2024 (11) TMI 71 - AT - Income Tax

Addition made u/s 56(2)(x) - Conversion as a transfer u/s. 2(47) - scope of the terms 'transfer' and 'received' - conversion of one class of rights (tenancy rights) in the property to another class of rights (ownership rights) in the same property - correctness action of the AO in invoking the provision of 56(2)(x) CIT(A) held that the purchase transaction, i.e. conversion of tenancy rights into ownership rights, is duly covered under the definition of transfer as provided in section 2(47) accordingly, upheld the invocation of provisions of section 56(2)(x)(b)(B) - HELD THAT - From a careful perusal of the aforesaid decisions, it is clearly evident that the transfer of ownership rights is distinguished by the Hon ble Courts from the transfer of ownership by the protected tenant. Dr. D.A. Irani 1998 (9) TMI 81 - BOMBAY HIGH COURT and Mrs. Nila V. Shah 2012 (6) TMI 379 - ITAT MUMBAI are the cases where the taxpayer purchased the tenant premises from the owner and thus there was a transfer of ownership by the erstwhile tenant. We agree with the submissions of the assessee that if the assessee had purchased an immovable property, then he would have entered into a Deed of Conveyance, however, in the instant case the parties entered into a Deed for Conversion. The fact that while computing the fair market value of the subject property, the DVO considered 30% of the gross value as the fair market value of the subject property also supports the case of the assessee as in the case of purchase of ownership entire 100% would have been considered as fair market value. Having considered the peculiar facts of the present case in light of the various judicial pronouncements as noted above and also in light of the detailed analysis of the provisions of section 56(2)(x)(b) of the Act, we are of the considered view that since the assessee, being a protected tenant since 1992, has merely acquired an ownership right of the Flat earlier occupied by him as a protected tenant and not any immovable property vide Deed for Conversion dated 05/12/2019, therefore section 56(2)(x)(b) of the Act is not applicable to the present case. Reliance on the definition of the term transfer as provided in section 2(47) of the Act is immaterial in the instant case as no addition on account of capital gains was made either in the hands of the assessee or the landlord. Accordingly, the impugned addition made by the AO and upheld by the learned CIT(A) under section 56(2)(x)(b) of the Act is directed to be deleted. As a result, the grounds raised by the assessee are allowed.

Issues Involved:

1. Whether the conversion of tenancy rights into ownership rights constitutes a "transfer" under section 2(47) of the Income Tax Act, 1961.
2. Applicability of section 56(2)(x)(b)(B) regarding the addition made for the difference in fair market value and consideration paid.
3. Acceptance of the valuation report provided by the assessee.
4. Levy of interest under sections 234B and 234C.

Issue-wise Detailed Analysis:

1. Transfer under Section 2(47):

The primary issue was whether the conversion of tenancy rights into ownership rights constitutes a "transfer" under section 2(47) of the Income Tax Act, 1961. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] considered the transaction as a transfer, invoking section 56(2)(x)(b)(B) for the difference between the fair market value and the consideration paid. However, the Tribunal analyzed the nature of the conversion, noting that the assessee, a protected tenant since 1992, did not acquire new immovable property but merely converted existing tenancy rights into ownership rights. The Tribunal concluded that this conversion does not fall under the definition of "transfer" as per section 2(47), as no new property was acquired.

2. Applicability of Section 56(2)(x)(b)(B):

Section 56(2)(x)(b)(B) applies when a person receives immovable property for consideration less than the stamp duty value. The Tribunal examined whether the conversion of tenancy rights to ownership rights could be considered the receipt of immovable property. It was determined that the conversion involved only a change in the nature of rights already held by the assessee, not the acquisition of a new property. Thus, section 56(2)(x)(b)(B) was deemed inapplicable, as the assessee did not receive a new immovable property but merely enhanced existing rights.

3. Valuation Report:

The AO rejected the valuation report submitted by the assessee, which valued the conversion at 10% of the market value. The Tribunal noted that the valuation report was consistent with the nature of the transaction, which involved converting tenancy rights to ownership rights, not acquiring a new property. The Tribunal found fault with the AO's interpretation and upheld the assessee's valuation, emphasizing that the transaction did not involve the acquisition of an entire property but merely the enhancement of existing rights.

4. Levy of Interest under Sections 234B and 234C:

The Tribunal did not specifically address the issue of interest levied under sections 234B and 234C, as the primary focus was on the applicability of section 56(2)(x)(b)(B) and the nature of the transaction. However, by allowing the appeal and deleting the addition made under section 56(2)(x)(b)(B), any consequential interest levied would also be impacted.

Conclusion:

The Tribunal allowed the appeal, concluding that the conversion of tenancy rights into ownership rights does not constitute a "transfer" under section 2(47), and section 56(2)(x)(b)(B) is not applicable. The valuation report provided by the assessee was accepted, and the addition made by the AO was deleted. Consequently, the appeal by the assessee was allowed, and the impugned order was set aside.

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