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Facts
The Revenue appealed against the CIT(A)'s relief to the assessee regarding addition on valuation difference, and the assessee appealed against disallowance of depreciation and rent. The case involved a property purchase where the stamp duty valuation exceeded the consideration, and the DVO's report was considered.
Held
The Tribunal held that the 10% tolerance limit under Section 56(2)(x)(b)(B) was applicable retrospectively, thus deleting the addition made by the AO. For depreciation, the issue was remitted back to the AO for verification of possession. For rent disallowance, the matter was also remitted to the AO for verification of excess payment.
Key Issues
Whether the 10% tolerance limit for property valuation under Section 56(2)(x) applies retrospectively. Whether depreciation is allowable on an asset under interior work. Whether rent paid to a director is excessive under Section 40A(2)(b).
Sections Cited
143(3), 56(2)(x), 32, 40A(2)(b), 133(6)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “D” BENCH MUMBAI
Before: SHRI SANDEEP GOSAIN & SHRI GIRISH AGRAWAL
O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: These two appeals filed by Revenue and assessee are against the order of ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi, vide order no. ITBA/NFAC/S/250/2024-25/1072735549(1), dated 30/01/2025 passed against the assessment order by MUM-C-(441)(1), u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 22.09.2022 for Assessment Year 2020-21.
Grounds taken by the Revenue are reproduced as under:
i. Whether on the facts and the circumstances of the case and in law, the CIT(A) erred in relying on the preliminary valuation report of the DVO In adjudicating the appeal of the assessee without appreciating the fact the preliminary valuation report cannot be regarded as final report of the DVO ii. Whether on the facts and the circumstances of the case and in law, the CIT(A) erred in holding that the variation in the stamp duty valuation and value adopted by the DVO in the preliminary valuation is within the 10% of the variation provided by law without appreciating the fact that as per provisions of the section 56/2)|(x(b) of the Act as existed prior to its amendment by the Finance Act, 2020 w.e.f. 01.04.202 1, the permissible variation was 5o und not 10% he decision of Ld. CIT(A) is not acceptable. 2.1 Grounds taken by the assessee are reproduced as under: i. The Learned CIT Appeals erred in assessing the income at Rs 65,35,037/- instead of Rs 15,83,900/- as represented by the assessee. ii. The Learned CIT Appeals erred in disallowing depreciation u/s 32 of the Act of Rs 49,31,137/- without appreciating the fact that the asset was ready for its independent use and thus depreciation at 5% was allowable iii. The Learned CIT Appeals erred in disallowing rent paid of Rs 20,000/- without appreciating the fact that the payment of rent was not found bogus and thus disallowance of expenditure u/s 40A(2)(b) is not warranted as laid down in the case of Rajesh Bajaj vs. DCIT Allahabad MANU/IW/0008/2020.
These two appeals are one by the revenue and one by the assessee on two different issues. We first take up appeal by the revenue whereby relief was granted by ld. CIT(A) in respect of addition made towards difference in valuation arrived at by ld. District Valuation Officer (DVO) and the actual consideration. Brief facts of the case are that assessee had booked a flat bearing No. A-2, 3212 at India Bulls Sky Forest, Mumbai in the year 2014 for a consideration of Rs.8,01,61,000/-. Sale agreement for this was registered on 27.09.2019 for which the stamp duty value on the date of registration was Rs.11,32,76,000/-. Assessee disputed this stamp duty valuation before the ld. Assessing Officer and the matter was referred to ld. DVO at the request of the assessee. Since the assessment was getting time barred, ld. Assessing Officer completed the assessment pending receipt of report from ld. DVO, by making an addition of Rs.3,31,15,000/- u/s. 56(2)(x), being difference between the purchase consideration and the stamp duty value. The impugned assessment was completed by order dated 22.09.2022.
3.1. Subsequent to this report, by the ld. DVO was issued on 31.10.2022 determining the total value at Rs.8,73,87,000/-. These facts were brought by the assessee before the ld. CIT(A) by placing the copy of valuation report. It is important to note that the preliminary valuation assigned by ld. DVO was at Rs.8,73,87,000/- which was affirmed by the ld. DVO himself in his final valuation report, there being no difference in the valuation in the preliminary report and the final report. The difference between the stamp duty value as per the ld. DVO and the actual purchase consideration comes to Rs.72,26,000/- which is less than the prescribed limit of 10% u/s. 56(2)(x)(b)(B).
3.2. Ld. CIT(A) took note of the valuation report of ld. DVO and considering the difference within the tolerance band of 10%, allowed the ground of the assessee, deleting the addition thereof. However, while giving his findings inadvertently, he referred to the preliminary report for which Revenue has raised its ground that reliance has been placed the ld. CIT(A) on preliminary valuation report while giving the relief.
