An individual taxpayer faced trouble with the Income Tax Department after he calculated his income tax payable for long-term capital gain (LTCG) income of Rs 1.6 lakh as only Rs 33,296 while he sold his property for Rs 70 lakh, which he had purchased five years ago for Rs 36 lakh.

The income tax assessing officer (AO) argued that he was liable to pay tax on long-term capital gains (LTCG) income of Rs 17 lakh and the dispute resolution panel (DRP) agreed with him. However, the Income Tax Appellate Tribunal (ITAT) (Mumbai) was of a different opinion and ruled in favour of the taxpayer, taking into account the year in which he made substantial payments to acquire this property and the benefits of indexation.

Indexation is a technical term that refers to giving effect to inflation in a particular transaction. By applying indexation benefits, the cost price of your property is increased to reflect the effect of inflation over a given time period. This means that the resulting capital gain (selling price minus cost price) is reduced,

This tax dispute arose because the taxpayer had entered into an agreement with the builder to purchase this property in FY 2007-08 but got possession of the same in FY 2010-11. Therefore, the income tax department used the argument that he should get indexation benefit from FY 2010-11 and accordingly, long term capital gain should be calculated at Rs 17 lakh. The taxpayer argued that indexation benefit for sale of this property should actually be calculated from FY 2007-08 and hence his LTCG should be only Rs 1.6 lakh.

The taxpayer’s lawyers said: “…more than 50% of the total cost i.e. 64.85% was paid up to FY 2007-08….The assessee (taxpayer) got the right to hold the property from the date of “agreement for sale” in January 2007 (FY 2007-08), hence the listing should start from that year.

ITAT Mumbai said that since he had paid more than 50% of the amount to the builder for acquiring this property in FY 2007-08, the precedent of similar decision of ITAT Mumbai (ITA 851/Mum/2025) would apply to this case, which shows that his capital gains computation (LTCG of Rs 1.6 lakh) may be accurate.

In the case discussed in this article, if the taxpayer had applied the indexation number of FY 2007-08, his long term capital gains (LTCG) would have been Rs 1,66,482. However, if he had used the tax department’s indexation number of FY 2010-11, his LTCG would have been Rs 17 lakh, a difference of Rs 15 lakh. This is why the taxpayer challenged the tax department’s order and eventually won in ITAT Mumbai.

Keep reading to know how this taxpayer won the case in ITAT Mumbai.

How did this matter start?

As per the ITAT Mumbai order dated June 23, 2025, the timeline of events is as follows:

Financial Year 2007-08: This taxpayer who was a non-resident individual (NRI), purchased a property in Mumbai and signed a sale agreement with the builder for Rs 36 lakh (36,77,020).

Financial Year 2010-11: This taxpayer got possession of the property.

Financial Year 2014-15: He sold this property for Rs 70 lakh.

April 26, 2022: The tax department reopened his file under section 147 and issued him a section 148 notice. The tax department alleged that there was a mistake in assessing income of Rs 74,18,194 during the year under consideration (FY 2014-15).

May 28, 2022: In response to this notice, he filed ITR for assessment year 2015-16, in which he declared his total income as Rs 1,54,700.

October 3, 2022: He was issued a notice under section 142(1) of the Income Tax Act, 1961 and questionnaire and asked to file full details of all immovable properties, copy of agreement of purchase/sale of property, details of payment made for purchase of property, details of payment received on sale of immovable property, details of payment of credit card bill, etc.

October 17, 2022: He did not respond to this notice. The tax department issued him a penalty notice under section 274 cum section 272(1)(b).

November 14, 2022: He submitted copy of account statement of Union Bank, copy of passport, computation of income along with acknowledgement of ITR filed in response to notice under section 148, bank account statement of Corporation Bank, reply letter, Index-II of property purchased in 2007.

August 26, 2023: A notice was issued to him under section 142(1), requesting him to submit the details of LTCG working along with details of property sold, details of property purchased, etc.

September 13, 2023: In response to the notice, he submitted his reply along with all the required documents asked for.

November 22, 2023: The reply of the taxpayer was not found to be tenable on the ground that the taxpayer had entered into the purchase agreement in January 2007, but possession of the property was given in December 2010. Therefore, the taxpayer was eligible to claim indexation only from FY 2010.

December 17, 2023: The tax department issued the order for this revised computation for his LTCG income.

June 23, 2025: Taxpayer wins the case in ITAT Mumbai.

The taxpayer filed an appeal against this order in the Dispute Resolution Panel (DRP) and lost the case. He then filed an appeal in the ITAT, Mumbai, where he won the case.

What did ITAT Mumbai say about this property sale transaction?

Raj Kumar Chauhan, Judicial Member, ITAT Mumbai, said:

“…we have examined the documents including the agreement for sale dated November 16, 2007 and at page 4 in clause 2, the flat has been identified as flat number B-707, 7th floor and it is mentioned: “The purchaser hereby agrees to purchase and acquire Flat B-707, 7th floor measuring 65 sq.mt. built-up area of ​​the said unit in the said building being constructed on the said property for a total consideration of Rs. 34,57,000.”

Clause 3 of the sale agreement contains the schedule of payments. As per the payment mentioned in the written arguments and reproduced by us in Para No. 9 of this order, a substantial amount has already been paid in the financial year 2007-08. It was submitted that up to the financial year 2007-08, 64.85% of the total cost had already been paid.

Therefore, respectfully following the decision of the jurisdictional Tribunal in Anand Swarup Mehta v. ITO ITA 851/Mum/2025 (supra), we are of the view that the assessee/appellant has the right to possess the property from the date of ‘agreement for sale’ dated 16th November, 2007 (FY 2007-08) and the arguments of the ld AR on behalf of the assessee are therefore cogent and solid wherein he has contended that indexation benefit should start from FY 2007-08.

Thus, the taxpayer has justified his claim to consider the date of acquisition of the asset for computing capital gains as the date of agreement for sale i.e. 16th November, 2007 and not from the date of possession letter dated 16th December, 2010 as proposed in the assessment order.

Judgement: “On the basis of the above discussion and the reasons mentioned therein, grounds Nos. 2, 3 and 4 are accepted in favour of the assessee. Accordingly, we direct the Assessing Officer to consider the date of acquisition for computing capital gains as the date of agreement for sale on 16th November, 2007 and compute the capital gains accordingly for the relevant assessment year 2015-16.

Due to this decision, this taxpayer saved LTCG of Rs 15 lakh

Sanjoli Maheshwari, executive director, Nangia & Co LLP, says: “If the tax department’s argument is accepted, indexation benefits will be considered from FY 2010-11 and accordingly, long-term capital gains will be calculated at Rs 17,04,264 instead of Rs 1,66,482.

Chartered Accountant (Dr) Suresh Surana shares a table that shows how capital gains have worked out after applying indexation from FY 2007-08, and also compares it with what the LTCG and tax would have been if the tax department’s position (indexation from FY 2010-11) had been accepted:

Note – These calculations have been done using the cost inflation index of the financial year 1981-82. The figures presented consider only the tax rates applicable on the transfer of long-term capital assets, particularly land and building. Surcharge and health and education cess have not been included in the above calculation.

What could be the impact of this decision in the current assessment year 2025-26 scenario?

ET Wealth Online spoke to various experts about the impact of this decision on assessment year 2025-26; here is what they said:

Sanjoli Maheshwari, Executive Director, Nangia & Co LLP, says: The said judgment follows the well-established principle enunciated by the Supreme Court and various courts that the relevant date for determining the holding period and listing is the date of the sale agreement and not the date of possession by which the allottee/purchaser acquires a legally enforceable right over the said property. The mere delivery of possession subsequently does not derogate from the fact that the allottee/purchaser had a right over the said property on the issuance of the allotment letter.

