ITAT Restores Capital Gains Exemptions, Overturns tax treatment of Capital Asset Transfer under the Head ‘Income from Other Sources’

Introduction

The Hon’ble Income Tax Appellate Tribunal, Ahmedabad (“ITAT”), in the case of Rajsheel Jitendra Patel vs. ITO (International Taxation), Ahmedabad¹ (AY 2019-20) upheld that a documented and registered transfer of a capital asset cannot be re-characterized as an unexplained receipt, thereby deleting an addition made under Section 56 of the Income-tax Act, 1961 (“the Act”) and restoring the Assessee’s rightful claim to exemptions under Sections 54 and 54EC. The ITAT emphasized that once a receipt is duly evidenced, traceable, and eligible for capital gains computation, the Assessing Officer cannot invoke unrelated deeming provisions to tax the same.

The ITAT observed that the AO neither invoked any specific charging limb of Section 56 nor demonstrated how consideration arising from a registered sale deed, already forming part of capital gains computation, could fall within the ambit of income from other sources. The Tribunal further noted that the Assessee furnished comprehensive documentary evidence, including society resolutions, share certificates, the registered sale deed, investment proofs for Section 54/54EC, and bank records, clearly establishing ownership, transfer, and utilization of capital gains, all of which were ignored by both the AO and the Dispute Resolution Panel – 2, Mumbai (“DRP”).

It held that taxability cannot rest on assumption or ambiguity, and that a receipt cannot be treated as unverified when its source is fully established through statutory documents.

Facts

• The Assessee and appellant in the case was Rajsheel Jitendra Patel, and the assessment was conducted by the Income Tax Officer, Ward-2 (International Taxation), Ahmedabad (“the AO”).
• The residential property (Row House No. 17, Shyamal Row House), jointly owned by the Assessee and his wife, was sold on November 22, 2018, for INR 3.12 Crores, with each co-owner receiving INR 1.56 Crores through banking channels and TDS duly deducted.
• The AO issued a Section 148 notice to the Assessee on March 31, 2023, citing information from material seized from search on the Shivalik, Shilp and Sharda Group and an associated broker, on February 10, 2022,
• The AO treated INR 48.90 Lakhs “on-money” for Unit No. 84 of Sky City Floris reflected in the seized material as unexplained investment under Section 69 of the Act.
• The Assessee contended that he had no dealings with the broker, the seller named in the seized material did not match the actual seller and that no corroborative evidence supported the alleged cash payment.
• The AO further held that the Assessee failed to prove ownership or cost of acquisition and therefore treated INR 1.56 Crores of sale proceeds as unexplained receipts under Section 56 of the Act, while denying exemptions under Sections 54 and 54EC claimed by the Assessee.
• The Assessee, however, submitted the registered sale deed, society documents, bank statements, and proofs of investment in a new residential house and NHAI bonds within statutory timelines.
• The AO denied the Assessee’s claim for exemptions and made additions under Section 69 for INR 48.90 Lakhs and under Section 56 for INR 1.56 Crores, issuing a Draft Assessment Order under Section 144C of the Act on March 27, 2024.
• The DRP upheld these additions maintaining which the AO passed the Final Assessment Order on January 09, 2025, leading to the Assessee’s appeal before the ITAT.

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Judgements referred

• Hon’ble Gujarat High Court in the case of Pr. CIT v. Kaushik Nanubhai Majithia²
• Hon’ble ITAT, Ahmedabad in the case of Kiritkumar Champaklal Shah v. DCIT³
• Hon’ble Supreme Court in the case of CIT v. Balbir Singh Maini

Assessee’s Contention

• On the alleged “on-money” addition of INR 48.90 Lakhs under Section 69, the Assessee contended that he never appointed the alleged broker and had no dealings with him. Further, his specific request for cross-examination of the broker was not granted.
• The seized material was an uncorroborated third-party information and hence, cannot be used without supporting evidence.
• On the INR 1.56 Crores treated as “Unexplained Receipt”, the Assessee contended that he and his wife were joint owners of the residential property sold, supported by society resolution, updated share certificate and registered sale deed. The co-owners received INR 1.56 Crores each via cheque with TDS duly deducted.
• He contended that the transfer of 50% ownership from wife in 1995 was valid under Section 2(47)(vi) placing reliance on the decision of Hon’ble Supreme Court in the case of CIT v. Balbir Singh Maini.
• It was further contended that once joint ownership and receipt of consideration were established through statutory documents, the amount could only be assessed under “Capital Gains” and not under Section 56.
• The Assessee contended that he submitted complete evidence of investment in the new residential property and NHAI bonds within the prescribed timelines, and since neither the AO nor the DRP disputed the genuineness or timing of these investments, the exemption under Sections 54 and 54EC could not be denied.

