Letter of Allotment can not be considered as agreement to sale. Addition u/s 56(2)(vii)(b) upheld

Letter of Allotment can not be considered as agreement to sale by any stretch of imagination. ITAT upheld addition u/s 56(2)(vii)(b) of the Income Tax Act. 

ABCAUS Case Law Citation:
ABCAUS 3042 (2019) (07) ITAT

Important Case Laws Cited/relied upon by the parties:
Babulal Shambhubhai Rakholia v. ACIT
Sanjay Kumar Gupta v. ACIT
Anita D. Kanjani v. ACIT (2017) 79 taxmann.com 67
DCIT v. Deepak Shashi Bhusan Roy (2018) 96 taxmann.com 648
Pr. CIT v. Vembu Vaidyanathan (2019) 101 taxmann.com 436
ACIT v. Shri Keyur Hemant Shah
CIT v. Balbir Singh Maini 86 taxmann.com 94 (SC)
Gurbax Singh v. Kartar Singh & Ors
Govt. of Karnataka v. Ragini Narayan
Ved Nath v. Indra Vikram Alias Chhote Singh
Alapati Venkataramiah v. CIT (1965) 57 ITR 185 (SC)
CIT v. Podar Cements Pvt. Ltd. (1997) 226 ITR 625 (SC),
National Cement Mines Industries Ltd. v. CIT [1961] 42 ITR 69

The instant appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) in confirming the addition made by the Assessing Officer (AO) u/s 56(2)(vii)(b) of the Income Tax Act, 1961 (the Act) under the head ‘Income from Other Sources’.

The AO on perusal of the purchase deed filed by the assessee noticed that the Government value for stamp duty purpose of the immovable property was more than the actual value as per the deed.

The AO issued a show cause notice to the assessee asking the assessee to explain why the difference shall not be treated as income from other sources u/s 56(2)(vii)(b) of the Act.

The AO was not convinced with the reply of the assessee for the reason that he came to a finding that the actual cost of the property was more than what the assessee had shown. The assessee had himself paid amount more than the Government valuation for the said property.

The AO also noted that the assessee vide order sheet noting had agreed for the proposed addition. Accordingly, the AO made an addition u/s 56(2)(vii)(b) of the Act.

The CIT(A) dismissed the appeal filed by the assessee.

The sum and substance of the arguments of the assessee were that

(i) in the case of the assessee, the letter of allotment was executed with the builder on 27.04.2012, which gives the right to obtain the conveyance of the said flat, so it becomes an asset u/s 2(14) of the Act and therefore, the date of letter of allotment should be considered as a date of receipt of immovable property,

(ii) since the allotee gets title to the property on issuance of an allotment letter and that the payment of instalment is only a consequential action, upon which the delivery of possession follows,

(iii) the assessee had received the immovable property on the date of execution of allotment letter and not the date of registration

(iv) as provisions of section 56(2)(vii)(b) were not applicable for the AY 2013-14, the addition made by the AO during the AY 2015-16 is against the provisions of the Act and therefore, the same deserved to be deleted.

The Tribunal noted that the dispute was in respect of receipt of the immoveable property i.e. between ‘’ Letter of Allotment” dated 27.04.2012 and “Agreement for Sale’ dated 10.09.2014.

The Tribunal noted that on the case law relied upon by the assessee, the Hon’ble High Court referring to the CBDT Circular No. 471 dated 15.10.1986 and No. 672 dated 16.12.1993 had held that the date of allotment would be the date on which the purchaser of a residential unit can be stated to have acquired the property. The Hon’ble High Court had noted that the allotment in construction scheme promised by the builder was not materially different from the terms of allotment and construction by DDA.

However, the Tribunal noted that in the instant appeal, the issue was not the allotment in construction scheme promised by the builder which is materially same as the terms of allotment and construction by DDA. Thus the case of the assessee in the instant case was distinguishable from the decision relied on by the assessee.

The Tribunal opined that the “Letter of Allotment” dated 27.04.2012 could not be considered as the date of execution of agreement by any stretch of imagination. Immovable property is not conveyed by delivery of possession, but by a duly registered deed. Further, it is the date of execution of registered document, not the date of delivery of possession or the date of registration of document which is relevant.

The Tribunal noted that the Hon’ble Supreme Court had held that once the executed documents are registered, the transfer will take place on the date of execution of documents and not on the date of registration of documents.

The Tribunal noted that section 56(2)(viii)(b)(ii) clearly stipulated that where any immoveable property is received for a consideration which is less than the stamp duty value of the property by an amount exceeding Rs.50000/-, the stamp duty value of such property as exceeds such consideration, shall be chargeable to tax in the hands of the individual or HUF as income from other sources. It is applicable from A.Y. 2014-15.

The Tribunal observed that the Hon’ble Supreme Court emphasized the principles of interpretation to be adopted by the Court in construing a commercial transaction stating that the true nature and character of the transaction have to be ascertained from the covenants of the contract in the light of the surrounding circumstances.

The Tribunal upheld the order of the CIT(A).

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