Section 50C Inapplicable Where Assessee Relinquishes Right to Specific Performance, Not Land Itself: ITAT Chennai

Case Overview

Case Name: May Flower Enterprises Private Limited Vs ACIT (ITAT Chennai)
Appeal Number: ITA No. 443/CHNY/2026
Date of Order: 23/09/2026
Assessment Year: 2017-18
Forum: Income Tax Appellate Tribunal, Chennai

Background and Transaction Structure

May Flower Enterprises Private Limited, a company engaged in housing project development, entered into a sale agreement dated 22.08.2005 with one Shri H. R. Ravichandra for the purchase of a site. The total consideration under this agreement was ₹1,40,40,000/-, bifurcated as ₹32,40,000/- towards the site value and ₹1,08,00,000/- towards development charges covering drainage, sewerage, electricity, water storage tank, tar road, plantation with concrete tree guards, club house, swimming pool in the layout, and individual water and sewerage connections.

Crucially, no registered sale deed was ever executed in favour of the assessee. Under Clause 4.7 of the agreement, the assessee's sole remedy in the event of vendor default was to institute a suit for specific performance before a competent court. The ownership of the property remained vested in the vendor throughout.

Subsequently, the vendor paid a sum of ₹2,00,00,000/- to the assessee in connection with the cancellation of the 2005 agreement — effectively compensating the assessee for giving up its rights under the agreement. The receipts issued by the assessee to Shri H. R. Ravichandra expressly described these payments as being received towards cancellation of the agreement dated 22.08.2005.

For Assessment Year 2017-18, the assessee filed its return of income on 07.11.2017 declaring a total income of ₹3,12,73,740/- and also claimed a long-term capital loss of ₹1,17,80,684/-, computed after setting off the indexed cost of acquisition against the ₹2,00,00,000/- received.

The Assessing Officer's Position

Upon scrutiny, the Assessing Officer (AO) took a different view of the ₹2,00,00,000/- receipt. He split the amount into two components:

  • ₹1,08,00,000/- — treated as a reimbursement of development charges originally paid by the assessee, on the reasoning that no development work had actually been carried out by the vendor.
  • ₹92,00,000/- — treated as consideration attributable to the land itself.

Correspondingly, the AO restricted the cost of acquisition to only ₹32,40,000/- (the site component), excluding the development charges component entirely.

The AO further noted that the stamp duty valuation of the land stood at ₹2,16,00,000/-. Invoking Section 50C of the Income Tax Act, 1961 in place of the ₹92,00,000/- actual consideration, the AO recomputed the transaction and determined a long-term capital gain of ₹1,42,89,230/-, which was added to the assessee's income in place of the capital loss claimed.

Proceedings Before the Commissioner (Appeals)

The assessee challenged the AO's order before the CIT(A), raising multiple contentions:

  1. No transfer within the meaning of Section 2(47) of the Income Tax Act, 1961 had occurred during the relevant financial year.
  2. The asset transferred was the right to specific performance under the agreement, not land or building — hence Section 50C could not be invoked.
  3. The agreement was composite in nature, and the entire ₹2,00,00,000/- should be treated as a single consideration; on that basis, the variance from the stamp duty value of ₹2,16,00,000/- was within the 10% tolerance band under the third proviso to Section 50C(1).
  4. The AO ought to have referred the matter to the Valuation Officer before applying Section 50C.

The CIT(A) rejected all these submissions and upheld the AO's addition. On the question of Section 50C applicability, the CIT(A) reasoned that since Section 2(47) defines "transfer" to include extinguishment of rights in a capital asset, and since the capital asset in which rights were extinguished was land, the transaction fell squarely within Section 50C. The CIT(A) placed reliance on the Bombay High Court's decision in Vidarbha Veneere Industries Ltd. v. ITO [2025] 174 taxmann.com 223 (Bom), holding that the manner in which a property is held is immaterial for the purpose of applicability of Section 50C.

On the year-of-transfer issue, the CIT(A) noted that the assessee itself had reported the transaction in its return for AY 2017-18 and had only raised this objection after the AO determined a capital gain rather than a loss. The CIT(A) also observed that amounts of ₹50,00,000/- on 02.12.2008, ₹1,00,00,000/- on 21.01.2010, and ₹50,00,000/- on 28.08.2013 had been received in earlier years but had been carried as "Advance" in the books until the year under consideration, when the Advance account was closed — indicating that the relinquishment crystallised in AY 2017-18 itself.

Arguments Advanced Before the ITAT

Assessee's Submissions

The learned Authorised Representative (AR) advanced the following key arguments: