Section 56(2)(x) is not applicable to investments made before its insertion.

Unexplained Investment Addition Deleted, and Section 56(2)(x) Deemed Inapplicable

Key Issues and Decisions:

I. Unexplained Investment in a Flat:

Issue: Whether an addition made under Section 69 for an unexplained investment in a flat is justified when the investment was made in an earlier year and was duly reflected in the assessee’s balance sheet.
Decision: The court held that the addition was not justified. The investment in the flat was not unexplained, as it was made in a previous year and was properly recorded in the assessee’s financial records. Additionally, the payments for the flat were made through banking channels, further supporting the legitimacy of the transaction. (In favor of assessee)

II. Applicability of Section 56(2)(x) for Property Purchase:

Issue: Whether Section 56(2)(x), which deals with the taxation of certain receipts, is applicable to a property purchased by the assessee before the provision was introduced by the Finance Act, 2017.
Decision: The court held that Section 56(2)(x) was not applicable in this case. The property was purchased prior to the insertion of clause (x) in Section 56(2), and therefore, the provision could not be applied retrospectively. The addition made under Section 56(2)(x) was deleted. (In favor of assessee)

Key Takeaways:

Unexplained Investments: This ruling clarifies that an investment cannot be treated as unexplained if it is properly documented and reflected in the assessee’s financial records.
Retrospective Application: The decision confirms that Section 56(2)(x) cannot be applied retrospectively to transactions that occurred before its introduction.

This case provides valuable guidance on the interpretation of Sections 69A and 56(2)(x) of the Income-tax Act, 1961, emphasizing the importance of considering the timing of transactions and the availability of supporting documentation before making additions for unexplained investments or applying specific tax provisions.

IN THE ITAT KOLKATA BENCH ‘A’

Smt. Kajari Banerjee

Income-tax Officer

Rajesh Kumar, Accountant Member
and PRADIP KUMAR CHOUBEY, Judicial Member

IT Appeal No.2167 (KOL) of 2024
[Assessment Year 2020-21]

JANUARY 29, 2025

Soumitra Choudhury, AR for the Appellant. Gautam Patra, DR for the Respondent.

ORDER

Rajesh Kumar, Accountant Member.- This is an appeal preferred by the assessee against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 26.08.2024 for the AY 2020-21.

2. Ground no.1 is general in nature and does not require any adjudication.

3. The issue raised in ground no.2 is against the confirmation of addition of Rs. 19 lacs by CIT (A) as made by the Id. AO on account of unexplained investments u/s 69 of the Act.

4. The facts in brief are that the assessee filed the return of income on 25.02.2021, declaring total income at Rs. 25,71,610/-. The case of the assessee was selected for complete scrutiny and statutory notices were duly issued and served upon the assessee. The ld. AO during the course of assessment proceedings observed that assessee has purchased property at PurbaJadabpur, Corporation Kolkata, Municipal Corporation, Road barakhola, Premises 401, Ward No. 109, Flat No..2C 1107, Floor, No.11, in respect of which the verification unit reported that assessee has purchased this property. The ld. AO noted that as per the said report the market value of the said property was Rs. 63,78,336/-, whereas the purchase price was Rs. 19 lacs. The ld. AO further noted as per the information available in departmental portal, circle rate value of the property was 59,24,736/-. The lower authorities thereafter observed that assessee has not admitted that she has purchased the said property and did not disclose the correct facts and therefore, the source of the investment of Rs.19 lacs in the property remained unexplained. Accordingly, the addition made u/s 69 of the Act to the income of the assessee.

5. In the appellate proceedings, the ld. CIT (A) dismissed the appeal by observing that the assessee is required to explain the source of investment in the immovable property which he has failed to explain and therefore, the ld. AO has rightly confirmed the addition.

