The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that a genuine property transaction originating from an earlier allotment and ultimately completed through a civil court decree cannot be subjected to addition under Section 56(2)(x) of the Income-tax Act, 1961 merely by comparing the historical purchase consideration with the higher stamp duty value prevailing on the subsequent date of registration.

The bench of Beena Pillai (Judicial Member) and Jagadish (Accountant Member) observed that where the consideration had already been fixed under an allotment made years earlier, payments had been made through banking channels, and the eventual registration represented the legal completion of rights enforced through court proceedings rather than a fresh bargain, the difference between the consideration and later stamp duty valuation could not by itself be regarded as an unaccounted benefit in the hands of the purchaser.

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The ITAT deleted an addition of Rs. 35.09 lakh made under Section 56(2)(x).

The assessee had filed his return of income declaring total income of Rs. 14.08 lakh. His case was selected for limited scrutiny concerning investment in immovable property.

The assessee, jointly with other purchasers, had acquired Flats Nos. 301 and 302 on the third floor of Jainik Apartment, Matunga, Mumbai, for a total consideration of Rs. 2,01,51,570.

The instrument relating to the property was eventually registered on September 11, 2019. At the time of registration, the Stamp Valuation Authority adopted a value of Rs. 2,71,70,500.

This resulted in a difference of Rs. 70,18,930 between the actual consideration and stamp duty valuation. The Assessing Officer attributed 50% of this difference to the assessee and consequently treated Rs. 35,09,465 as income under Section 56(2)(x). 

The assessee’s central case was that the 2019 registration could not be viewed as an independent property transaction undertaken at the market conditions prevailing in 2019.

The property had originally been allotted by the builder under an allotment letter dated August 29, 2009, and payments had been made through banking channels. Subsequently, disputes arose with the builder, resulting in the institution of Suit No. 1936 of 2010 before the Bombay City Civil Court.

The conveyance was ultimately executed and registered during financial year 2019-20 pursuant to the decree and proceedings before the executing court. 

The Assessing Officer, however, held that the assessee had failed to establish payment of consideration on or before the date of the allotment letter through the mode prescribed under the second proviso to Section 56(2)(x)(b). The stamp duty value applicable on the registration date was therefore adopted and the addition was made. 

The Commissioner of Income Tax (Appeals) accepted that the allotment letter dated August 29, 2009 had fixed the consideration. The CIT(A) also found that a payment of Rs. 3,58,316 dated March 29, 2010 was reflected in the bank statement.

However, according to the CIT(A), payments claimed to have been made on August 29, 2009 and December 7, 2009 were not conclusively discernible from the bank statement placed before the appellate authority.

The CIT(A), therefore, concluded that the requirement contained in the second proviso to Section 56(2)(x)(b) had not been satisfied and upheld the addition. 

The assessee argued that the conveyance executed in 2019 was merely the culmination of the allotment made in 2009 and the decree passed in the civil suit. The consideration mentioned in the eventual conveyance was the same consideration that had been fixed earlier and acted upon by the parties.

The assessee relied upon the scrutiny assessment completed in the case of another co-owner, concerning the very same property.

In the co-owner’s assessment, the Assessing Officer had examined the allotment letter, five cheques aggregating to Rs. 43.30 lakh paid before 2010, the amounts deposited before the City Civil Court and the relevant court orders. After considering these materials, the Assessing Officer had expressly held that Section 56(2)(x) was not applicable. 

The assessee consequently argued that an indivisible property transaction could not simultaneously be regarded as genuine and outside Section 56(2)(x) in the hands of one co-owner while being treated as giving rise to deemed income in the hands of another.

Reliance was also placed on the Karnataka High Court’s judgment in PCIT v. Dr. Ranjan Pai, where Section 56(2) was considered in the context of its anti-abuse purpose.

The assessee contended that the provision should not mechanically be applied to a genuine transaction where there was no tax-abusive arrangement or device. 

The Revenue, on the other hand, supported the orders of the lower authorities. It maintained that the registered instrument had been executed only on September 11, 2019 and that the assessee had failed to prove payment on or before the date of the allotment letter through the prescribed mode.

Accordingly, the Department defended the use of the stamp duty value prevailing on the registration date. 

The Tribunal identified the limited controversy as whether the stamp duty value prevailing on September 11, 2019 could, in the peculiar circumstances, be substituted for the consideration that had been fixed under the allotment made in 2009 and subsequently enforced through a decree of a competent civil court. 