With regard to assessment year 2025-26, it is pertinent to note that the Finance (No. 2) Act, 2024 has made a significant change relating to taxation of LTCG on immovable property (land or building or both), effective from July 23, 2024, whereby it allows resident individuals to compute tax on LTCG arising from properties acquired before July 23, 2024, which is more beneficial to them.

However, the said exemption is not extended to non-resident individuals (NRIs). Thus, the above decision will not hold any significance in case of non-residents selling their properties effective from July 23, 2024, given that no indexation benefit will be available on properties acquired before July 23, 2024 and long-term capital gains will be taxed at 12.5%.

However, this will also be relevant for NRIs while filing tax returns for assessment year 2025-26 (i.e. wherein transfer of immovable properties takes place during the period April 1, 2024 and before July 23, 2024), as well as for ongoing assessments and litigations relating to earlier years, wherein the said judgment can be relied upon and indexation benefit can be considered from the date of allotment letter and not from the date of possession.

Chartered accountant Dinesh K. Jain, founding partner Dinesh Aarav & Associates, says: “The tribunal’s decision is both legally correct and equitable. It is in line with established judicial precedents such as Sanjiv Lal vs CIT and PCIT vs Vembu Vaidyanathan, which have held that legal rights in a capital asset are conferred not merely from the date of possession but from the date of a registered agreement with substantial payment.”

From a tax policy perspective, once the taxpayer parts with a significant consideration, his economic investment in the property effectively commences. Accordingly, it is only fair that the benefit of indexation – which is intended to neutralise the effect of inflation during the period of actual investment – be provided from that date. It would be unfair to deny such a benefit, as it would ignore the period during which the taxpayer’s money has been locked up in the property.”

Effect in assessment year 2025-26: “However, in the current regime, the practical effect is more limited. For non-resident taxpayers, a flat 12.5% ​​long-term gains tax (LTCG) rate without indexation will apply to transfers made on or after 23 July 2024, making this decision of limited relevance, except for sale transactions before 23 July 2024. For resident taxpayers, both options will co-exist – 20% with indexation or 12.5% ​​without indexation – making the tribunal’s reasoning more relevant to domestic cases where indexation calculations continue to apply in respect of assets acquired before 23 July 2024

Nevertheless, the date of acquisition remains important as it determines whether the benefit is short-term or long-term. This decision emphasises that the two-year holding period for immovable property should be reckoned from the date of agreement and substantial payment, and not from the date of possession.

Chartered Accountant (Dr) Suresh Surana says: “The Mumbai ITAT decision in the case of Braj Kishore Singh is a rational and progressive interpretation of the tax law, particularly with regard to the computation of LTCG on immovable property. The tribunal rightly emphasised on actual ownership determined from the date of allotment or agreement of sale rather than mere legal possession or registration. This approach reflects the economic reality of property transactions and provides greater tax certainty, especially in cases of long periods between payment and possession.”

Some of the major implications of this judgement are as follows:

Enhanced indexation benefit for property sellers – “Taxpayers selling property in FY 2025-26 and beyond can claim indexation from the date of understanding or allotment instead of possession or registration

Even with the introduction of the 12.5% ​​LTCG tax rate without indexation benefit under the Finance (No. 2) Act 2024, this development remains significant. For properties acquired before 23 July 2024, taxpayers still have the option to be taxed at the existing 20% ​​rate with indexation. In such cases, the ability to apply indexation from an earlier date may result in more favourable tax outcomes, making this decision a valuable opportunity for property sellers to optimise their capital gains tax liability.

Aligning tax benefits with investment realities “The recent decision is of particular significance for transactions involving under-construction properties, where project delays are a common occurrence. By aligning tax benefits with the actual economic timeline of property investment, the decision provides a more realistic and equitable framework for taxpayers.

Importance of Proper Documentation “The ITAT decision regarding facility-related expenditure underlines the importance of maintaining comprehensive documentation for all related payments. This ensures that taxpayers are able to take full advantage of the deductions allowable under capital gains provisions, thereby improving their tax position.”