6. After hearing the rival contentions and perusing the materials available on record, we find that the ld. AO has made the addition on account of investment in the flat by the assessee of Rs. 19 lacs which according to the ld. AO was not explained. However, we note that the investment in the flat has been made in the earlier year and was duly reflected in the balance sheet of the assessee a copy of which is available at page no.3 of the Paper Book. We note that the investment in Bengal Peerless was shown at Rs. 18,96,939/- under the head investment and deposits in the balance sheet as on 31.03.2020. We further note that the payments for the purchase of flats were made in the earlier financial year as per the details contained in the memo of consideration attached with the sale deed dated 30.04.2019. The details whereof are extracted below for ready reference:-

7. We have also perused the copy of the agreement which is attached at page no.15 to 33 and thus, it is clear from the above that all payments were made through banking channel right from the F.Y. 2012-13 to A.Y. 2018-19. Therefore, conclusion drawn by the ld. AO is against the facts on record available in the assessment folder as all the materials were before the ld. AO. Similarly, the ld. CIT (A) has not appreciated these facts correctly and simply confirmed the addition made by the ld. AO. We note that the ld. AO has wrongly made the addition and similar ld. CIT (A) affirmed the same. Considering these facts, we are inclined to set aside the order of ld. CIT (A) on this issue and direct the ld. AO to delete the audition. The ground no. 2 is allowed.

8. The issue raised in ground no.3 is against the confirmation of Rs. 63,78,336/- by the Id. CIT (A) as made by the Id. AO u/s 56(2)(x) of the Act on account of difference between the stamp valuation and set forth vaIue.

9. The facts in brief are that the Id. AO during the course of assessment proceedings, noted that the flat which was purchased for Rs. 19 lacs had stamp valuation at Rs. 63,78,336/- and therefore, difference in the invested value and the stamp valuation of Rs. 44,78,336/- was added u/s 56(2)(x) of the Act by the ld. AO. The ld. CIT (A) affirmed the order of the ld. AO by simply holding that the case fell within the scope of section 56(2)(x)(b) of the Act, as amended by Finance Act, 2018 from A.Y. 2019-20. According to the ld. CIT (A), if there is a difference between the purchase consideration and the value as per stamp valuation authority then the difference is liable to be added u/s 56(2)(x)(b) of the Act and thus, the ld. AO has rightly made the addition.

10. After hearing the rival contentions and perusing the materials available on record, we find that there is a difference between the purchase price of the flat and the value as per Stamp Valuation Authority. However, as a matter of fact the property was purchased in the earlier year as observed by us hereinabove in view of the payments being made in entirety in the earlier financial year and the details of payments have already extracted hereinabove. We note that the first payment of the flat was made on 12^th June, 2012 and all the payments were completed till the F.Y. 2018-19. So far as the observation of the ld. AO is concerned that the difference between the purchase consideration and the value as per stamp valuation authority is to be taxed at 56(2)(x) of the Act, we note that the provisions of clause (x) of sub section (2)of sub section 56 were inserted by Finance Act 2017, with effect from 01.04.2017 and was not applicable because this flat was brought prior to that. Moreover, as per the first proviso to section 56(2)(x), it is stated that when the date of agreement fixing the amount for transfer of immovable property and the date of registration are not same. The stamp valuation on the date of registration may be taken for the purpose of this sub clause but in any case, the insertion of this clause was made by the Finance Act, 2017 and was not applicable when the flat was bought. So far as the provisions of Section 56(2)(vii)(b) of the Act are concerned, the clause b was inserted by finance act 2015 with effect from 01.04.2014, which provides that in case consideration which is less than the stamp value of the property by an amount exceeding 50,000/- than the stamp value of such property as exceeded amount shall be added to the income of the assessee. However, the proviso provides that the stamp value of the property on the date of agreement may be taken for the purpose of this consideration. Even this clause does not apply to the assessee as this is applicable for A.Y. 2014-15 and therefore, these provisions are not applicable to the present transaction which was agreed to in A.Y. 2013-14. We also note that this new charging section brought under statute book is applicable prospectively not retrospectively. The ld. Authorized Representative relied on the decision of Pinki Chetan Shah v. Addl. ACIT in ITA no. 3629/MUM/2023 and for the sake of ready reference, the operative part of the said decision in the case of Pinki Chetan Shah v. Addl. ACIT (supra) is extracted below:-

