Section 54 Relief Upheld Despite Unregistered Agreement: Analysis of ITO Vs Anju Madhan (ITAT Delhi)

The Delhi bench of the Income Tax Appellate Tribunal in ITO Vs Anju Madhan has reaffirmed that for the purposes of claiming exemption under Section 54 of the Income Tax Act 1961, a registered sale deed is not an absolute prerequisite, so long as the assessee has substantially complied with the conditions of purchase — namely, substantial payment and possession, even through an unregistered agreement to sell, protected by Section 53A of the Transfer of Property Act.

This decision is significant for assessees who reinvest their long-term capital gains in residential properties through unregistered agreements to sell, particularly in situations where formal registration is delayed or pending but the assessee has effectively completed the transaction in substance.

Background of the Case

Origin of the Capital Gains

  1. The assessee, Smt. Anju Madhan, jointly with her husband, had acquired a residential property at W-135, Greater Kailash-1, New Delhi in Financial Year 1994-95.
  2. Over the years, particularly during FY 2010-11, 2011-12 and 2012-13, the assessee incurred substantial expenditure on improvements to the property amounting to:
    • Rs. 31,57,738/-
    • Rs. 20,68,593/-
    • Rs. 22,40,413/- respectively
  3. The assessee further redeveloped the property by constructing parking plus four floors, and sold all the floors during Assessment Year 2016-17 for a total sale consideration of Rs. 8.40 crore.
  4. On the resultant long-term capital gains of Rs. 6,68,29,816, the assessee claimed exemption under Section 54 by investing in another residential property.

Investment in New Residential Property

  • The claim under Section 54 was based on an agreement to sell dated 06.06.2015 entered into with Sh. Prateek Madhan (son of the assessee) for 25% share in property E-108, Malcha Marg, New Delhi.
  • As per the assessee, a substantial part of the consideration for the new property had been paid and possession was taken in terms of this agreement.

Assessment Proceedings and AO’s Objections

During scrutiny assessment under Section 143(3), the Assessing Officer (AO) rejected the assessee’s claim for exemption under Section 54 primarily on two counts:

  1. Unregistered Agreement to Sell

    • The AO noted that the assessee’s claim was founded on an unregistered agreement to purchase the share in property at Malcha Marg.
    • Relying on the proposition that transfer of immovable property must be through a registered conveyance, the AO concluded that there was no valid “purchase” for Section 54 purposes.

  2. Alleged Defect in Vendor’s Title

    • The AO further pointed out that Sh. Prateek Madhan allegedly did not have a clear and marketable title over the Malcha Marg property.
    • The property was stated to be involved in litigation before the ADJ-02 & Waqf Tribunal.
    • On this basis, the AO concluded that the assessee could not be said to have purchased a valid property so as to attract Section 54 benefit.

Accordingly, the AO disallowed the entire exemption of Rs. 6,68,29,816 claimed under Section 54 and added the same to the total income.

First Appeal before CIT(A)

Aggrieved, the assessee filed an appeal before the CIT(A)-23, New Delhi. Extensive submissions were made to justify the allowability of Section 54 exemption.

Proof of Vendor’s Title

Before the CIT(A), the assessee demonstrated that:

  • The title in property E-108, Malcha Marg had been conveyed to the vendor through a conveyance deed dated 16.10.2012.
  • The property was converted from leasehold to freehold and conveyed in favour of the vendor by the President of India acting through the Land & Development Officer, Ministry of Urban Development.
  • The CIT(A) recorded the factual background from this conveyance deed, including the recitals relating to title and mutation.

The assessee further pointed out:

  • As per para 3 of the conveyance deed dated 16.10.2012, the name of Smt. Kuwarni Padmini Shah, through GPA Jaswant Singh, was last mutated vide letter No. LDO/LS4/251 dated 05.10.2012.
  • As per para 4 of the same conveyance deed, no person had objected to the mutation or claimed to be the successor in interest of the original lessee or anyone claiming through the original lessee.

This, according to the assessee, conclusively showed that clear title had vested in the vendor well before the agreement to sell dated 06.06.2015.

Earlier Agreement with M/s Jain Realty Ltd.

The assessee also placed on record details of an earlier agreement to sell in respect of the same Malcha Marg property entered into with M/s. Jain Realty Ltd., Kolkata, explaining that this was during the process of conversion from leasehold to freehold and that ultimately title was formally conveyed by the government through the 16.10.2012 conveyance deed.