A significant ruling has recently been delivered by the Delhi Bench of the Income Tax Appellate Tribunal in the case of Vinay Chaudhary vs ACIT for AY 2021-22. The judgment is highly relevant for taxpayers, especially NRIs, investors, and individuals claiming exemption under Section 54F of the Income Tax Act.
The Tribunal quashed the assessment order passed by the Assessing Officer (AO) after holding that the AO had illegally converted a limited scrutiny case into complete scrutiny without obtaining mandatory approval from the Principal Commissioner of Income Tax (PCIT). The Tribunal also held that registration of a property is not mandatory for claiming exemption under Section 54F if the taxpayer has substantially invested the sale consideration in purchasing a residential house.
This ruling provides substantial relief to taxpayers facing additions under Section 69A for alleged bogus Long Term Capital Gains (LTCG) and clarifies the legal position relating to Section 54F exemption claims.
Brief Facts of the Case
In this case, the assessee, a non-resident individual, filed his Income Tax Return for AY 2021-22 declaring income of Rs. 2.32 lakh. During the relevant financial year, he earned Long Term Capital Gain (LTCG) of Rs. 4.07 crore from the sale of shares of M/s Gemini Merchandise Pvt. Ltd. and claimed exemption under Section 54F of the Income Tax Act against investment in a residential property in Gurgaon.
The case was selected for limited scrutiny under CASS specifically for verification of “capital gain deduction claimed.” During assessment proceedings, the Assessing Officer (AO) questioned the genuineness of the share transactions and treated the sale proceeds of Rs. 4.14 crore as unexplained money under Section 69A of the Income Tax Act. The AO also denied exemption under Section 54F on the ground that the sale deed of the residential property was not registered.
The department alleged that the shares were originally purchased from several Kolkata-based entities which were either not traceable or allegedly non-functional during investigation conducted by the Income Tax Department. Based on these inquiries, the AO held the share transactions to be bogus and made additions under Section 69A.
The assessee, however, contended that all transactions were genuine, conducted through banking channels, and supported by documentary evidence including bank statements, share certificates, valuation reports, agreement to sell, and possession documents relating to the residential property.
The matter ultimately reached the Delhi Bench of the Income Tax Appellate Tribunal (ITAT), where the assessee challenged both the addition under Section 69A and denial of exemption under Section 54F
Why Did the Assessing Officer Treat the LTCG as Bogus?
The Assessing Officer rejected the assessee’s explanation and held that the share transactions of M/s Gemini Merchandise Pvt. Ltd. were bogus and non-genuine. According to the AO, the assessee failed to justify why such a large investment was made in a lesser-known company and merely relying on banking transactions was not sufficient to prove genuineness.
The AO also observed that ten Kolkata-based entities holding the shares had common features and that all share transfer transactions were executed in Delhi on the same date before the same witness, which appeared suspicious. Further, the assessee failed to furnish complete share purchase agreements or produce any representative of the entities involved.
Based on these observations and applying the “test of human probabilities,” the AO treated the sale proceeds of Rs. 4.14 crore as unexplained money under Section 69A of the Income Tax Act.
Objections Raised Before DRP
The assessee filed objections against the draft assessment order before the Dispute Resolution Panel (DRP) on 19 January 2023. The assessee argued that the provisions of Section 69A were not applicable because both the purchase and sale of shares were genuine and fully supported by documentary evidence.
It was further submitted that the Assessing Officer wrongly questioned the purchase of shares made in AY 2010-11, even though those transactions had never been disputed earlier and had already become time-barred. The assessee contended that all relevant documents relating to purchase of shares, subsequent sale transactions, and gifted shares received in AY 2017-18 were duly furnished before the department.
However, the DRP observed that the shares of M/s Gemini Merchandise Pvt. Ltd. were acquired from Kolkata-based entities and partly through gift transactions, and later sold to the Director of the company. The DRP agreed with the findings of the Assessing Officer that the transactions were not genuine and upheld the addition made under Section 69A of the Income Tax Act.
The DRP also upheld denial of exemption under Section 54F by observing that once the capital gains were treated as unexplained income under Section 69A, the assessee was not eligible to claim exemption under Section 54F. Accordingly, the objections of the assessee were rejected and the final assessment order was passed treating Rs. 4.14 crore as bogus LTCG and unexplained income.
Aggrieved by the final assessment order passed by the department, the assessee ultimately filed an appeal before the Delhi Bench of the Income Tax Appellate Tribunal (ITAT)
Major Legal Issue: Limited Scrutiny Converted Into Complete Scrutiny
One of the most important legal issues before the Tribunal was whether the AO could expand the scope of limited scrutiny without obtaining approval from the PCIT.
The Tribunal carefully examined the records and observed that:
- The case was selected under CASS for limited scrutiny
- The issue selected was only “Capital Gains Deduction Claimed”
- The AO converted the proceedings into complete scrutiny
- No written approval from the PCIT was obtained
The ITAT referred to CBDT Instruction No. 7/2014, which clearly provides that limited scrutiny can be converted into complete scrutiny only after obtaining written approval from the PCIT or DIT.
The instruction further requires that such approval should be granted only after satisfaction that there is substantial income escapement requiring wider scrutiny.
In the present case, no such approval existed.
Therefore, the Tribunal held that the AO had exceeded jurisdiction and violated mandatory CBDT instructions.
Importance of CBDT Instruction No. 7/2014
CBDT Instruction No. 7/2014 plays an important role in protecting taxpayers from arbitrary and excessive scrutiny.
