Advance on Unsold Land Cannot Be Taxed as Capital Gains, ITAT Orders AO To Recalculate LTCG

Moneylife Digital Team 09 September 2025

Economy & Nation

Holding that advance money received for portions of land not actually sold cannot be assessed as capital gains, the Chennai bench of the income tax appellate tribunal (ITAT) directed the assessing officer (AO) to allow exemption under section 54F of the Income-tax (I-T) Act, 1961 and recalculate the computation of long-term capital gains (LTCG) tax.

In an order earlier this week, the bench of judicial member SS Viswanethra Ravi and accountant member SR Raghunatha says, "In the peculiar facts and circumstances of the case, we are of the considered view that the assessee is entitled for exemption under section 54F of the Act in respect of the investment made towards construction of a residential house, aggregating to a sum of Rs82.15 lakh. The AO is directed to grant an exemption under section 54F of the Act for the sum and to recompute the LTCG chargeable to tax after giving effect to the same. In the result, the ground of appeal raised by the assessee on this issue stands allowed."

"In view of the foregoing, to make it clear, we direct the AO to adopt the sale consideration at Rs1.01 crore instead of Rs2.50 crore for the purpose of computing the taxable long-term capital gains. Further, the AO is directed to compute the LTCG after allowing the exemption under section 54F of the Act considering the investment of Rs82.15 lakh made towards house property by the assessee," it added.

The dispute arose when Natesan Ekambaram, the assessee, sold 30.35 cents out of 121 cents of land situated at Siruseri village, Kancheepuram district, for over Rs1 crore in October 2013. The AO, however, treated the entire Rs2.50 crore, comprising the actual sale consideration and advances received for the remaining 90.5 cents, as taxable consideration and computed LTCG accordingly.

The exemption claimed by Mr Ekambaram under Section 54F for reinvestment of Rs82.15 lakh in the construction of a residential house was also denied by the AO on the grounds that supporting documents were inadequate. The commissioner of income-tax (appeals) (CIT(A)) upheld the assessment in September 2024.

On appeal, ITAT examined the facts, including fresh evidence such as Mr Ekambaram’s bank statements. The tribunal observed that only 30.35 cents had been legally transferred during the year under consideration and the registered sale deed clearly reflected a consideration of over Rs1 crore. The balance of Rs1.50 crore, it held, was only an advance towards the unsold portion of the land, duly reflected as a liability in Mr Ekambaram’s books. In law, such an advance could not be taxed as capital gains until the actual transfer of the property took place.

On the claim for exemption under Section 54F, ITAT noted that while some bills submitted for construction expenses were on plain sheets, the bank account statements demonstrated significant withdrawals and payments towards the construction of a residential property. The tribunal held that substance must prevail over form and that the reinvestment of Rs82.15 lakh was sufficiently established. It directed the AO to grant the exemption under Section 54F and recompute the capital gains accordingly.

The ruling reinforces two important principles: that advances for property not yet transferred cannot be taxed prematurely as capital gains and that genuine reinvestment claims under Section 54F cannot be denied solely for want of formal invoices if bank transactions substantiate the expenditure. The decision is likely to be a useful precedent for similar disputes faced by taxpayers across the country.

(ITA No2873/Chny/2024 Date: 1 September 2025)

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