Karnataka High Court rules that the date of an agreement to sell can determine property transfer for Section 54 capital gains exemption where possession is delivered before execution of the sale deed.
The Karnataka High Court has reaffirmed that the date of an agreement to sell immovable property may be considered the relevant date of transfer for determining eligibility for capital gains exemption under Section 54 of the Income Tax Act, 1961, particularly where possession of the property has already been handed over to the purchasers pursuant to the agreement, even though the formal sale deeds are executed subsequently.
In a significant ruling, the Division Bench comprising Justice S.G. Pandit and Justice Dr. Chillakur Sumalatha dismissed the Revenue’s appeal and upheld the relief granted to the assessee, C.A. Badrinath (HUF).
Background of the Case
The assessee, a Hindu Undivided Family (HUF), had entered into agreements for the sale of 23 flats during the period from January 2014 to October 2014. Pursuant to these agreements, possession of the flats was handed over to the respective purchasers between April 2014 and November 2014.
However, the corresponding registered sale deeds were executed subsequently, during the period from July 2014 to July 2015.
Meanwhile, the assessee had purchased a new residential property on 10 January 2014 and claimed exemption under Section 54 of the Income Tax Act against the capital gains arising from the sale of the flats.
The Assessing Officer disallowed the exemption claim through an assessment order dated 29 December 2017. Aggrieved by the decision, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals), who granted relief and directed the Assessing Officer to examine the applicability of the exemption for Assessment Years 2014-15 and 2015-16.
The Revenue challenged the appellate order before the Income Tax Appellate Tribunal (ITAT), Bengaluru.
ITAT’s Decision in Favour of the Assessee
The ITAT relied upon the Supreme Court’s judgment in Sanjeev Lal v. Commissioner of Income Tax, Chandigarh [2014] 46 Taxmann.com 300 (SC).
Following the principles laid down by the Supreme Court, the Tribunal held that the date of the agreement to sell could be considered the relevant date of transfer, rather than insisting exclusively upon the subsequent execution of the registered sale deed.
Consequently, the Tribunal rejected the Revenue’s appeal and upheld the relief granted to the assessee.
Revenue’s Arguments Before the High Court
The Revenue approached the Karnataka High Court, contending that the ITAT had incorrectly relied upon the Supreme Court’s decision in Sanjeev Lal.
According to the Revenue, the Supreme Court had decided that matter in the context of peculiar circumstances involving pending litigation, and its reasoning could not automatically be extended to the present case.
The Revenue further argued that exemption under Section 54 was subject to strict compliance with the statutory conditions and could not be granted merely on the basis of an agreement to sell.
Assessee’s Defence and Legal Submissions
The assessee contended that the agreements to sell were not merely preliminary arrangements. They were followed by actual delivery of possession of the flats to the purchasers.
Reliance was placed on Section 2(47) of the Income Tax Act, which provides an inclusive definition of transfer and covers transactions involving the allowing of possession of immovable property to be taken or retained in part performance of a contract.
The assessee also relied upon the following judicial precedents:
- Sanjeev Lal v. CIT – Supreme Court.
- Shri Lahar Singh Siroya v. ACIT – Karnataka High Court.
- Kishorbhai Harjibhai Patel v. ITO – Gujarat High Court.
It was argued that the Revenue had already accepted the capital gains offered by the assessee for Assessment Year 2015-16 and, therefore, could not deny the corresponding exemption under Section 54.
Karnataka High Court’s Observations and Decision
The High Court accepted the assessee’s submissions and observed that the agreements to sell had been followed by delivery of possession to the purchasers, while the formal sale deeds were executed subsequently.
The Court also noted that the Revenue had accepted the capital gains offered by the assessee for Assessment Year 2015-16. Having accepted the taxability of the capital gains in that assessment year, the Revenue could not deny the corresponding benefit under Section 54 in the circumstances of the case.
Relying upon its earlier decision in Shri Lahar Singh Siroya and the Supreme Court’s ruling in Sanjeev Lal, the Court reiterated that beneficial provisions relating to capital gains exemptions should receive a liberal interpretation in favour of taxpayers, provided the prescribed conditions are fulfilled.
The Court found no error or perversity in the ITAT’s order and answered both substantial questions of law against the Revenue and in favour of the assessee.
Accordingly, the Revenue’s appeal was dismissed.
Key Takeaway for Taxpayers
This judgment is significant for taxpayers involved in property transactions where an agreement to sell is executed and possession is handed over before the formal registered sale deed.
It reinforces the principle that the date of transfer for capital gains purposes cannot invariably be determined solely by the date of execution of the registered sale deed. The actual nature of the transaction, contractual arrangements and delivery of possession must also be examined.
However, the ruling should not be treated as an automatic entitlement to exemption in every case involving an agreement to sell. The statutory conditions governing Section 54, the nature of the property, the applicable time limits and supporting documentary evidence must be carefully examined.
Case Reference: Pr. Commissioner of Income Tax v. C.A. Badrinath (HUF), Income Tax Appeal No. 129 of 2021, Karnataka High Court, decided on 15 October 2026
Disclaimer: This article is intended for general legal and informational purposes only and should not be treated as professional legal or tax advice.