TAXPAYER ALERT: ITAT DENIES SECTION 54 TAX RELIEF DUE TO UNREGISTERED SALE AGREEMENT
In this case, the individual taxpayer submitted their income tax return on December 11, 2021, reporting a total income of Rs. 2,07,55,350/-. The tax return was selected for scrutiny under the Centralized Action for Survey and Scrutiny (CASS), and a notice under section 143(2) dated June 28, 2022, was duly served. The Assessing Officer subsequently issued multiple statutory notices under section 142(1) of the Income Tax Act, requesting the taxpayer to provide explanations for significant capital gains exemption claimed under section 54. In response, the taxpayer submitted explanations on August 23, 2022, and November 23, 2022. After reviewing these submissions, the Assessing Officer accepted the return as filed.
However, the Principal Commissioner of Income Tax (PCIT), Hyderabad-4, held the assessment order made by the Assessing Officer to be erroneous and detrimental to the interests of the Revenue. Exercising his revisionary powers under section 263 of the Income Tax Act, the PCIT issued a notice on January 3, 2025, demanding an explanation from the taxpayer.
Issue Raised:
The primary concern raised by the PCIT is that the taxpayer purchased immovable property from his wife, Smt. Radha Kumari Boddapaty, for Rs. 4,40,00,000/- on May 15, 2021, through an unregistered sale agreement. The taxpayer claimed a deduction for this transaction under section 54 of the Income Tax Act. The PCIT asserted that since the agreement was not registered, it could not be considered a “valid transfer.” Consequently, the taxpayer’s claim for a deduction of Rs. 4,26,28,194/- under section 54F was deemed inadmissible.
ITAT Findings:
Upon reviewing the facts presented by the PCIT alongside the assessment order issued by the Assessing Officer, the ITAT concluded that the order made by the Assessing Officer was indeed erroneous and prejudiced the Revenue’s interests.
The taxpayer’s attempt to claim exemption under section 54 based on an unregistered sale agreement with his wife was problematic. Although the Assessing Officer sought additional information under section 142(1) and the taxpayer provided a copy of the sale agreement, the claim was based on an unregistered transaction between related parties. The Assessing Officer neglected to adequately verify this issue against the relevant provisions of the Income Tax Act and the Registration Act of 1908, making the original assessment order erroneous and harmful to the Revenue’s interests.
In accordance with the Registration Act, 1908, a property title cannot be transferred without a registered deed. Thus, the absence of registration means that the transfer was not “valid,” and the taxpayer did not obtain a legitimate title or rights to the property.
Furthermore, the taxpayer failed to present sufficient evidence to demonstrate that he made a good faith effort to register the property with the appropriate registering authority. Without proper documentation, the assertions made based solely on the unregistered agreement lack evidentiary value.