Delhi Tribunal rules that capital gains need to be computed on actual consideration and no notional interest can be added for delayed execution of sale deed

In the case of Deepak Kotari ^[1]  (Taxpayer), the issue before the Delhi Income Tax Appellate Tribunal was whether the tax authority was justified in enhancing the actual sales consideration by adding the notional interest income for the interim period i.e., from the date of the agreement to sell/receipt of sale consideration (i.e. year 2007) until the execution of the sale deed (i.e. year 2016).

In the peculiar facts of the case, the Taxpayer entered into an Agreement to Sell plot of land on 28 December 2007 (tax year 2007-08), received full consideration of INR72m and also handed over possession of the land to the buyer in tax year 2007-08 but the execution of registered sale deed was delayed due to certain legal issues. The transaction although noticed by the tax authority in scrutiny assessment proceedings for tax year 2007-08, was not taxed in that year. The Taxpayer executed a sale deed with the buyer in tax year 2016-17 and offered the long-term capital gains to tax in that year by claiming indexed cost of acquisition till tax year 2016-17. The tax authority contended that the Taxpayer was claiming a double benefit by claiming indexation till tax year 2016-17 although the possession of land was handed over and sale consideration was received in tax year 2007-08.  

Therefore, the tax authority proposed to enhance the actual sales consideration by adding notional interest on the advance received in tax 2007-08 on execution of the agreement to sell till the execution of the final sale deed. However, first appellate authority (FAA) ruled in favor of the Taxpayer, holding that capital gains must be computed by considering actual sales consideration received or accrued alone, and not on the basis of notional income.

On further appeal by the tax authority, the Delhi Tribunal upheld the FAA’s ruling, observing that the method of computing capital gains adopted by the tax authority is not sustainable in law. It is not the tax authority’s case that the transfer of the plot took place in tax year 2007-08 instead of tax year 2016-17. If the amount is held to be taxable in tax year 2016-17, then the Taxpayer has correctly computed the capital gains by considering the actual sale consideration and indexed cost till tax year 2016-17. Merely because indexation is availed till tax year 2016-17 does not entitle the tax authority to add a notional interest income to the actual sale consideration received in tax year 2007-08. No doubt, the Taxpayer has benefitted by receiving sale consideration in tax year 2007-08 but there is no mechanism to address such computation by adding a notional income to actual sale consideration. The Taxpayer has declared the actual income earned on sale consideration since tax year 2007-08. The taxation under Income Tax Act, 1961 applies only to real income and not hypothetical gains. Accordingly, the Tribunal held that capital gains should be computed only considering actual sale consideration, without adding any notional interest.

^[1] [TS-1038-ITAT-2025(Del)]