Hyderabad ITAT Clarifies Treatment of Capital Gains Deductions and Business Income Errors

The Hyderabad Bench of the Income Tax Appellate Tribunal in Manchala Ravinder Alias Raviendra Vs DCIT (ITA No. 1078/Hyd/2025, AY 2016-17, order dated 21.08.2026) examined four key areas:

  1. Allowability of commission/transfer expenses while computing capital gains
  2. Deductibility of land development/improvement expenditure as part of indexed cost of acquisition
  3. Eligibility for exemption under Section 54F
  4. A computational mistake leading to disclosure of ₹1,06,02,100 as business income instead of a business loss of ₹5,42,616

The Tribunal upheld the disallowances relating to commission, land improvement and Section 54F exemption on the ground of absence of credible evidence, but remanded the business income computation issue to the Assessing Officer (AO) for fresh verification.

Background of the Case

The assessee filed a return of income for AY 2016-17 declaring total income of ₹1,10,66,820 after adjusting current and brought forward losses. The return was initially processed under Section 143(1) of the Income Tax Act 1961.

Subsequently, the case was selected for limited scrutiny under CASS on two specific aspects:

  • Whether investments and income from securities transactions were properly disclosed
  • Whether the sale consideration adopted for capital gains computation was correctly shown

During scrutiny, the AO focused on:

  • Commission/transfer expenses claimed against capital gains
  • Large development expenditure claimed as cost of improvement
  • Exemption claimed under Section 54F
  • Business income/loss figures as per original and revised returns

The assessee challenged the AO’s order before the CIT(A), NFAC, and then further appealed to the ITAT Hyderabad.

Grounds Raised Before the Tribunal

The assessee broadly disputed:

  • Sustenance of disallowance of commission paid on property sales
  • Rejection of land development/improvement expenses
  • Denial of exemption under Section 54F
  • Non-consideration of the ground relating to adoption of business income at ₹1,06,02,100 instead of the originally declared loss of ₹5,42,616

The Tribunal analysed each issue independently.

Disallowance of Commission / Transfer Expenses on Sale of Property

Facts and Claim

The assessee computed capital gains on three different land transactions:

  • Tellapur Land – claimed transfer expenses: ₹2,50,000
  • Medipally Land – claimed transfer expenses: ₹2,00,000
  • Miyapur Land – claimed transfer expenses: ₹2,00,000

Aggregate commission/transfer expenses claimed: ₹6,50,000.

To support the claim, the assessee produced self-prepared debit vouchers showing:

  • Cash commission to one individual on 23.08.2015 – ₹2,00,000
  • Cash commission on 31.03.2016 purportedly related to two flats – ₹2,00,000
  • Cash commission to another individual on 27.11.2015 – ₹2,00,000
  • Cash commission to a third individual on 23.08.2015 – ₹50,000

During assessment and appellate proceedings, the assessee relied mainly on these vouchers to substantiate that intermediaries had assisted in effecting the property transfers.

AO and CIT(A)’s Findings

Both the AO and CIT(A) rejected the claim on the same fundamental deficiencies:

  • The vouchers were self-generated by the assessee
  • No addresses of the alleged recipients of commission were mentioned
  • No details of mode of payment, nor bill numbers or independent acknowledgements were provided
  • No additional material such as broker confirmations, agreements, or supporting correspondence was filed, even at appellate stage

Consequently, the authorities concluded that the commission payment was not proved and disallowed the entire amount of ₹6,50,000 as transfer expenses.

ITAT’s View

The Tribunal carefully examined the record and noted:

  • The assessee had not produced any external or independent documentation to corroborate that the alleged commission had in fact been paid.
  • Even the basic identity particulars (such as full addresses) of persons to whom commission was stated to be paid were missing.
  • Self-made vouchers, without corroboration, carry very limited evidentiary value.