A Critical Analysis with Practical Use Cases from
Dharampal Saghera v. ITO (2025) 174 taxmann.com 838 (Chandigarh ITAT)
"In property law, possession may be nine-tenths of the law, but in tax law, this case makes it ten-tenths—when supported by sustained assertion, civil proceedings, and equitable compromise."
I. Established Law: A Landmark Interpretation by Chandigarh ITAT
The ITAT Chandigarh in Dharampal Saghera v. ITO held that:
Where an individual relinquishes long-standing possessory and beneficial rights over an immovable property under a family settlement, the consideration received is taxable as capital gains, not as "income from other sources".
Core Propositions Recognised:
| Legal Concept | Interpretation by Tribunal |
|---|---|
| Capital Asset [Section 2(14)] | Includes possessory/beneficial interest, even without registered ownership. |
| Transfer [Section 2(47)] | Relinquishment or extinguishment of such interest qualifies as “transfer”. |
| Capital Gains Head [Section 45] | Applies to such transfer, eligible for exemptions. |
| Exemptions [Sections 54 & 54EC] | Permissible if proceeds reinvested in eligible instruments. |
| No Gift Taxation [Section 56(2)(x)] | Rejected: not gratuitous; backed by litigation and mutual compromise. |
II. Legal Interpretation in Light of Judicial Trends
| Legal Provision | Application by Tribunal |
|---|---|
| Section 2(14) | Recognised "settled possession + beneficial interest" as a capital asset. |
| Section 2(47) | Considered relinquishment under family arrangement a “transfer”. |
| Section 54 / 54EC | Allowed deduction despite absence of legal title, treating right as capital asset. |
| Section 56(2)(x) | Receipt not a gift but consideration — hence, not chargeable under this section. |
III. Supporting Case Law
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Sarfaraz S. Furniturewalla v. Afshan Sharfali Ashok Kumar [2024] 166 taxmann.com 425 (Bom HC)
Possession + Assertion = Capital Asset
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CIT v. Neba Ram Hansraj [1997] 223 ITR 854 (Patna)
Possessory rights having marketable value are capital assets.
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Ajay Parasmal Kothari v. ITO [2024] 159 taxmann.com 570 (Mumbai ITAT)
Peaceful relinquishment against consideration is taxable under capital gains.
IV. Case Study: Practical Illustration
Case Study: Settlement Among Three Siblings Over Inherited House
Facts:
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Property in Old Delhi was inherited by the eldest son, Amit, via registered will.
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His sister Priya and younger brother Ravi had been living in portions of the house for 25+ years.
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Civil suits were filed by Priya and Ravi claiming "beneficial interest and settled possession."
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Matter settled through a registered family settlement:
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Amit sold the property to a third party for ₹2 crore.
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Priya and Ravi relinquished their rights for ₹40 lakhs each.
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They signed relinquishment affidavits and vacated peacefully.
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Tax Position:
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Amit paid capital gains tax on full sale value minus indexed cost.
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Priya and Ravi declared ₹40 lakhs each as capital gains, claimed Section 54 exemption on reinvestment in residential flats.
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The AO issued notices, proposing that:
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₹40 lakhs is “income from other sources” under Section 56(2)(x).
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They had no legal title.
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Final Outcome Post Dharampal Saghera Ruling:
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They relied on the Chandigarh ITAT ruling.
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Civil suits + family settlement + long-term settled possession = valid capital asset.
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Exemption allowed under Section 54.
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Section 56(2)(x) dropped, as receipt was not gratuitous.
Result:
Smooth tax treatment, no unnecessary litigation, lawful exemptions preserved.
V. Real-Life Application and Strategic Usage
| Scenario | Legal Strategy Based on Dharampal Saghera |
|---|---|
| 1. Family Settlement Without Legal Title | Clearly document the duration and nature of possession; use affidavit or registered MOU; assert beneficial ownership. |
| 2. Property Sold by One Legal Owner but Others in Possession | Allocate consideration to non-title possessors via family arrangement; treat their share as capital gains with proper tax planning. |
| 3. Avoiding Gift Taxation under Section 56(2)(x) | Ensure payment is against relinquishment of enforceable rights or beneficial possession. Back it with evidence: court orders, family agreement, affidavits. |
| 4. Claiming Section 54 or 54EC | Show that the individual had capital interest in the property even if not on paper. Maintain reinvestment proofs and ownership continuity. |
| 5. Planning Litigation Settlements | While settling property disputes, allocate consideration with a clear legal framework. Structure transactions to ensure tax neutrality and capital gain treatment. |
VI. Recommendations and Best Practices
| Action Item | Reason |
|---|---|
| 📄 Document Possession Clearly | Date of entry, nature of possession, utilities paid, legal notices etc. |
| ⚖️ Use Court Filings Strategically | If civil suits have been filed, keep copies to prove asserted interest. |
| 🧾 Record Family Settlements | Register if possible, else notarize and record consideration details. |
| 🏠 Preserve Proof of Reinvestment | For claiming Section 54/54EC – retain sale deeds, bank transactions, allotment letters. |
| 📚 Maintain Legal Opinions | Helpful to attach with ITR in complex cases, especially when legal title is ambiguous. |
VII. Critical Reflection and Forward-Looking Thought
This judgment is a watershed for real-world Indian property tax situations, especially in joint families, ancestral homes, and undocumented but peaceful possessions. It reflects a move toward justice that recognises economic realities over formalistic rigidity.
Applicable Sanskrit Maxim:
"यथाभूतं न्यायं कुर्वीत"
Yathābhūtaṁ nyāyaṁ kurvīta — Justice must reflect the truth of the situation.
VIII. Concluding Remarks
The ruling in Dharampal Saghera v. ITO opens a dignified tax treatment route for possessors of disputed or inherited properties in India—especially where patriarchal systems deny legal titles to women or dependents. It strengthens the tax treatment of family arrangements and minimises undue burden from Section 56(2)(x).