“7. We have heard the parties and perused the material on record. The assessee has purchased a flat along with Shri Prakash Keshrimal Shah and in this regard made a payment of Rs.11 lakhs on 06.02.2015. The builder has issued a letter of allotment dated 02.03.2015 acknowledging the receipt of the said amount and also mentioning the other terms and conditions of further payments along with delivery schedule of the flat etc. The said letter also mentions that the assessee has agreed to pay a sum of Rs.49,53,375/- on or before 28.02.2015 which according to the AO was not possible since the letter is dated 02.03.2015. The AO further found certain other discrepancies such as assessee’s signature not found in the allotment letter etc., and accordingly held that the letter of allotment cannot be held as agreement to sell. The AO therefore made addition considering the market value on the date of sale and the agreement vale by applying the provisions of section 56(2)(x)(b) of the Act. Before proceeding further we will look at the provisions of the said section as extracted below –

(2) In particular, and without prejudice to the generality of the provisions of subsection (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely :—

****

(x) where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,—

(a) ***

(b) any immovable property,—

(A) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;

(B) for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:—

(i) the amount of fifty thousand rupees; and

(ii) the amount equal to ten per cent of the consideration:

Provided that where the date of agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of agreement may be taken for the purposes of this sub-clause:

Provided further that the provisions of the first proviso shall apply only in a case where the amount of consideration referred to therein, or a part thereof, has been paid by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed28, on or before the date of agreement for transfer of such immovable property:

Provided also that where the stamp duty value of immovable property is disputed by the assessee on grounds mentioned in sub-section (2) of section 50C, the Assessing Officer may refer the valuation of such property to a Valuation Officer, and the provisions of section 50C and sub-section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of such property for the purpose of this sub-clause as they apply for valuation of capital asset under those sections:

[Provided also that in case of property being referred to in the second proviso to sub-section (1) of section 43CA, the provisions of sub-item (ii) of item (B) shall have effect as if for the words “ten per cent”, the words “twenty per cent” had been substituted;]

8. From the plain reading of the above section it is clear that when a person receives an immovable property where the stamp duty value of such property as exceeds consideration received, then the amount in excess is to be taxed under section 56(2)(x)(b). However the proviso to the above section contains an exception to the effect that where the date of agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of agreement may be taken for the purposes of this subclause and said proviso to be applied only where the amount of consideration or a part thereof is paid by an account payee cheque or bank draft or through online clearing system of a bank or through any other electronic mode. In assessee’s case it is an undisputed fact that the assessee hasmade part payment towards purchase consideration on 06.02.2015 and therefore the first proviso to section 56(2)(x)(b) is applicable in assessee’s case. However the dispute is whether the exception under the first proviso is applicable since the same mentions the date of agreement to be considered and that in assessee’s case whether the letter of allotment is the agreement to sell in order to consider the stamp duty value on that date and not the date of sale. In this regard we notice that the coordinate bench in the case of Parth Dashrath Gandhi v. ACIT (ITA No.1990/Mum/2022 dated 31.01.2023) has considered a similar issue where it is held that –

6. We heard the parties and perused the record. We notice that the AO has considered the stamp duty value as on the date of registration of the agreement to sell for the purpose of determining the applicability of sec.56(2)(x) of the Act. However, the facts that the assessee had been allotted both the properties by way of allotment letters and further, the assessee has also paid instalments as per that letter are not disputed. Hence, the question that arises is whether the allotment letter can be considered as “agreement to sale” within the meaning of the provisos to sec. 56(2)(x) of the Act, which states that the stamp duty valuation as on the sale of sale agreement should be taken into consideration for the purpose of sec.56(2)(x), provided that amount of consideration or part thereof had been paid as per the mod prescribed on or before the date of agreement for transfer of such immovable property.

