2025 (7) TMI 1481 - AT - Income Tax

Addition u/s 56(2)(x)(b) - FMV determination - difference in the Value decided by DVO and the purchase price paid by the assessee as per the Registered Agreement - difference is 4 % - tolerance band of 5% HELD THAT - To arrive at the Fair market value the DVO has considered prices of so-called similar flats but actually all the flats considered by the DVO are on 47 43 52 floors whereas the flat of the Assessee is on 41st Floor. It is a common knowledge that in Mumbai price increases with floor. Therefore the value of Flat at 52, 47 floors will be definitely higher than that of flat at 41 floors. As per the amendment if the difference between the Stamp Duty Value and the Actual cost is less than 5% then no addition can be made. This amendment is with effect from 01/04/2019. Thus we hold that the addition made is non maintainable as the difference between Amount paid by the assessee and the value determined by DVO is only 4% which is less than 5%. Assessee appeal allowed.

Summary

ISSUES:

Whether addition under section 56(2)(x) of the Income Tax Act, 1961 can be made on the difference between the fair market value (FMV) determined by the Departmental Valuation Officer (DVO) and the actual purchase consideration paid for immovable property when such difference is less than 5% of the consideration.Whether the amendment to section 56(2)(x)(b)(B) of the Income Tax Act, effective from 01/04/2019, providing a 5% tolerance band between stamp duty value and consideration applies retrospectively to assessment year 2018-19.Whether the valuation methodology adopted by the DVO, including consideration of flats on higher floors, is appropriate for determining FMV for the subject property.

RULINGS / HOLDINGS:

On the first issue, the Court held that the addition of Rs. 7,75,500/- under section 56(2)(x) is not maintainable as the difference between the FMV determined by the DVO and the purchase price paid is only 4%, which is less than the 5% threshold prescribed by the amendment effective from 01/04/2019. The addition is therefore deleted.Regarding the applicability of the 5% tolerance band amendment, the Court noted that the amendment applies from 01/04/2019 and to AY 2019-20 and subsequent years; however, following judicial precedents, the Tribunal extended the benefit of the tolerance band to the assessment year 2018-19, thereby disallowing the addition.On the valuation methodology, the Court observed that the DVO considered comparable flats located on higher floors (47th, 43rd, and 52nd floors) whereas the subject flat is on the 41st floor, and since property prices increase with floor level, the FMV determined by the DVO is inflated and not appropriate for addition under section 56(2)(x).

RATIONALE:

The Court applied the statutory provisions of section 56(2)(x) of the Income Tax Act, 1961, as amended by the Finance Act, 2018, which introduced a threshold limiting additions to cases where the excess of stamp duty value over consideration exceeds the higher of Rs. 50,000 or 5% of the consideration.The Court relied on the legislative intent expressed in the Finance Bill 2018, which aimed to minimize hardship by providing a tolerance band to genuine real estate transactions where valuation differences are marginal.The Tribunal followed binding precedents from coordinate benches of the ITAT Mumbai, which held that the tolerance band should be applied to AY 2018-19 despite the amendment's effective date, reflecting a doctrinal shift towards protecting taxpayers from arbitrary valuation additions.The Court critically examined the DVO's valuation approach, emphasizing the relevance of floor level in Mumbai real estate pricing, thereby rejecting the DVO's comparables as inappropriate for FMV determination.No contrary High Court decisions were brought to the Court's notice, reinforcing the Tribunal's reliance on existing ITAT precedents.