Unregistered Agreements and Section 54 Exemption: Key Takeaways from ACIT Vs Prasanna Lakshmi Chakka (ITAT Hyderabad)

The Hyderabad Bench of the Income Tax Appellate Tribunal in ACIT Vs Prasanna Lakshmi Chakka has delivered an important ruling clarifying whether an assessee can claim relief under Section 54 where the new residential property is covered only by an unregistered sale agreement and not by a registered conveyance deed.

The Tribunal has reaffirmed that the substance of investment in a residential property within the statutory time limits is what matters for Section 54 benefit, rather than mere formal transfer of legal title through registration. At the same time, it has emphasized that the genuineness of such unregistered agreements and actual flow of money must be carefully verified by the Assessing Officer (AO).

Background of the Case

Search and Reassessment Proceedings

  • A search under Section 132 was carried out on Vertex Group and related concerns on 31.01.2023.

  • Consequent to this action, the AO initiated reassessment proceedings under Section 147 in the case of Prasanna Lakshmi Chakka, an individual earning income from:

    • Salary
    • House property
    • Capital gains
    • Other sources

  • Assessments were framed under:

    • Section 147 r.w.s. 143(3) vide order dated 19.03.2025 for AY 2021-22
    • Section 147 r.w.s. 144 vide order dated 18.03.2025 for AY 2022-23

The Revenue challenged the relief granted by the Commissioner of Income Tax (Appeals)-12, Hyderabad [CIT(A)] for both years by filing appeals before the ITAT.

Facts Relevant to Section 54 Claim

Capital Gains and Investment Claim

During assessment for AY 2021-22, the AO noticed that:

  • The assessee had earned Long Term Capital Gains (LTCG) of
    Rs. 2,69,30,723/- from the sale of three residential flats.
  • The assessee claimed exemption under Section 54 by asserting that this capital gain was invested in purchasing a new residential house for Rs. 7,35,00,000/-.

To substantiate the claim, the assessee furnished an “Agreement to Sell” dated 01.03.2021 relating to the purchase of a residential property.

AO’s Objection

The AO disallowed the Section 54 benefit on the following reasoning:

  • The assessee failed to produce any registered sale deed in her favour for the new residential house.
  • The AO held that an unregistered agreement does not confer ownership or transfer of title in immovable property.
  • Consequently, in the AO’s view, the assessee could not be said to have “purchased” a residential house within the meaning of Section 54.

On this basis, the AO added the entire LTCG of Rs. 2,69,30,723/- to the returned income.

Order of the CIT(A)

The assessee contested the addition before the CIT(A)-12, Hyderabad.

Reasoning of the CIT(A)

The appellate authority deleted the addition and allowed the Section 54 claim by holding that:

  • The assessee had substantially invested the sale proceeds towards acquisition of a new residential house.
  • For the purpose of Section 54, what is crucial is the investment in the new residential property, not necessarily the execution of a registered conveyance deed within the relevant period.
  • The CIT(A) supported this view by relying on multiple judicial precedents, notably:
    • Sanjeev Lal vs. CIT (2014) 365 ITR 389 (SC)

The Revenue, aggrieved by this relief, filed appeals before the ITAT for both AY 2021-22 (ITA No. 1599/Hyd/2025) and AY 2022-23 (ITA No. 1600/Hyd/2025).

Contentions Before the ITAT

Arguments of the Departmental Representative (DR)

The Senior Departmental Representative (Sr. DR) argued: