, 2016.
The Assessing Officer disallowed the deduction, ruling that the transfer only occurred upon registration in April 2018, which shifted the tax liability to the assessment year 2019-20.

Decision

Held, yes: The transaction qualifies as a “transfer” under Section 2(47)(ii) via the extinguishment of rights, as both parties fully complied with the agreement and transferred all property rights by October 31, 2017.
Held, yes: Because the substantive transfer occurred within the period corresponding to the assessment year 2018-19, the capital gains are taxable in that year, and the assessee’s Section 54 deduction is valid.

Key Takeaways

Substance Over Registration: In capital gains taxation, the physical hand-over of possession combined with receiving full payment effectively concludes a transfer by extinguishing the seller’s rights, even if administrative hitches delay the formal registration.
Section 54 Timeline Alignment: Deeming the transfer date by the actual shift in control protects the taxpayer’s eligibility window for statutory deductions against prior investments.

IN THE ITAT CHANDIGARH BENCH ‘B’

Sat Paul Bansal

Deputy Commissioner of Income-tax^*

Rajpal Yadav, Vice President
and Manoj Kumar Aggarwal, Accountant Member

IT Appeal No.1545 (CHANDI) of 2025
[Assessment year 2018-19]

MAY 7, 2026

Dhruv Goel, CA- Ld. AR for the Appellant. Smt. Kusum Bansal, CIT- Ld. DR for the Respondent.

ORDER

Manoj Kumar Aggarwal, Accountant Member.- Aforesaid appeal by assessee for Assessment Year (AY) 2018-19arises out of an order of learned Commissioner of Income Tax (Appeals), NFAC [CIT(A)] dated 15-09-2025 in the matter of an assessment framed by Ld. AO u/s 143(3) of the Act on 27-09-2021. The sole issue that arises for our consideration is qua Long-Term Capital Gains on sale of property and assessee’s claim of deduction u/s 54.

2. The Ld.AR advanced grounds and referred to various documents as placed on record. The Ld. CIT-DR stated that considering the date of sale deed, the impugned gains have rightly been held to be chargeable to tax in subsequent year and deduction u/s 54 has rightly been denied to the assessee. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under.

Assessment Proceedings

3.1 During assessment proceedings, Ld. AO verified the deductionclaimed by the assessee u/s 54 of the Act against sale ofa property situated at 749, Sector 8-B, Chandigarh. The assessee’s share therein was 50% and sale consideration towards assessee’s share was for Rs.750 Lacs. The assessee computed long term capital gains of Rs.422.82 Lacs and against the same, claimed deduction u/s 54 on account of the fact that it made investment in new property situated at 285, Sector 10, Chandigarh.

3.2 Upon perusal of relevant documents as furnished by the assessee, it was observed by Ld. AO that agreement to sell for the sold property was executed on 21-10-2017 whereas sale deed was executed on 06-04-2018 which falls in FY 2018-19. Therefore, the gains would accrue in subsequent year and the assessee would not be allowed deduction u/s 54 since the investment in new property was beyond the specified period of one year.

3.3 The assessee relied on the decision of Hon’ble Apex Court in the case of Sanjeev Lal v. CIT [2014] 365 ITR 389 (SC) to support its claim. However, Ld. AO held that the decision was not applicable since it was held that in normal circumstances, the property could not be said to be sold at the time of entering into agreement to sell. In the case of Suraj Lamp & Industries (P.) Ltd. v. State of Haryana (SC)/AIR 2012 SC 206, it was held by Hon’ble Court that an immovable property could be legally transferred only by way of a registered deed of conveyance and transactions which are in the nature of GPA sales or Agreement to sell, would not confer the title and does not amount to transfer of immovable property.

