2024 (11) TMI 421 - AT - Income Tax

Addition u/s. 56(2)(x) - transfer/surrender of tenancy rights - HELD THAT - Sec. 56(2)(x) is a deeming provision akin to Section 50C of the Act. While the provisions of Section 50C are applicable to the seller of immovable property, the provisions of Section 56(2)(x) are applicable to a buyer. The question as to whether the provisions of Section 50C of the Act would be applicable to transfer of lease hold right came to be examined in the case of Atul G Puranik 2011 (5) TMI 576 - ITAT, MUMBAI It was held that the provisions of Section 50C of the Act will not be applicable to lease hold rights. The decisions rendered in the context of sec. 50C shall be applicable to the provisions of Section 56(2)(x) of the Act. There is no dispute with regard to the fact that the assessee has transferred only tenancy right to the builder and obtained a new flat in lieu of such transfer as consideration for such transfer. The AO has applied the provisions of Section 56(2)(x) to the transfer of tenancy right, since the stamp duty value of new property was much higher. The provisions of Section 56(2)(x), being a deeming provision, the same has to be interpreted strictly. In the above said decisions, the transfer of tenancy right has been held to be outside the scope of sec. 50C of the Act. Since the provisions of Section 50C and Section 56(2)(b) of the Act are applicable to Immovable property being land or building or both , following the above said decisions, we hold that the provisions of Section 56(2)(x) of the Act will not apply to the transfer of tenancy right. We notice that the assessee was entitled for 753 Sq. ft on surrender of tenancy right. However, the assessee obtained 824.24 sq. ft, by purchasing additional area of 71.24 sq.ft. For purchasing the above said additional area, the assessee paid a consideration of Rs. 20.00 lakhs. Since the additional purchase of 71.24 sq.ft., is not related to tenancy right held by the assessee, the provisions of sec. 56(2)(x) will apply to the same. We noticed that the value determined by the stamp authorities for 824.24 sq.ft was Rs. 2,47,93,300/-. Hence proportionate value for 71.24 sq.ft will work out to Rs. 21,42,913/-. The assessee has paid a consideration of Rs. 20,00,000/-. Hence there is a difference of Rs. 1,42,913/- and the said difference works out to 7.14% of the consideration paid by the assessee. As per sec. 56(2)(x)(b)(ii), the difference of upto 5% has to be ignored. The said tolerance limit was increased to 10% w.e.f. 01-04-2021. In the case of Maria Fernandez Cheryl 2021 (1) TMI 620 - ITAT MUMBAI has held that the amended tolerance limit of 10% shall be applicable from the date of insertion of sec. 50C of the Act. The ratio of above said decision would be equally applicable in the present case also. Since the difference between the actual consideration and stamp duty valuation is less than 10% of the consideration, there is no requirement of making any addition u/s. 56(2)(x) of the Act. Appeal filed by the Revenue is dismissed.

Summary

Issues Involved:

1. Applicability of Section 56(2)(x) of the Income Tax Act, 1961 to the transfer/surrender of tenancy rights.
2. Determination of whether tenancy rights fall under the definition of "property" as per Section 56(2)(x) and Section 50C of the Act.
3. Assessment of additional consideration paid for extra area acquired and its tax implications under Section 56(2)(x).

Issue-wise Detailed Analysis:

1. Applicability of Section 56(2)(x) to Tenancy Rights:

The primary issue in this appeal is whether the provisions of Section 56(2)(x) of the Income Tax Act, 1961, apply to the transaction involving the transfer/surrender of tenancy rights. The Assessing Officer (AO) had added an amount of Rs. 1.97 crores to the assessee's income under Section 56(2)(x), arguing that the difference between the stamp duty value of the newly acquired property and the consideration paid should be taxed. The assessee contended that Section 56(2)(x) does not apply to tenancy rights. The CIT(A) accepted the assessee's contention, and the Tribunal upheld this view, referencing past decisions that Section 56(2)(x), similar to Section 50C, applies only to immovable property defined as "land or building or both," and does not extend to rights in land or building, such as tenancy rights.

2. Definition of "Property" and its Relevance:

The judgment delves into the definition of "property" under Section 56(2)(x) and Section 50C of the Act. The term "property" is defined exhaustively and includes immovable property as "land or building or both." The Tribunal cited previous cases, such as Atul G. Puranik vs. ITO, which clarified that deeming provisions like Section 50C apply strictly to the sale of land or building and not to rights in them, such as tenancy rights. The Tribunal noted that the legal fiction created by such provisions should not extend beyond their explicit mandate, thereby excluding tenancy rights from the ambit of Section 56(2)(x).

3. Additional Consideration for Extra Area:

The assessee acquired additional area beyond the entitlement from the surrender of tenancy rights, paying Rs. 20 lakhs for 71.24 sq.ft. The Tribunal assessed whether Section 56(2)(x) applied to this additional purchase. It was determined that the stamp duty value for the entire new property was Rs. 2,47,93,300, with the proportionate value for the extra area being Rs. 21,42,913. The difference between the stamp duty value and the consideration paid was Rs. 1,42,913, which was less than 10% of the consideration. The Tribunal applied the amended tolerance limit of 10% for differences under Section 56(2)(x)(b)(ii), concluding that no addition was warranted as the difference was within the permissible limit.

Conclusion:

The Tribunal concluded that the provisions of Section 56(2)(x) do not apply to the transfer of tenancy rights, and the additional area acquired by the assessee did not result in a taxable difference under the said section. Consequently, the appeal filed by the Revenue was dismissed, affirming the CIT(A)'s order. The judgment underscores the importance of strict interpretation of deeming provisions and the distinction between immovable property and rights in such property for tax purposes.