ITAT Rules: Discounts on Property Purchases Not Taxable as Income

When a homebuyer purchased a flat in DLF Camellias for Rs 23.13 crore, after receiving a Rs 9.82 crore discount from the builder, the Income Tax Department (ITD) sent him a tax notice. The property’s listed price before the discount was Rs 32.95 crore. However, in a significant ruling, the Income Tax Appellate Tribunal (ITAT), Delhi, decided that discounts on property purchases cannot be treated as income from other sources and hence, cannot be taxed. The tribunal also allowed the taxpayer to claim capital gains of Rs 9.65 crore under Section 54F, reversing the decision made by the lower authority.

The ITD’s assessment officer (AO) had initially treated the Rs 9.82 crore rebate as ‘income under other sources’ under Section 56(1) of the Income Tax Act, 1961. However, ITAT clarified that these discounts were part of the apartment buyer’s agreement and tied to payment and other conditions, and thus, cannot be treated as other income.

ITAT, Delhi, further explained that Section 56 cannot be applied unless specific deeming provisions are triggered. This case revolved around an individual who bought a flat for Rs 23.13 crore at DLF Camellias after receiving a discount of Rs 9.82 crore from the seller. The property’s listed price before the rebate was Rs 32.95 crore.

Chartered Accountant Suresh Surana explained to ET Wealth Online that in this case, the assessee had filed his income tax return (ITR) and claimed income tax exemption under Section 54F of the Income Tax Act, 1961 for capital gains arising from the sale of shares of an unlisted company. The capital gains were claimed to have been reinvested in buying a residential apartment at Gurugram.

During the assessment proceedings, the Assessing Officer (AO) made two key adjustments: ● Firstly, the AO denied the exemption claimed under Section 54F on the ground that the assessee allegedly owned more than one residential property on the date of transfer of the original asset and that the new property had not been registered within the prescribed period. ● Secondly, the AO treated the rebate of approximately Rs 9.81 crore granted by the builder on the purchase price of the apartment as income chargeable under the head “Income from Other Sources” under Section 56(1), contending that the discount represented a benefit or income received by the assessee. These findings were subsequently upheld by the Commissioner of Income-tax (Appeals) [CIT(A)], leading the assessee to file an appeal before the ITAT.

After studying the facts and evidence on record, the Tribunal ruled in favor of the assessee. Regarding the addition (of Rs 9.81 crore) under Section 56(1), the Tribunal observed that the rebate granted by the developer was not an independent receipt of income but rather a contractual concession embedded in the apartment buyer’s agreement, granted for factors such as early payment, timely payment, and compliance with the payment schedule.

The Tribunal noted that such rebates are typical in commercial real estate deals and do not count as “real” income. Moreover, the property was bought for more than the stamp duty value, which means the deemed income provisions under Section 56(2)(x) do not apply. Since there wasn’t any specific rule that deemed such rebates as income, the Tribunal held that Revenue (the income tax department) could not tax the rebate merely on presumptions or conjectures. Accordingly, the addition made by the Assessing Officer under Section 56 was held to be unsustainable and was removed.

Regarding the denial of exemption under Section 54F, the Tribunal found that the lower authorities had made a mistake by concluding that the assessee owned more than one residential property at that time. The Tribunal accepted the assessee’s explanation that his interests in certain properties had been transferred to his wife through gift deeds well before the sale of the original asset, and therefore he did not own multiple residential houses on the relevant date.

Further, the Tribunal clarified that registration of the sale deed is not a mandatory condition for claiming exemption under Section 54F, and that acquisition of possession and substantial payment for the property can establish “purchase” for the purpose of the provision. According to Surana, the Tribunal also distinguished the case from the one that the CIT(A) relied on regarding ‘colourable devices’, observing that in the present case, the gifts had been made several years before the transaction and formed part of a legitimate family arrangement rather than a tax avoidance mechanism.

Thus, the ITAT concluded that both the addition of the rebate as income and the denial of exemption under Section 54F were not justified in law. The Tribunal therefore allowed the appeal by the assessee and directed the deletion of the impugned additions, holding that the assessee met the legal requirements for claiming the exemption and that the rebate received under the apartment buyer’s agreement could not be taxed as income.

In the Rajguru vs DCIT ITA No. 2550/Del/2025 case (Assessment Year: 2021-22), Rajguru filed an Income Tax Return (ITR) for the Assessment Year 2021-22 on December 31, 2021, and revised it on March 31, 2022, declaring an income of Rs 1.94 crore and claiming a capital gains deduction of Rs 9.65 crore under Section 54F.

The AO contended that as on the date of the transfer of the capital asset, shares of unlisted companies, Rajguru was in possession/occupation of more than one residential house, and the new property was not registered, making him ineligible for deduction under Section 54F. Rajguru filed an appeal to the Learned Commissioner of Income Tax (Appeals) but did not receive any relief. He then filed an appeal at ITAT, Delhi.

Rajguru's defence counsel argued that the CIT(A) had erred in law and on facts in confirming the AO’s order, adding a deemed income of Rs 9.81 crore in the hands of the assessee as Income from Other Sources under Section 56. The counsel also stated that the action of the CIT(A) in not allowing the exemption of Rs 9.65 crore claimed by Rajguru was bad in law and against the facts and circumstances of the case.

The buyer’s defence also raised an important legal point that for immovable property, Section 56(2)(x) of the Income Tax Act, 1961, usually applies where the purchase price is below the stamp duty value. In this case, the purchase price was higher than the stamp value of Rs 14.68 crore, and so there was no case of undervaluation of the property, further weakening the ITD’s case.

ITAT, Delhi, observed that the rebate of Rs 9.82 crore was part of the apartment buyer’s agreement and was linked to payment and other conditions. ITAT did not consider the Rs 9.82 crore discount as a separate income source but found it to be a contractual discount.

The discount breakdown was as follows: Nature | Amount (INR) ------------------|-------------- Down Payment Rebate | 4,27,83,490 Move-in Rebate | 2,22,90,000 Special Rebate | 1,82,05,740 Timely Payment Rebates | 1,48,60,000 Total Rebate | 9,81,39,230

ITAT observed that joint ownership in properties does not disqualify a taxpayer from claiming exemption. The tribunal stated that to get Section 54F exemption, the registration of the property is not mandatory, as ownership for 54F exemption can be established by the possession, payments, and rights of a property. ITAT also noted that gifts to a spouse are valid as the transfer of properties to the wife years before the transaction was a genuine family arrangement and not an effort to avoid tax.

In its decision, ITAT, Delhi, deleted the Rs 9.81 crore addition and stated that discounts on these facts were not taxable as income from other sources. ITAT also confirmed that Rajguru is eligible to get Rs 9.65 crore exemption under Section 54F as the possession and the payment of the flat were within the two-year window.