7. Before us, the Ld A.R placed reliance on the decision rendered by the coordinate bench in the case of Mr. Sajjanraj Mehta v. ITO (ITA No.56/Mum/2021 dated 05-09-2022), wherein it was held that the date of allotment letter can be taken as date of agreement of sale for the purposes of sec.56(2)(x) of the Act. On the contrary, the Ld D.R placed his reliance on the decision rendered by another co-ordinate bench, which was relied upon by AO & CIT(A), viz., SujauddianKasimsab (supra).

8. With regard to the decision rendered in the case of SujauddianKasimsab (supra), the Ld A.R submitted that the said decision has been rendered on the basis of facts prevailing in that case. The assessee, in the above said case, had paid Rs.3.00 lakhs before the date of agreement, but the same was described as “earnest money deposit” in the Agreement, meaning thereby, the assessee did not fulfill the condition prescribed in sec.56(2)(x) of the Act. The Ld A.R furthersubmitted that the Tribunal did not consider the effect of second proviso to sec.56(2)(x) of the Act in the above said case. We agree with the submissions of Ld A.R with regard to the distinguishing features pointed out in the decision rendered by the co-ordinate bench in the case of SujauddianKasimsab (supra). Hence, we are of the view that the above said decision could not lend support to the case of the revenue.

9. On the contrary, we are of the view that the decision rendered by another coordinate bench in the case of MrSajjanraj Mehta (supra) is applicable to the facts of the present case. The decision rendered in the case of MrSajjanraj Mehta by the co-ordinate bench is extracted below, for the sake of convenience:-

“10. We have gone through the order of the A.O, Ld. CIT(A) and various submissions of assessee dated 06-10-2021. Vide pg no-23 to 27 of paperbook we have observed the payment made by the assessee to the developer on 17-102011 amounting to Rs 14 lacs vide cheque no 906740, Bank of Maharashtra to enter into an agreement cum acknowledgement of payment made and other terms and conditions about the property. This agreement between assessee and developer clearly confirms the amount of consideration along with other terms and conditions relating to levy of stamp duty, service tax and other charges to be paid by the assessee.

11. The finding of the A.O vide pg no-4, para-2.6 wherein he observed that assessee has deposited Rs 14 lacs with the developer to year mark the said premises for Rs 70 lacs. Even if for the time being it is assumed that this agreement is merely a letter of intent, still amount mentioned in this so called letter of intent can’t be changed by either of the party.At the max the parties involved may opt for exit from the transaction but amount of consideration can’t be changed. This transaction of the assessee has to be analysed in commercial parlance, without finalisation of consideration nobody will deposit 20% of the final consideration. The vitality of the agreement further found force from the behaviour of the assessee as confirmed by the A.O also that assessee paid further Rs 34.5 lacs till financial year 2012-13. Assessee also paid Rs 1,00,285/- as VAT, Rs 1,35,187/- as service tax, Rs 5,02,000/- as stamp duty and Rs 30,000/- as registration charges.

12. The chronology of the events confirms that the finding of the A.O treating the agreement of the assessee as letter of intent is not correct. In this matter treating the said agreement as letter of intent shows an over thinking and hyper technical interpretation at the end of the A.O.assessee’s case clearly falls in the proviso to Section 56(2)(vii)(b). For sake of clarity we are reproducing herein below the relevant portion of proviso

“Provided that where the date of the agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of the agreement may be taken for the purposes of this sub-clause:

Provided further that the said proviso shall apply only in a case where the amount of consideration referred to therein, or a part thereof, has been paid by any mode other than cash on or before the date of the agreement for the transfer of such immovable property”.

13. We further relied on following judicial pronouncement of coordinated benches of ITAT, Hon’ble High Court and Apex Court as under:

(a) “Siraj Ahmed Jamalbhai Bora v. ITO Ward- 1(3)(1)ITA No. 1886/M/ 2019 dtd. 28/10/2020, (Mum.) (Trib.):

Date of registration irrelevant for Sec 56(2)(vii)(b) as substantial obligation discharged on date of agreement.

(b) Radha Kishan Kungwani v. ITO Ward – 1(2) ITA No. 1106/JP/2018 dtd. 19/08/2020, ] Where assessee entered into agreement for purchase of flat and had made certain payment at time of booking of flat, stamp duty valuation or fair market value of immovable property was to be considered as on date of payment made by assessee towards booking of flat

Where date of agreement for fixing amount of consideration for purchase of a plot of land and date of registration of sale deed were different but assessee, prior to date of agreement, had paid a part of consideration by cheque, provisos to section 56(2)(vii)(b) being fulfilled, stamp value as on date of agreement should be applied for purpose of said section

(d) Ashutosh Jhavs. ITO Ward-2(5), Ranchi ITA No. 188/Ranchi/2019 dtd. 30/04/2021,

Where assessee purchased a property and made part payment of sale consideration by cheque on very next day of execution of purchase agreement and registry was done after a year, since such part payment made by cheque on very next day of execution of agreement was towards fulfilment of terms of purchase contract itself and there was no mala fide or false claim on part of assessee, no addition could be made on account of difference between amount of sale consideration for property shown in purchase agreement and stamp duty value of said property on date of registry by invoking section 56(2)(vii)(b)

(e) Dy. CIT-5(3)(1) v. Deepak Shashi Bhusan Roy ITA No. 3204 & 3316/M/2016 dtd. 30/07/2018(Mum.) (Trib.) In order to determine taxability of capital gain arising from sale of property, it is date of allotment of property which is relevant for purpose of computing holding period and not date of registration of conveyance deed

(f) Mohd. Ilyas Ansari v. ITO- 23(2)(3),Mumbai [ITA No. 6174/M/2017dtd. 06/11/2020, Where Assessing Officer mechanically applied provisions of section 56(2) to difference between stamp duty value and actual sale consideration paid by assessee and made additions, without making any efforts to find out actual cost of property, additions made by Assessing Officer were to be set aside.”

14. Similar property in the case of assessee’s wife with similar transactions has been accepted by the same A.O without any addition for the same A.Y. Here we would like to rely on the decision of Hon’ble Gauhati HC.

“Gulabrai Hanumanbox. v. Commissioner of Wealth-tax

Two different Assessees having similar/identical facts w.r.t valuation of property cannot be assessed with different rates for the same property. Thereby, the order passed by the Assessing officer for cosharer of property is arbitrary and unjustified in law”

15. Keeping in view the facts of the case, chronology of events and respectfully following the pronouncements of the co-ordinated benches of ITAT, we delete the addition made by A.O and confirms that assessee is entitled to the benefits of proviso to Section 56(2)(vii)(b).”

10. Accordingly, following the above said decision, we hold that the respective allotment letters issued to the assessee should be considered as “Agreement to sellfor 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. Accordingly, the stamp duty valuation as on the date of respective Allotment letters should be considered for the purposes of sec.56(2)(x) of the Act. Hence the AO was not justified in considering the stamp duty valuation as on the date of execution of agreement to sell.

11. On a perusal of record, we notice that the details of stamp duty value as on the date of respective allotment letters was not brought on record. Since we have held that the stamp duty valuation as on the date of respective allotment letters should be considered for the purpose of sec.56(2)(x) of the Act, it is imperative on the part of the assessee to show that the actual consideration was equal or less than the stamp duty valuation as on the date of issue of respective allotment letters. Accordingly, we are restoring this issue to the file of AO for the limited purpose of comparing the actual sale consideration with the stamp duty valuation as on the date of respective allotment letters. In the limited set aside, the AO shall take appropriate decision in accordance with law after affording adequate opportunity of being heard.

9. In assessee’s case the advance payment is made through account payee check and the allotment letter with the terms of balance payment and other conditions of delivery of flat etc is issued. Therefore in our considered view, the above decision of the Hon’ble Tribunal is applicable to assessee’s case also. Accordingly respectfully following the above case, we hold that the addition made by the AO is not sustainable and be deleted.

10. In the result, the appeal of the assessee is allowed.”

11. Considering the facts of the case in the light of decision of the coordinate Bench, we are inclined to set aside the order of ld. CIT (A) and direct the ld. AO to delete the addition.

12. In the result, the appeal of the assessee is allowed.