2025 (6) TMI 477 - AT - Income Tax

Applicability of the provisions of Section 56(2)(X) - difference of stamp value and purchase price or property - CIT (A) upheld the applicability of Section 56(2)(X) but directed the ld. AO to assess the income in the hands of the assessee to the extent of his ownership in the said property which was 25% thereby deleting the of the addition made in the hands of the assessee HELD THAT - We find that the agreement for the purchase of the said property was made on 28.12.2012 when the assessee paid by cheque of Rs. 10 lacs and the remaining consideration paid up to 25.11.2015. Therefore the assessee has entered into a purchase agreement on 28.12.2012 arguably before Provision of Section 56(2)(X) was brought on statute book by Finance Act 2017 with effect from 01.04.2017 meaning thereby that the same is applicable from A.Y. 2017-18. Therefore in our opinion the ld. AO has wrongly invoked the provisions of Section 56(2(X) of the Act in the case of the assessee and similarly same was wrongly affirmed by the ld. CIT (A). Assessee appeal allowed.

Summary

The core legal questions considered in this appeal pertain to the applicability of Section 56(2)(x) of the Income Tax Act, specifically:

• Whether the provisions of Section 56(2)(x), introduced by the Finance Act, 2017 with effect from 01.04.2017, can be applied retrospectively to transactions entered into before this date.
• The correct valuation date and method for determining the stamp duty value of immovable property for the purpose of Section 56(2)(x), particularly when there is a difference between the purchase consideration and the stamp duty valuation.
• The relevance and applicability of the provisos to Section 56(2)(x), especially concerning the date of agreement fixing the consideration versus the date of registration of the property.
• The treatment of ownership shares in the property for the purpose of income addition under Section 56(2)(x).

Regarding the first issue, the Tribunal examined whether Section 56(2)(x) could be invoked for a property purchase agreement dated 28.12.2012, with payments completed by 25.11.2015, predating the statutory introduction of the provision effective from 01.04.2017. The Tribunal noted that the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] had invoked Section 56(2)(x) to add the difference between the stamp duty value and the declared purchase price to the assessee's income. However, the Tribunal held that since the agreement and payments predated the effective date of the provision, applying Section 56(2)(x) was erroneous. This interpretation was supported by a coordinate bench decision in the assessee's own case for a subsequent assessment year, which had ruled similarly that the provision applies prospectively and not retrospectively.

On the question of valuation date and method under Section 56(2)(x), the Tribunal analyzed the provisos to the section, which provide that where the date of agreement fixing the consideration and the date of registration differ, the stamp duty value on the date of the agreement may be taken for computation, provided certain payment conditions are met (payment by account payee cheque, bank draft, or electronic mode on or before the date of agreement). The Tribunal emphasized that this proviso is crucial in determining the correct valuation date for assessing the addition under Section 56(2)(x).

The Tribunal extensively reviewed judicial precedents, including decisions by coordinate benches of the Income Tax Appellate Tribunal and High Courts, which clarified that the date of the agreement fixing the consideration, rather than the date of registration, is relevant for applying Section 56(2)(x). It was further clarified that an allotment letter or letter of intent, accompanied by part payment through banking channels, can constitute an "agreement to sell" for these purposes. The Tribunal relied on a detailed decision that examined similar facts, where payments made prior to the execution of the sale deed and the issuance of allotment letters were held to satisfy the conditions of the proviso, thus precluding additions under Section 56(2)(x).

In applying these principles to the facts, the Tribunal found that the assessee had made initial and subsequent payments through banking channels well before the registration of the sale deed. The allotment letters issued contained terms fixing the consideration and other conditions, and thus qualified as agreements for the purposes of Section 56(2)(x). The AO's reliance on the stamp duty valuation as on the date of registration, rather than on the date of the allotment letters or agreements, was therefore held to be legally unsustainable.

Regarding the ownership share issue, the CIT(A) had directed that the addition under Section 56(2)(x) be proportionate to the assessee's 25% ownership in the property, reducing the addition accordingly. However, since the Tribunal found the entire invocation of Section 56(2)(x) to be erroneous due to retrospective application and incorrect valuation date, this proportional adjustment became moot.

The Tribunal also addressed the competing arguments presented by the parties. The revenue's contention centered on the applicability of Section 56(2)(x) to the transaction and the use of stamp duty valuation as on the date of registration. The assessee's representatives countered with the timing of the agreement and payments, the applicability of provisos, and supporting judicial precedents. The Tribunal found the assessee's arguments more persuasive, particularly given the detailed analysis of the provisos and the precedents emphasizing the prospective nature of the provision and the relevance of the date of agreement.

Key evidence considered included the purchase agreement dated 28.12.2012, payment records showing part payments by cheque from 2012 onwards, allotment letters specifying terms and consideration, and the absence of any dispute regarding the timing and mode of payments. The Tribunal also noted the consistency of treatment in related cases, including the acceptance of similar transactions for the assessee's spouse without additions, reinforcing the principle against arbitrary differential treatment.

In conclusion, the Tribunal held that:

• The provisions of Section 56(2)(x) of the Income Tax Act are not applicable retrospectively to transactions entered into before 01.04.2017.
• The correct valuation date for the stamp duty value under Section 56(2)(x) is the date of the agreement fixing the consideration, not the date of registration, where the payments are made as prescribed by the provisos.
• An allotment letter accompanied by part payment through banking channels qualifies as an agreement for the purposes of Section 56(2)(x).
• The addition made by the AO under Section 56(2)(x) was therefore unsustainable and was rightly deleted by the Tribunal.

Significant holdings include the Tribunal's clear statement:

"Therefore, in our opinion, the ld. AO has wrongly invoked the provisions of Section 56(2)(X) of the Act in the case of the assessee and similarly, same was wrongly affirmed by the ld. CIT (A)."

"Accordingly, following the above said decision, we hold that the respective allotment letters issued to the assessee should be considered as 'Agreement to sell for the purposes of sec. 56(2)(x) of the Act.' Since the assessee has paid the parts of consideration as per the terms and conditions of allotment through banking channels prior to the execution of Sale agreement, we are of the view that the provisos to sec. 56(2)(x) shall apply to the facts of the present case."

"We are inclined to set aside the order of ld. CIT (A) and direct the ld. AO to delete the addition."

Core principles established include the prospective application of Section 56(2)(x), the relevance of the date of agreement fixing consideration for valuation purposes, and the recognition of allotment letters with part payments as valid agreements under the statute. The Tribunal's directions to the AO to delete the addition and to consider the correct valuation date reinforce these principles.