Capital Gains on Property Sale: ITAT Bengaluru Allows Section 48 Deduction for ₹3 Crore Paid to Agreement Holder

The Bengaluru Bench of the Income Tax Appellate Tribunal in Trident Automobiles (P) Ltd Vs DCIT (ITAT Bangalore) has clarified how capital gains are to be computed where an assessee sells immovable property for a higher amount, but is contractually obliged to pass on part of the sale proceeds to an earlier agreement holder.

The decision examines whether, in such circumstances, the assessee must adopt the entire figure mentioned in the registered sale deed as the "full value of consideration" and then seek a deduction, or whether only the net amount retained by the assessee can be treated as consideration. The Tribunal has held that while the full sale consideration remains taxable in principle, a payment made to extinguish the agreement holder’s enforceable rights is deductible under Section 48 of the Income Tax Act 1961.

Factual Background: Earlier Agreement and Final Sale

Property and Initial Arrangement

  • The assessee, Trident Automobiles (P) Ltd, owned a parcel of land measuring 2 acres and 5 guntas at Tumkur Amanikere Village.
  • An initial agreement was executed with Mr. N. Radhakrishna for sale of this land for ₹3 crore.
  • Under this first agreement, an advance of ₹11 lakh was paid by Mr. Radhakrishna.
  • Subsequently, Mr. Radhakrishna was unable to discharge the balance consideration as per the terms of this agreement.

Revised Understanding with Agreement Holder

Given the inability of the original agreement holder to complete the purchase, the parties restructured their arrangement:

  • The assessee and Mr. Radhakrishna agreed that:
    • The assessee would be entitled to ₹3 crore, as originally agreed.
    • Mr. Radhakrishna would locate a new purchaser for the property.
    • Any sale price exceeding ₹3 crore would belong to Mr. Radhakrishna.
  • This understanding effectively transferred to the agreement holder the right to source a buyer and to enjoy the incremental portion of the sale consideration over and above ₹3 crore.

Sale for ₹6 Crore and Payment Flow

A new buyer was eventually introduced, and the property was sold under a registered sale deed dated 31.08.2016 for ₹6 crore. The key aspects were:

  • The registered sale deed recorded the sale consideration as ₹6 crore.
  • Out of this ₹6 crore:
    • The assessee ultimately retained ₹3 crore.
    • A sum of ₹3 crore was paid to Mr. N. Radhakrishna, the earlier agreement holder.
  • The assessee asserted that the payment of ₹3 crore to Mr. Radhakrishna was routed entirely through banking channels.
  • Mr. Radhakrishna was also shown as a consenting witness in the arrangements surrounding the sale transaction, underlining his continuing interest in the property and his role in facilitating the ultimate sale.

Return Filing and Capital Gain Declaration

For the Assessment Year 2017-18, the assessee filed its return of income on 30.10.2017, declaring total income of ₹19,60,85,180/-.

  • In respect of the land sale, the assessee considered only ₹3 crore as the sale consideration (being the amount it kept) while computing long-term capital gains.
  • Based on that, it reported long-term capital gains of ₹75,18,067.
  • The assessee’s working ignored the fact that the registered document itself reflected a sale consideration of ₹6 crore.

In addition, during assessment, the Assessing Officer (AO) noticed that the assessee had made long-term investments in quoted and unquoted shares of ₹2,96,09,541/-, and invoked Section 14A to compute a disallowance of ₹2,96,096/- at 1% of such investments. The Tribunal’s order, however, primarily turned on the capital gains issue relating to the land transaction.

Assessment Proceedings: AO Treats Full ₹6 Crore as Consideration

Scrutiny and Notices

  • A notice under Section 143(2) dated 24.09.2018 was issued and duly served on the assessee.
  • Subsequently, notices under Section 142(1) dated 13.08.2019, 19.09.2019, and 04.11.2019 were issued, seeking details in connection with the scrutiny reasons.
  • A show cause notice dated 04.12.2019 was also served, to which the assessee filed its replies along with supporting documents.

AO’s Findings on the Capital Gains Issue

On examination of the sale deed and the assessee’s computation, the AO observed:

  • The registered sale deed of the property clearly recorded ₹6 crore as the sale consideration.
  • However, the assessee, while computing capital gains, had only taken ₹3 crore as the sale consideration, claiming that the balance ₹3 crore belonged to an intermediary/agreement holder in terms of a prior understanding.

The assessee explained that:

  • The land was initially under an agreement with Mr. N. Radhakrishna, and later an MoU was entered into whereby:
    • The assessee would receive a fixed sum of ₹3 crore.
    • Any amount over and above ₹3 crore realised from an eventual sale would be paid to Mr.