Explaining the statutory framework, the ITAT noted that the first proviso to Section 56(2)(x)(b) provides that where the date of the agreement fixing the consideration and the date of registration are different, the stamp duty value prevailing on the date of the agreement may be considered.

The second proviso requires that the consideration, or part of it, should have been paid otherwise than in cash on or before the date of the agreement.

Importantly, the Tribunal explained the purpose behind these safeguards. It observed that the provisos are intended to ensure that a purchaser whose consideration had genuinely been fixed and acted upon through a verifiable non-cash payment is not taxed merely because registration occurred subsequently when stamp values had increased. 

The ITAT found that the material on record did not support the premise upon which the addition had been sustained.

The Tribunal placed considerable importance on the assessment completed in the case of the co-owner for the same assessment year and involving the same property.

In that assessment, the Assessing Officer had recorded that the property was offered under the allotment letter dated August 29, 2009 and that, before the institution of the civil suit, the purchasers had paid Rs. 43.30 lakh through five cheques before 2010.

The remaining amount of Rs. 1,58,21,570, including tax deducted at source, had been deposited with the Bombay City Civil Court. 

After examining the sale deed, bank statement, judgment and court orders, the Assessing Officer in the co-owner’s case had concluded that since the property had been purchased at the sale consideration determined by the Bombay City Civil Court, Section 56(2)(x) was not applicable in the circumstances. 

The Tribunal made a significant observation regarding consistency in the Revenue’s treatment of co-owners.

It noted that the co-owner’s assessment did not concern an unrelated person or unrelated facts. Rather, it involved the same property, same allotment, same consideration, same payments and same civil court proceedings.

There was also no material placed before the Tribunal showing that the assessment made in the co-owner’s case had subsequently been revised, reopened or otherwise disturbed. The Revenue had also failed to identify any distinguishing factual circumstances between the two co-owners. 

While acknowledging that the rule of res judicata does not strictly govern income-tax proceedings, the ITAT held:

“The Revenue cannot, without any cogent distinguishing material, adopt mutually destructive factual conclusions in the hands of co-owners arising from one indivisible transaction.” 

The co-owner’s assessment, the Tribunal further observed, directly verified the contemporaneous banking payments which the CIT(A) had considered unproved in the assessee’s case. 

The ITAT further held that the civil court decree and execution proceedings demonstrated the real nature of the eventual registration.

According to the Tribunal, registration in 2019 was not the result of a fresh bargain at the market value prevailing in 2019. Instead, it represented the legal completion of rights that had originated from the 2009 allotment at a consideration already fixed at that stage.

Part of that consideration had been discharged through banking channels, while the balance consideration had subsequently been deposited with the court. 

Consequently, the Tribunal held that merely because the stamp duty valuation on the date of eventual registration exceeded the consideration stated in the conveyance, the difference could not automatically be characterised as an unaccounted benefit received by the assessee. 

The Tribunal also considered the Karnataka High Court’s ruling in PCIT v. Dr. Ranjan Pai.

It noted that the High Court had examined the real nature and economic effect of the transaction and the absence of material demonstrating a transfer structured to evade tax. Section 56(2) had been viewed as an anti-abuse provision whose mechanical application was inappropriate where the transaction resulted in no real untaxed benefit.

At the same time, the ITAT carefully distinguished the precedent, observing that Ranjan Pai involved bonus shares and therefore was not a direct authority on the statutory provisos governing immovable property.

Nevertheless, the Tribunal found the interpretative principle relevant. It observed that a genuine, court-enforced transaction cannot be characterised as an abusive receipt merely by comparing the historical agreed consideration with a later stamp value. 

More importantly, in the present case the statutory requirement concerning non-cash payment was independently established through the Revenue’s own verification during the assessment of the co-owner. 

In view of these findings, the Mumbai ITAT held that the Rs. 35,09,465 addition under Section 56(2)(x) was unsustainable and directed the Assessing Officer to delete it.

The assessee’s substantive ground challenging the Section 56(2)(x) addition was accordingly allowed. The separate legal grounds concerning the assessment order and notice under Section 143(2), which had not been separately argued, were dismissed as not pressed.

The issue concerning interest under Sections 234A, 234B and 234C was treated as consequential and allowed for statistical purposes.

Accordingly, the assessee’s appeal was allowed. 

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