Under this instruction:
- Cases selected for limited scrutiny must remain confined to specific issues
- The AO cannot conduct fishing or roving inquiries
- Conversion into complete scrutiny requires proper approval
- Approval must be in writing
- Reasons must justify wider investigation
The Tribunal reiterated that CBDT instructions are binding on income tax authorities.
Violation of these instructions can invalidate the entire assessment proceeding.
This part of the judgment is extremely important for taxpayers whose scrutiny assessments are expanded beyond the original issues.
Tribunal Relied on Earlier Delhi ITAT Judgment
The Delhi ITAT relied on its earlier ruling in the case of Nisha Goel.
In that case also, the Tribunal had quashed the assessment order because the AO converted limited scrutiny into complete scrutiny without obtaining mandatory approval.
The Tribunal reiterated that tax authorities cannot bypass CBDT safeguards.
Whether AO Could Examine Old Share Transactions?
Another major issue was whether the AO could question share purchase transactions undertaken in earlier assessment years such as AY 2010-11, AY 2012-13, and AY 2017-18.
The assessee argued that:
- The transactions were duly disclosed in earlier returns
- Earlier returns had already been accepted
- Time limits for scrutiny of those years had expired
- The AO could not indirectly reopen settled assessments
The Tribunal acknowledged that Section 69A creates a deeming fiction. However, it also recognized that completed assessments cannot be disturbed casually without following proper reopening procedures under Sections 147 and 148.
This observation provides valuable protection to taxpayers against reopening of historical transactions in unrelated assessment proceedings.
Huge Relief on Section 54F Exemption
Another significant aspect of the judgment relates to exemption under Section 54F.
The AO denied exemption solely because the sale deed of the residential property was not registered.
However, the assessee had already:
- Entered into an agreement to sell
- Paid substantial consideration
- Obtained possession of the property
- Submitted supporting documentary evidence
The Tribunal held that registration of the property is not mandatory for claiming exemption under Section 54F if the taxpayer has substantially complied with the investment conditions.
Delhi High Court Judgment in Balraj v. CIT Followed
The ITAT relied on the landmark Delhi High Court judgment in Balraj.
The High Court had earlier held that:
The Assessing Officer, the appellate authority as well as theTribunal rejected the claim of the assessee in respect of theassessment year 1975-76 on the ground that he did not become theowner of the property, as the said transaction was not evidencedby registration thereof as provided under section 17 of theRegistration Act. For the purpose of attracting the provisions ofsection 54, it is not necessary that the assessee should become theowner of the property.Section 54 speaks of purchase. Moreover,the ownership of the property may have different connotations indifferent statutes. The question which arises for considerationappears to be squarely covered by a decision of the Apex Court inCIT v. T.N. Aravinda Reddy[1979] 120 ITR 461 where it has beenheld that the word ‘purchase’ occurring in section 54(1) of the Acthad to be given its common meaning, viz., buy for a price orequivalent of price by payment in kind or adjustment towards adebt or for other monetary consideration. Each release in thiscase was a transfer of the releasor’s share for consideration to therelease and the transferee, the assessee, “purchased” the share ofeach of his brothers and the assessee was, therefore, entitled to therelief under section 54(1). The question now is no longer resIntegra having regard to the decision of the Apex Court in CIT v.Podar Cement (P.) Ltd. [1997] 226 ITR 6252. The Apex Courtcategorically held that section 22 of the Act does not requireregistration of sale deed. The meaning of the word ‘owner’ in thecontext of section 22 has been held to be a person who is entitled toreceive income in his own right. The Apex Courtin MysoreMinerals Ltd. v. CIT [1999] 239 ITR 7751 and this Court in CIT v.R.L. Sood [2000] 245 ITR 7272 have held that registration of thedocument is not mandatory forclaiming depreciation on theproperty. In this view of the matter, we have no doubt in our mindthat the learned Tribunal went wrong in holding that for thepurpose of applicability of section 54, registration of document isimperative. We, therefore, answer the question in thenegative,i.e., the assessee is entitled to exemption in terms of section 54.”
The Tribunal also relied upon the Delhi ITAT decision in ACIT vs Sanjay Choudhary where similar relief was granted.
After considering the facts of the case, submissions of both parties, and applicable legal provisions, the Delhi ITAT decided the matter in favour of the assessee. The Tribunal held that the Assessing Officer had wrongly converted the limited scrutiny assessment into complete scrutiny without obtaining mandatory approval from the Principal Commissioner of Income Tax (PCIT), which was in violation of CBDT Instruction No. 7/2014.
The ITAT further held that the denial of exemption under Section 54F was not justified merely because the sale deed of the residential property was not registered, especially when substantial investment and supporting documents were already available on record.
Accordingly, the Tribunal allowed the appeal of the assessee and quashed the entire assessment order passed by the department. Since the legal grounds were decided in favour of the assessee, the Tribunal did not consider it necessary to adjudicate the remaining issues on merits.
Final Words
The Delhi ITAT ruling in the case of Vinay Chaudhary is an important taxpayer-friendly judgment that strengthens procedural safeguards during scrutiny assessments and clarifies the legal interpretation of Section 54F.
The judgment reinforces that tax authorities must strictly follow CBDT instructions and cannot arbitrarily widen scrutiny proceedings. It also confirms that genuine investment in residential property should not be denied exemption merely because registration formalities remain pending.
For NRIs, investors, and taxpayers dealing with capital gains exemptions, bogus LTCG allegations, or scrutiny proceedings, this decision provides strong legal support.
Taxpayers facing similar disputes should maintain proper documentary evidence, banking records, valuation reports, and property agreements to successfully defend their claims before tax authorities.
Professional guidance becomes extremely important in matters involving Section 69A additions, capital gains scrutiny, and Section 54F exemption claims to ensure proper representation and protection of taxpayer rights.
