Sale of Ancestral Property Taxable as Capital Gains, Not Income from Other Sources: ITAT Delhi in Milind Anand Karkhanis Vs ITO

Case Background and Core Issue

The Income Tax Appellate Tribunal, Delhi, recently pronounced its ruling in Milind Anand Karkhanis Vs ITO, addressing a fundamental question that frequently arises in reassessment proceedings — whether sale proceeds received from the disposal of ancestral immovable property ought to be charged to tax under the head "Capital Gains" or "Income from Other Sources."

The appeal pertained to Assessment Year 2012-13 and was directed against the order passed by the Commissioner of Income Tax (Appeals) Addl/JCIT (Appeals-1), Coimbatore, dated 27.03.2026.

Facts of the Case

The assessee held a one-third (1/3rd) undivided share in an ancestral immovable property. During the period relevant to the assessment year under consideration, the said property was collectively sold for a total consideration of ₹34.50 lakh. Accordingly, the assessee's proportionate share of the sale consideration worked out to ₹11.50 lakh, being one-third of the aggregate sale price.

Notably, the assessee did not report any capital gains arising from this transaction in the original return of income filed for the relevant assessment year.

Reassessment Proceedings Under Section 147

The matter came to light during reassessment proceedings initiated under Section 147 of the Income Tax Act, 1961. In the course of such proceedings, the assessee placed on record various documents before the Assessing Officer (AO) to establish:

  • That the property in question was ancestral in nature
  • That the assessee had a legitimate 1/3rd ownership share in the said property

Despite the assessee furnishing these documents, the Assessing Officer proceeded to:

  1. Treat the entire sale proceeds received by the assessee (i.e., ₹11.50 lakh) as "Income from Other Sources" rather than "Capital Gains"
  2. Deny the benefit of indexation on the cost of acquisition of the property
  3. Make an addition of ₹11.50 lakh in the hands of the assessee without computing it as capital gains under the applicable provisions

Key Issue: The Assessing Officer's approach of characterising proceeds from sale of immovable property as "Income from Other Sources" was fundamentally at odds with the settled provisions of the Income Tax Act, 1961.

Proceedings Before CIT(A)

The assessee challenged the AO's order before the Commissioner of Income Tax (Appeals). The CIT(A), in a somewhat contradictory ruling, acknowledged in paragraph 5.3 at page 15 of the impugned order that:

  • Income arising from the sale of immovable property is indeed chargeable under Section 45(1) of the Act under the head "Capital Gains"
  • The AO was required to compute capital gains strictly in accordance with the provisions of Section 48, Section 49, and Section 55 of the Income Tax Act, 1961