Provisions of section 56(2)(vii)(b)(ii) will not apply to a case where there was an allotment prior to A.Y. 2014-15 – The amended provisions cannot apply merely because the agreement was registered after the provision came into force

FACTS

The assessee, a practising advocate of Rajasthan High Court, e-filed the return of income declaring therein a total income of Rs. 27,38,450. In the course of assessment proceedings before the A.O., the assessee filed a registered purchase deed in respect of purchase of immovable property and various other details required by the A.O. The A.O. completed the assessment accepting the returned income.
 

Subsequently, the PCIT observed that the assessee had purchased an immovable property for a consideration of Rs. 70,26,233 as co-owner with 50% share in the said property and the stamp duty value thereof was determined at Rs. 1,03,12,220; therefore, the difference of Rs. 32,85,987 was to be treated as income from other sources. The PCIT held that the A.O. having failed to invoke section 56(2)(vii)(b) during assessment proceedings, the order he had passed was erroneous insofar as it is prejudicial to the interest of the Revenue. He invoked the jurisdiction u/s 263 and issued a show cause notice, and after considering the submissions of the assessee, passed an order u/s 263 on the ground that there was no agreement and therefore the assessee cannot be given benefit of the first proviso to section 56(2)(vii)(b)(ii). The PCIT set aside the assessment order passed by the A.O. and directed him to complete the assessment afresh after giving an opportunity to the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that on 23rd September, 2006, the assessee applied for allotment of Flat No. 201 at Somdatt’s Landmark, Jaipur. The flat was allotted vide allotment letter dated 6th March, 2009 on certain terms and conditions mentioned in the allotment letter. The assessee agreed to the allotment by signing the letter of allotment on 11th November, 2009 as a token of acceptance. Prior to the registration of the transaction on 9th December, 2014, the assessee had paid Rs. 45,26,233 against the total sale consideration of Rs. 65,57,500. The allotment letter contained all substantive terms and conditions which created the respective rights and obligations of the parties and bound the respective parties. The allotment letter provided detailed specifications of the property, its identification and terms of the payment, providing possession of the subject property in the stipulated period and so on. The seller had agreed to sell and the assessee agreed to purchase the flat for an agreed price mentioned in the allotment letter.

 
The Tribunal held that,

i) What is important is to gather the intention of the parties and not to go by the nomenclature. There being an offer and acceptance by the competent parties for a lawful purpose with their free consent, the Tribunal held that all the attributes of a lawful agreement are available as per the provisions of the Indian Contract Act, 1872. Such agreement was acted upon by the parties and pursuant to the allotment letter the assessee paid a substantial amount of consideration of Rs. 45,26,233 as early as in the year 2008 itself. For all intents and purposes, such an allotment letter constituted a complete agreement between the parties. Relying on the decisions in the cases of Hasmukh N. Gala vs. ITO [(2015) 173 TTJ 537] and CIT vs. Kuldeep Singh [(2014) 270 CTR 561 (Delhi HC)] rendered in the context of the provisions of section 54, the Tribunal was convinced that the assessee had already entered into an agreement by way of allotment letter on 11th November, 2009 in A.Y. 2010-11;

ii) the pre-amended law which was applicable up to A.Y. 2013-14 never contemplated a situation where immovable property was received for inadequate consideration. It was only in the amended law specifically made applicable from A.Y. 2014-15 that any receipt of immovable property for inadequate consideration has been subjected to the provisions of section 56(2)(vii)(b), but not before that. Therefore, the applicability of the said provisions could not be insisted upon in the assessment years prior to A.Y. 2014-15;

iii) in the present case, since there was a valid and lawful agreement entered into by the parties long back in A.Y. 2010-11 when the subject property was transferred and substantial obligations discharged, the law contained in section 56(2)(vii)(b) as it stood at that point of time did not contemplate a situation of receipt of property by the buyer for inadequate consideration. The Tribunal held that the PCIT erred in applying the said provision;

iv) the Tribunal did not find itself in agreement with the contention of the DR that allotment was provisional as it was subject to further changes because of some unexpected happening which may be instructed by the approving authority, resulting in increase or decrease in the area and so on because, according to the Tribunal, it is a standard practice to save the seller (builder) from unintended consequences;

v) the Tribunal, relying on the decision of the Ranchi Bench in the case of Bajranglal Naredi vs. ITO [(2020) 203 TTJ 925], held that the mere fact that the flat was registered in the year 2014, falling in A.Y. 2015-16, the amended provisions of section 56(2)(vii)(b)(ii) could not be applied;

vi) the assessment order subjected to revision is not erroneous and prejudicial to the interest of the Revenue.

The appeal filed by the assessee was allowed.