AO’s Contention

• AO contended that the Assessee paid “on-money” of INR 48.90 Lakhs for the purchase of Unit No. 84, Sky City Floris, relying on a seized Excel sheet and digital data from broker, claiming that it constituted credible evidence of unaccounted cash investment.
• AO further contended that the Assessee failed to establish joint ownership of Row House No. 17, Shyamal Row House, because the original 1994 purchase deed was solely in his wife’s name.
• AO contended that the society resolution adding him as a joint member, the updated share certificate and explanations regarding co-ownership did not conclusively establish his legal ownership in Row House No. 17.
• The receipt of INR 1.56 Crores was unverified, as the Assessee did not furnish adequate documentary evidence supporting capital gains computation, making the amount taxable as unexplained income under Section 56.
• AO contended that the Assessee did not substantiate eligibility for exemption under Sections 54 and 54EC, asserting that documents related to investments in the new house property and NHAI bonds were not properly produced or verified during the assessment proceedings.

Issues raised before the ITAT

1. Whether the addition of INR 48.90 Lakhs as alleged “on-money” payment for purchase of Unit No. 84, Sky City Floris based solely on a third-party Excel sheet found during a search on an unrelated person, was valid under Section 69?
   1. Whether the receipt of INR 1.56 Crores from the sale of Row House No. 17, Shyamal Row House, received through banking channels and supported by a registered sale deed, could be treated as “unexplained income” under Section 56?
   1. Whether the AO and DRP were justified in denying exemption under Sections 54 and 54EC?

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Decision of the ITAT

1. Whether the addition of INR 48.90 Lakhs as alleged “on-money” payment for purchase of Unit No. 84, Sky City Floris based solely on a third-party Excel sheet found during a search on an unrelated person, was valid under Section 69?
2. The ITAT observed that the sole basis for the alleged “on-money” payment was a third-party Excel sheet recovered from a broker during a search on an unrelated group, which was neither authenticated nor corroborated with any supporting material.
3. The Tribunal noted that the sheet even mentioned an incorrect seller’s name and that the assessee was never granted cross-examination, thereby rendering the document unreliable.
4. Relying on the Gujarat High Court ruling in Kaushik Majithia and the coordinate bench ruling in Kiritkumar Champaklal Shah, the ITAT concluded that an addition under Section 69 could not be sustained merely based on unverified, third-party digital data, and following judicial precedents, held that the alleged “on-money” addition of INR 48.90 Lakhs was unsustainable.
   1. Whether the receipt of INR 1.56 Crores from the sale of Row House No. 17, Shyamal Row House, received through banking channels and supported by a registered sale deed, could be treated as “unexplained income” under Section 56?
5. The ITAT observed that the Assessee’s joint ownership of Row House No. 17 was established through the society resolution adding the Assessee as joint holder, updated share certificate and the registered sale deed, all showing the Assessee and his wife as joint sellers.
6. The receipt of INR 1.56 Crores was through banking channels with TDS deducted, and the AO failed to show how such documented capital receipt could fall under Section 56.
7. The Tribunal further noted that the AO failed to invoke any specific charging limb of Section 56.
8. It was concluded that a receipt arising from a registered transfer of a capital asset, fully supported by statutory documents, cannot be characterised as “unexplained income” under Section 56 and held that the amount was properly assessable under the head “Capital Gains.”
   1. Whether the AO and DRP were justified in denying exemption under Sections 54 and 54EC?
9. The ITAT observed that the Assessee furnished complete primary evidence of investment in a new residential property and NHAI bonds within the prescribed timelines, and that neither the AO nor the DRP rejected the genuineness or timing of these investments.
10. The Tribunal noted that the DRP’s observations to the contrary were inconsistent with the material on record. Therefore, the ITAT concluded that when the source of capital gains is explained and the corresponding investments are duly proved, exemptions under Sections 54 and 54EC cannot be denied, and directed that the Assessee be granted the eligible reliefs.

Conclusion

The ITAT held that additions must rest on credible evidence and clear statutory authority. Unsupported third-party data cannot not sustain an allegation, and a documented capital receipt could not be reclassified as unexplained income.

The Tribunal’s ruling underscores the importance of factual verification and legal precision. Recognising the genuineness of the sale transaction and the Assessee’s qualifying investments, the Tribunal allowed the exemptions under Sections 54 and 54EC and granted full relief.

¹ I.T.A. No.388/Ahd/2025

² Tax Appeal No. 20 of 2024

³ ITA No. 1014/Ahd/2023