Substance over form in capital gains: actual agreement values governed computation, and the unexplained cash credit addition fell away.

ITAT Hyderabad held that long-term capital gains had to be recomputed on the basis of the unregistered purchase and sale agreements, because banking-channel payments and surrounding circumstances showed the real commercial arrangement and the substance over form principle required the actual consideration to prevail over the registered conveyance deeds. On that basis, the assessee succeeded on the capital gains issue. The Tribunal also deleted the addition as unexplained cash credit, since once the sale consideration was accepted on the basis of the actual agreement and banking evidence, the separate addition could not survive as an independent item. The assessment was therefore to be modified by adopting the agreement values and deleting the disputed addition.

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Issues: (i) Whether long-term capital gains were to be computed on the basis of the unregistered purchase and sale agreements supported by banking-channel payments rather than the registered conveyance deeds. (ii) Whether the addition made as unexplained cash credit was liable to be deleted.

Issue (i): Whether long-term capital gains were to be computed on the basis of the unregistered purchase and sale agreements supported by banking-channel payments rather than the registered conveyance deeds.

Analysis: The payments for both acquisition and transfer were substantially routed through banking channels, which supported the genuineness of the unregistered agreements and indicated the actual commercial arrangement between the parties. The principle of substance over form was applied, and the registered documents were treated as having been executed for procedural compliance rather than as reflecting the true consideration. Ignoring the unregistered agreements would distort the computation of capital gains.

Conclusion: The long-term capital gains were directed to be recomputed on the basis of the unregistered purchase and sale agreements, and the assessee succeeded on this issue.

Issue (ii): Whether the addition made as unexplained cash credit was liable to be deleted.

Analysis: Once the sale consideration was accepted on the basis of the actual agreement and the banking evidence, the excess amount treated separately as unexplained could not survive as an independent addition. The addition was therefore unsustainable in view of the accepted transaction pattern and recomputation direction.

Conclusion: The addition made as unexplained cash credit was deleted in favour of the assessee.

Final Conclusion: The assessee's appeal succeeded and the assessment was required to be modified by adopting the actual agreement values and deleting the disputed addition.

Ratio Decidendi: Where banking-channel payments and surrounding circumstances establish the real consideration, capital gains must be computed on the basis of the actual transaction rather than the mere form of registered documents.

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