Mrs. Swaminathan from Medavakkam, Chennai, had no idea that she would have got into trouble with the tax department when she sold her apartment in Rajparis on October 4, 2016 through a registered sale deed (no. 10626/2016) for Rs 35.5 lakh, of which Rs 2.5 lakh was in cash. Additionally, she sold various household and electronic items to different vendors for a total of Rs 8.09 lakh, also in cash.
All this cash added up, and with a Rs 1 lakh cash gift from her husband and daughter, and Rs 20,400 household cash, she ended up depositing Rs 11.8 lakh into her bank account.
Then, on January 5, 2017, she spent Rs 35 lakh to buy a residential apartment in Medavakkam through a registered deed (D. No.123/2017). This residential apartment was sold to her by Mr. Swaminathan, Power of Attorney-holder (PoA) for her son-in-law, Mr Guruswami.
She also paid Rs 2.8 lakh in stamp duty for the apartment and invested another Rs 12 lakh in interior decoration, bringing her total acquisition cost for the apartment to Rs 49.8 lakh.
Following this, she applied for a Section 54 long term capital gain (LTCG) tax exemption and reported a long term capital loss of Rs 7.05 lakh in her income tax return (ITR), declaring a total income of Rs 2 lakh.
This whole pattern of selling an apartment by taking part payment in cash and then selling household items for cash and finally buying another apartment while investing for its interior decoration, raised a red flag with the Income Tax Department.
The Income Tax Assessing Officer did not dispute her sale transaction of Rs 35.5 lakh of which Rs 2.5 lakh was taken in cash, but he did question the timing of her new apartment purchase. The AO noted that the payment for the new apartment and interior costs were made in August 2017, and not January 2017, as the registered deed claimed.
Thus the AO asked her to explain the discrepancy and provide the source of payment. The AO was of the view that, if she had already paid Rs 33 lakh in January 2017, as mentioned in the registered deed, then why did she pay Rs 33 lakh and Rs 12 lakh again in August 2017?
In her response, she explained that she had written a cheque of Rs 33 lakh at the time of registration in January 2017, but it was encashed by the seller only in August 2017.
She also said that this was the sole payment and no other sum was paid to the vendor. She also clarified that the flat which was bought from her son-in-law had been rented out to some tenant(s), who had sought time to vacate the premises until they found a suitable place to stay.
Accordingly, she had proposed to the seller [her son-in-law] that the cheque issued by her upon registration should be encashed only when the tenant(s) vacated the flat and physical possession was given to her.
Thus while she got symbolic possession through the registered deed in January 2017, physical possession was received only in August 2017 and the seller then encashed the cheque she issued back in January 2017.
The AO asked her to provide proof in support of this explanation. In response, she furnished a copy of the lease agreement dated January 5, 2017, between her and the seller (her son-in-law).
However, the AO questioned the veracity of the lease deed since it was signed on a stamp paper dated November, 2017, and the stamp paper was also issued in someone else’s name.
The AO didn’t believe the whole transaction, treating her cash deposits of Rs 10.8 lakh in her bank account as unexplained cash credit under Section 69A. Feeling aggrieved, she appealed to the CIT (A), but her appeal was turned down.
This prompted her to take her case to the Income Tax Appellate Tribunal (Chennai). On April 17, 2026, she won the case in ITAT Chennai. Advocates Mr. J. Radhakrishnan and Mr. Vishnu Jayaram. R represented her before ITAT Chennai.
Summary of the judgement
Chartered Accountant Suresh Surana said to ET Wealth Online that during the scrutiny proceedings, the AO observed that although the new flat was registered in January 2017, the corresponding cheques issued for the purchase were encashed by the seller (son-in-law) only in August 2017.
Based on this timing difference and doubts regarding a lease agreement produced by the taxpayer to explain delayed encashment, the AO treated the investment of Rs 49.80 lakh in the new flat as unexplained money under Section 69A of the Act.
The AO also treated the cash deposits of Rs 10.80 lakh as unexplained. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the additions made by the AO.
Surana says that on appeal, the Income Tax Appellate Tribunal (ITAT), Chennai Bench, ruled in favour of the taxpayer and deleted both additions. The Tribunal observed that the taxpayer had furnished registered sale and purchase deeds, bank statements, confirmations from the seller and supporting documentation proving the transactions.
Surana says: “The Tribunal noted that the sale of the original property and the subsequent purchase of the new residential flat were genuine transactions duly supported by registered documents and banking records.”
According to Surana, ITAT Chennai further observed that the taxpayer had sufficient bank balance at the relevant time to issue the cheques for buying the new property.
Therefore, ITAT Chennai held that merely because the seller encashed the cheques at a later date, one could not lead to the conclusion that unexplained money was involved, particularly when the payments were ultimately routed through disclosed bank accounts.
Surana says: “The Tribunal also held that the AO had wrongly disregarded the sanctity attached to registered documents without bringing any material evidence on record to establish that the transactions were sham or fraudulent.”
In this regard, ITAT Chennai relied on a settled legal principle that a registered sale deed carries a strong presumption of validity and genuineness unless disproved through cogent evidence.
So, ultimately the ITAT Chennai held that the taxpayer had duly satisfied the conditions prescribed under Section 54 of the Income Tax Act, 1961 and was therefore entitled to exemption on reinvestment of capital gains.
With respect to the cash deposits, Surana says the ITAT Chennai accepted the taxpayer’s explanation that the amounts represented cash received from the sale of the property and sale of household effects and electronic items, which were supported by invoices and surrounding circumstances.
ITAT Chennai also observed that the AO had rejected the explanation merely because confirmations from certain purchasers could not be obtained, despite the taxpayer having produced supporting evidence.
Surana says: “Accordingly, the Tribunal held that the additions made under Section 69A were arbitrary and unsustainable.”
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