3.4 The assessee referred to the provisions of Sec.45(1) r.w.s. 2(47)(v) of the Income Tax Act r.w.s. 53A of the Transfer of Property Act to state that the possession was handed over to the buyer and transfer had already taken place in this year only. However, Ld. AO held that the agreement to sell was neither registered nor notarised whereas the same required compulsory registration under the Registration Act. In such a case, the protection of possession or any benefit conferred by Sec. 53A would not be provided. The proviso to Sec.59 of Indian Registration Act only postulates that such agreement could be tendered in evidence in a suit for specific performance. It was further observed by Ld. AO that the assessee was director in M/s Paul Merchants Ltd. (the purchaser of the property) and this agreement was merely an internal arrangement to avail benefit of Sec 54. The assessee received excess amount of Rs.60 Lacs more than the amount as specified in Agreement to Sell. The fact of sale agreement was not found mentioned in the sale deed. Therefore, the sale was held to have taken place on 06-04-2018 which fall in AY 2019-20 and therefore, capital gains were to be taxed in AY 2019-20. In the result,deduction as claimed by the assessee u/s 54 would not be available sincethe investment was made in new asset on 03-11-2016 which was earlier than specified period of one year from the date of sale of the property (06-04-2018). Finally, the assessment was framed.

Appellate Proceedings

4. During first appeal, the assessee pointed out that the full payment under the agreement to sell was credited to the bank account of the assessee on 31-10-2017. The buyer deducted applicable TDS u/s 194-IA on 21-10-2017 and deposited the same on 08-11-2017. The possession of the property was already with M/s Paul Merchants Ltd. as tenant which was confirmed in Para-9 of the sale agreement. As per agreement, the registration of sale deed was fixed on 31-102017. However, when the partiesapproached the registering authority, it was gathered that the said property had lien in favour of Excise & Taxation Department, Sangrur to recovercertain outstanding dues. The lien was finally removed on 28-03-2018 and thereafter, the sale deed could be executed on 06-04-2018. A copy of search report of the property was also filed. The agreement dated 21-10-2017 was duly executed but the agreement was not registered because of lien noting in the revenue records. However, the assessee relinquished the rights in the property by virtue of agreement dated 21-10-2017 after receipt of total payment and alsohanded over the possession which was covered u/s 2(47)(ii). However, Ld. CIT(A) held that legal transfer occurs only when the title deed was transferred. Therefore, the action of Ld. AO was upheld against which the assessee is in further appeal before us.

Our findings and Adjudication

5. It emerges that the assessee has entered into an agreement to sell on 21-10-2017 to sell impugned property to the purchaser. The assessee’s share in the property was to the extent of 50%. As per term of the agreement, the total sale consideration was fixed for Rs.15 Crores out of which Rs.4.50 Crores was advanced by the purchaser as earnest money. The remainingpayment of Rs.10.50 Crores was to be given on or before 28-10-2017. The date of execution of sale deed was fixed as 31-10-2017. The sellers were required to clear all outstanding due against the said house before executing sale deed. The Clause-9 of the agreement mentioned that the physical possession of the house was already with the purchaser. The sellers were accordingly required to hand over the original document of the property at the time of execution of sale deed. However, there was an extension agreement on 30-10-2017 which extended the execution of sale deed with mutual consent to 10-04-2018.The assessee receivedentire sale consideration of Rs.222.75 Lacs &Rs.579.15 Lacs which stood credited to assessee’s account on 31-10-2017. The assessee has thus received full sale consideration by that date. In fact, the assessee received excess payment of Rs.60 Lacs which was refunded by the assessee to the purchaser on 06-12-2017. The due tax was deducted by the purchaser while making the aforesaid payments which has been reflected in Form 26AS of the seller. The other two co-owners have computed capital gains in AY 2018-19 which apparently has not been disputed by revenue. The clause-1 of sale deed as placed on record would show that full sale consideration has flown to all the three sellers by 05-12-2017.

6. We further find that the assessee has carried out inspection of the said property and the copy of inspection report has been placed on Page No.28 of the paperbook. The same read as under: –

Inspection Report

Inspection report of House No. 749, Sector 8-B, Chandigarh (File No. RP-12299) for the correspondence between Excise and Taxation Commissioner Sangrur and Estate office U.T, Chandigarh as follows:

That the Assistant Excise and Taxation Officer, Sangrur had written a letter to Estate Office, U.T, Chandigarh vide letter no. 804, dated 28.02.2017 stating that Sh. Arvind Singla S/o Sh. Pawan Singla R/o House No. 1378, Sector 33-C, Chandigarh under the business name M/S Royal Wine (Sangrur Group) and M/S Star Wine (Sunam Group is in the arrear of Excise duty to the tune of Rs. 41,52,38,826/- and presuming that Sh. Arvind Singla is the share holder/owner of the following properties,

1. House No 1378, Sector 33-C, Chandigarh. (File No. RP 14203)

2. House No. 2106, Sector 38-C, Chandigarh. (File No. RP-19658)

3. House No. 749, Sector 8-B, Chandigarh. (File No. RP-12299)

And further requested to the Estate Officer to make red entry in revenue records that Sh. Arvind Singla could not alienate the property without the prior consent of Excise Department.

