Indexed Cost of Acquisition Allowable for Entire Land Parcel When Complete Rights Are Relinquished via Comprehensive Settlement – ITAT Pune

Case Background and Overview

ITO Vs Ramesh Shankarlal Bhandari (ITAT Pune) — This matter reached the Income Tax Appellate Tribunal, Pune, by way of an appeal filed by the Revenue against the order passed by the Commissioner of Income Tax (Appeals)/NFAC for Assessment Year 2023-24. The central dispute involved the deletion of an addition of ₹20,28,10,757 that the Assessing Officer had incorporated while computing the assessee's long-term capital gains on transfer of immovable property rights.

The assessee, an individual, had filed his return of income under Section 139 of the Income Tax Act, 1961 declaring total income of ₹98,53,380. The case was flagged for scrutiny under CASS owing to a discrepancy between the sale consideration of property reported in the ITR and the corresponding figure appearing in the Statement of Financial Transactions (SFT).

Facts Leading to Assessment

Upon issuance of statutory notices under Section 143(2) and Section 142(1) of the Income Tax Act, 1961, the Assessing Officer examined the transaction and noted that the assessee had received ₹33,00,00,000 as consideration in connection with an immovable property transaction. The stamp authority value of the property was declared at ₹15,18,86,616.

The assessee had claimed:

  • Deduction under Section 48 of the Act for indexed cost of acquisition amounting to ₹32,44,30,676, with the base cost of acquisition declared at ₹9,80,15,310
  • Deduction under Section 54F amounting to ₹14,47,358
  • Long-term capital gains of ₹41,21,966

On examination of the conveyance deed, the Assessing Officer observed that the deed pertained to land admeasuring 13,967.50 sq. mtrs out of Survey No. 230A/2 admeasuring 17,800 sq. mtrs, situated at Village Lohegaon, Haveli Taluka, Pune. The total consideration for this land under the conveyance deed was ₹83,36,27,000, out of which ₹33,00,00,000 was paid to the assessee, who was a confirming party pursuant to Consent Terms dated 03.08.2021.

Assessing Officer's Computation and Addition

The Assessing Officer took the position that since the physical land sold under the conveyance deed admeasured only 13,967.50 sq. mtrs, the assessee could not legitimately claim indexed cost of acquisition in relation to the full larger land admeasuring 35,600 sq. mtrs. According to the Assessing Officer:

  1. The assessee's share of the sale consideration was ₹33,00,00,000 out of the total consideration of ₹83,36,27,000
  2. This ratio worked out to a coefficient of 0.396
  3. Applying this coefficient proportionately, the indexed cost of acquisition was restricted to ₹5,04,06,410 as against the claimed figure
  4. The long-term capital gains were accordingly recomputed at ₹20,28,10,757

The total assessed income was revised upward to ₹21,26,64,137, starkly higher than the returned income of ₹98,53,380. The Assessing Officer also initially proposed to treat the receipt as income under the head "Income from Other Sources", though this position was eventually abandoned in favour of assessment under "Capital Gains".

Historical Background of the Property Dispute

The CIT(A)/NFAC undertook a thorough examination of the historical backdrop to appreciate the true character of the transaction. The relevant chronology is set out below:

Development Agreement of 1989

The assessee had entered into a Development Agreement dated 10.04.1989 with the Balgude family and received possession of land bearing Survey No. 230A/2 admeasuring 35,600 sq. mtrs, supported by a possession receipt of the same date. The entire consideration of ₹50,51,000 was paid through banking channels. An irrevocable Power of Attorney was also registered in favour of the assessee by the Balgude family. The Balgude family committed to registering a sale deed in favour of the assessee or any person nominated by him.

Note: Urban Land Ceiling Act restrictions were applicable to this land, preventing execution of a formal sale deed. The land was to be utilised solely for development purposes, and certain area was to be handed over to government/municipal authorities under Section 20 of that Act.

Bifurcation of Land and Joint Venture Agreement

  • The original Survey No. 230A/2 was subsequently bifurcated into the Eastern portion (Survey No. 230A/2) and the Western portion (Survey Nos. 230A/2/1, 230A/2/2, 230A/2/3)
  • In 2005, the assessee entered into a Joint Venture Agreement dated 09.11.2005 with the Lunkad family for development of approximately 1,50,000 sq. ft. out of the Western portion of the larger land
  • The Lunkad family subsequently entered into a separate Development Agreement directly with the Balgude family without the assessee's consent, triggering fresh disputes

Civil Litigation and Final Settlement

  • The assessee filed Special Civil Suit No. 408/2013 before the Civil Judge, Senior Division, Pune, seeking specific performance of the 1989 Development Agreement in respect of the entire 35,600 sq. mtrs and execution of the final conveyance deed
  • The alternative relief sought in the suit was for damages of ₹1,12,50,00,000 computed on the basis of the aggregate developable area of the entire larger land
  • After nine years of litigation, the parties arrived at a comprehensive settlement through Consent Terms dated 03.08.2021, which was filed in court
  • Under this settlement, the assessee received ₹33,00,00,000 as full and final consideration

Key Documents Examined