Addition u/s 56(2)(ii) deleted as Law cannot operate in vaccum de-horse ground realities though deeming section not requires any incriminating material
ABCAUS Case Law Citation:
ABCAUS 3270 (2020) (02) ITAT
Section 56(2) of the Income Tax Act, 1961 (the Act) is a deeming provision which creates an artificial fiction by deeming income in the hands of the buyer of immovable property. Finance Act, 2018 w.e.f. 01.04.2019 amended Section 50C and 56(2) providing that where the difference between the stamp duty valuation and actual sale consideration is upto 5% then the same shall not be deemed to be income u/s 56(2) and also u/s 50C of the Act.
In the instant case the appeal was filed by the assessee against the appellate order passed by Commissioner of Income Tax(Appeals) arisen from assessment order passed by Assessing Officer (AO) bringing to tax the difference between the sale consideration of property purchased by the assessee and the stamp duty value of the said property by invoking provisions of Section 56(2)(vii) of the Act.
The case of the assessee was selected for framing scrutiny assessment through CASS. During the course of assessment proceedings the AO observed that the assessee had purchased vacant lands at a consideration which was less than stamp duty valuation.
The AO invoked provisions of Section 56(2)(vii) of the Act and brought the said difference to tax.
The assessee submitted before AO that guideline value of the property was later revised downward by State Government. It was submitted that differential between guideline value on the date of sale and the sale consideration was less than 5%.
The assessee also submitted that amendment made by the Finance Act, 2018, which permitted that difference up-to 5% between stamp value and the sale consideration shall not be treated income under deeming fiction of Section 56(2) of the Act.
The assessee also requested AO to refer the matter to valuation cell to find out the correct value of the property.
The AO observed that stamp duty value on the date of registration shall prevail. The AO was also of the view that amendment in Section 50C and 56(2) of the Act were a subsequent event and was not applicable on the date of registration /transfer in the instant case.
Since the valuation report was not received by the AO on the date of framing scrutiny assessment, the AO made the impugned addition.
The CIT(A) confirmed the addition.
The Tribunal noted that the difference between the stamp duty value vis-à-vis actual sale consideration was only 3.71% which was less than 5%.
The Tribunal observed that Section 56(2)(vii) is a deeming provision, which creates an artificial fiction by deeming income in the hands of the buyer of immovable property, where the value of sale consideration of immovable property is less than guideline value by more than Rs.50,000/-, then the guideline value has to be taken as the value of property for bringing to tax income u/s 56(2)(vii) of the Act under the head ‘Income from other sources’ in the hand of buyer of the party.
The Tribunal further observed that Later on with a view to minimize hardship in real estate transactions in the hands of the buyer and seller, amendments were brought in by Finance Act, 2018 w.e.f. 01.04.2019 applicable from AY: 2019-20 in Section 50C and 56(2)(x), wherein in case the differential between stamp duty value fixed by State Government for stamp duty purposes and actual sale consideration is upto 5%, then same shall not be deemed to be income for the purposes of Section 56(2) and also for Section 50C of the Act.
The Tribunal stated that though Section 56(2)(vii) is a deeming Section and artificial fiction is created wherein in case of differential between the stamp duty value and sale consideration exceeding Rs. 50,000, the same shall be deemed to be income in the hands of purchaser and there was no doubt that the deeming section has to be given full play but the law cannot be allowed to operate in vaccum de-horse ground realities.
The Tribunal stated that it has to operate within the realm of realities otherwise, there will be absurdities leading to perversities which no Court will be part of accepting such absurdities/ perversities.
The Tribunal observed that the State Government realising that market value of the properties had fallen brought down the stamp duty value in tune with realities in real estate declining market values. Also in the Budget speech of 2018, the Finance Minister recognised that variation can occur in respect of different properties in the same area because of a variety of factors including shape of the plot and location. Also, 5% bracket was given to minimize hardship in real estate transaction.
Thus the Tribunal noted that simultaneous amendments were made in the Act by amending provisions of Section 50C and 56(2) by the Finance Act 2018 w.e.f. 01.04.2019 with a view to minimize hardship to buyers and sellers in real estate transactions and where the differential is up to 5% between the guideline value and the actual sale consideration.
Addition u/s 56(2) deleted as Law cannot ignore ground realities
The Tribunal further observed that though the said amendment was made applicable from AY 2019-20. However the amendment was to minimize hardship faced by buyers and sellers in real estate transaction wherein the law makers had taken note of the hardships faced by buyers and sellers in real estate transactions and suitably amended the law to meet with ground realities. On the same line the State Government had also noted the hardships faced by parties in real estate transactions and brought down the guideline value.
The Tribunal noted that in the instant case, firstly the differential was only 3.71% which was less than 5% and there could not be precision in all the cases that consideration should be the same or higher than stamp duty value as there are several factors which determine the actual sale consideration, secondly, the assessee challenged guideline value being adopted by the AO but the report of the DVO was not brought on record, thirdly the State Government had itself reduced the stamp duty value which was indicator of the fact that the market value of the property was lower than guideline value, fourthly amendments were made by Finance Act, 2018 in Section 56(2) where in differential upto 5% was allowed and no additions be made under deeming fiction of Section 56(2) of the Act albeit it was applicable from AY 2019-20 onwards.
Also the Tribunal noted that no incriminating evidence was brought on record by Revenue which could evidence that assessee in fact paid higher sale consideration than the actual sale consideration recorded in registered sale document albeit the Tribunal stated that it was aware that Section 56(2) is deeming section and Revenue is not obligated to bring on record any incriminating material in such circumstances to prove that actual sale consideration paid by tax-payer is higher than that recorded in sale document.
Thus, in view of the above reasonings, the Tribunal held that law cannot operate in vaccum de-horse ground realities which under the surrounding circumstances in the instant case lead to only one irresistible conclusion that the additions as were made by authorities below were not sustainable in the eye of law
Accordingly, the addition made by the AO was deleted.
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