Again Assistant Excise and Taxation Department Sangrurwrote a letter vide letter no. 1560, dated 15.12.2017 to Estate officer for whether Arvind Singla is the owner of above said property, enabling to recover the arrears.

Estate Officer vide letter no. 235125, dated 09.01.2018 Intimated to the Assistant Excise and Taxation Department Sangrur that above said property is owned by Sh. Sat Paul Bansal 50%, Smt. Sarita Ram Bansal 25% and Sandeep Bansal 25% share.

Deputy Commissioner State Tax, Distt Sangrur vide his letter no. 1690, dated 10.01.2018 wrote to Assistant Controller (F& A) Estate Office, Chandigarh that as per your letter no. 235125, dated 09.01.2018, it has been cleared that Sh. Arvind Singla has no ownership in this property, hence we have no objection if the owners of said property sell or transfer his property to any other person.

Estate Officer wrote a letter vide letter no. 246915, dated 27.03.2018 to D.C. State Tax Distt Sangrur that your letter no. 1690, dated 10.01.2018 is placed on record.

Assistant Controller (F& A) Estate Office, Chandigarh wrote a letter no. 247186. dated 28.03.2018 to SubRegistrar Office, Chandigarh to delete the red entry in the records in respect of House No. 749, Sector 8-B, Chandigarh.

Upon perusal of the same, it could be seen that this property was flagged as red entry in revenue records on the instructions of Assistant Excise& Taxation Officer, Sangrur dated 28-02-2017 to the Estate Officer on the ground that one Shri Arvind Singla was the owner of the said property under consideration. The instructions were issued so that Shri Arvind Singla could not alienate the property without the priorconsent of Excise Department. Again, the Excise and Taxation Department wrote another letter on 15-12-2017 to Estate Officer to enquire whether Shri Arvind Singla was the owner of the said property, enabling it to recover the arrears. The Estate officer, vide letter dated 09-01-2018 intimated that the said property was owned by the assessee along withother two co-owners. Considering the same, the Deputy Commissioner, Sales Tax, Sangrur issued no objectionon 10-01-2018 for transfer of the said property to any other person. Finally, vide letter dated 28-03-2018, Asstt. Collector (F&A) wrote a letter no.247186 dared 28-03-2018 to Sub-Register Chandigarh to delete the red entry in the records with respectto the impugned property. After removal of red flag, the sale deed has finally been executed on 06-04-2018.

7. In the given set of facts, it could be said that the sale consideration has flown to the present assessee by 31-10-2017 and the physical possession was already handed over to the purchaser by that date. The execution of sale deed got extended due to reasons which was beyond the control of the assessee. No doubt, the sale deed was executed on 06-04-2018, however, the assessee seller as well as purchaser fully complied with the terms of the agreement to sell in AY 2018-19 only. There is no quarrel on the proposition that the ownership would be conveyed only upon execution of sale deed, however, the facts of the case would indicate that the execution of sale deed has been postponed due to reasons which were beyond the control of the assessee.However, for all intents and purposes, the rights in the property stood transferred by 31-10-2017 and the case was covered u/s 2(47)(ii) which provide that the transfer would include the extinguishment of any rights in the immovable property. The assessee has filed affidavit and certificate on behalf of the purchaser entity confirming the said facts which is kept on page nos. 79 to 82 of the paper book. It could be well that for all practical purposes, the assessee as well as the purchaser had complied with all the terms of the sale in this year only. Therefore, the claim of the assessee, in our considered opinion, has to be accepted. The new property has been purchased by the assessee on 03-11-2016 which is within one year from the date of exchange of full sale consideration to the assessee i.e., 31.10.2017. Therefore, finding substantial force in the arguments of Ld. AR, we direct that the gains are to be taxed in this year only and the assessee would be entitled for impugned deduction u/s 54 since the said claim has not been disputed by Ld. AO, in any manner. We order so. No other ground has been urged in the appeal.

8. The appeal stands partly allowed.