3.3. To this effect, we have already taken note of the factual position about there being no difference in the valuation arrived at by the ld. DVO in both the reports, wherein the valuation amount stated is Rs.8,73,87,000/-. It is a verifiable fact and admittedly there is no variation in the two reports. In this given set of facts, ground no.1 raised by the Revenue does not survive.
3.4. As far as ground no.2 is concerned, it is a settled position of law that the tolerance limit was increased from 5% to 10% in section 56(2)(x) by Finance Act, 2020 w.e.f. 01.04.2021 which is held to be applicable retrospectively, it being curative in nature and therefore would apply retrospectively from AY 2018-19.
3.5. Reliance is placed on the following judicial precedents which dealt with similar issues: a. Maria Fernandes Cheryl A.Y 11-12 Dated 15.01.2021 b. Rajeev Kumar Agarwal vs. ACIT (2014) 45 taxmann.com 555 (Agra) c. CIT vs. Ansal Landmark Township Pvt. Ltd. (2015) 61 taxmann.com 45 (Del)
3.6. In the case of Maria Fernandes Cheryl (supra), it was held that amendment made by introducing proviso for tolerance band of 5% and later on increased to 10% applied w.e.f. 01.04.2003 when the provisions of section 50C were introduced.
3.7. It is also noted that third proviso to section 56(2)(vii) provides reference to section 50C for determining the valuation of the property by Valuation Officer. The third proviso to section 50C provides that where the value adopted or assessed or assessable by the Stamp valuation Authority does not exceed 10% of the consideration received shall be taken as full value of consideration, i.e., if the difference is less than 10%, the same can be taken as fair market value. Though this provision is brought in the statute w.e.f. 01.04.2019, however, Courts have consistently held that the same is a beneficial provision and therefore benefit should be given with retrospective effect.
Thus, in the given set of facts and considering judicial precedents as well as provisions of the Act, we find that assessee is eligible for 10% tolerance limit u/s.56(2)(x)(b)(B). Accordingly, the addition made by the ld. Assessing Officer is deleted and we uphold the findings arrived at by ld. CIT(A) to this effect. Accordingly, grounds raised by the Revenue are dismissed.
In the result, appeal of the Revenue is dismissed.
We now take up the appeal by the assessee, where the issue relates to disallowance of depreciation u/s.32 of Rs.49,31,137/- as ld. Assessing Officer held that the asset was not put to use, since it was under a passive use for carrying out interior work by the assessee.
6.1. Fact of the matter is that assessee started the interior work of the flat purchased by it, details of which are already discussed above while adjudication the appeal by the Revenue. Assessee undertook the interior work post registration of the sale agreement for which it had taken the possession. Assessee claimed depreciation on this property at the rate of 5% in its rectified return. However, ld. Assessing Officer disallowed the same as according to him, the property was under passive use for carrying out interior work. Ld. CIT(A) sustained the disallowance so made, though ld. CIT(A) made an observation that if possession is taken then, the depreciation should be granted. He took an adverse view on account of the fact that no letter of possession was produced by the assessee.
Claim of the assessee is that subsequently this flat has been sold in AY 2023-24. While reporting capital gain on this transaction in AY 2023-24, assessee has taken the Written Down Value (WDV) at a lower figure, i.e., after the claim of depreciation in the year under consideration which has been accepted by the Department. We note that in the course of assessment proceedings, ld. Assessing Officer made an attempt to enquire about the details of transaction of purchase of flat by the assessee from India Bulls Properties Pvt. Ltd. by issuing notice u/s.133(6) to which ld. Assessing Officer did not receive any response. No further verifications were undertaken by the ld. Assessing Officer in this respect. Also, the acceptance of capital gain on sale transaction in the subsequent year of AY 2023-24 by the Department is not in consonance with the stance taken by ld. Assessing Officer while making the disallowance of the depreciation in the year under consideration.
7.1. In these given set of facts, we find it appropriate to remit this particular issue back to the file of ld. Assessing Officer for the limited purpose of verification about possession taken by the assessee and treatment thereof. Needless to say, assessee be given reasonable opportunity of being heard and to make any further submission, if so required. Accordingly, ground no.2 raised by assessee is allowed for statistical purposes.
In ground no.3, assessee has challenged the addition made towards disallowance of rent paid of Rs.20,000/- by invoking provisions of section 40A(2)(b). Fact relating to this issue is that assessee has being paying yearly rent of Rs.1 lakh to its Director, Shri Lakhamshi Malshi Shah. In the year under consideration, a supplementary agreement was entered into to increase the payment of rent from Rs.1 lakh to Rs.1,20,000/- as claimed by the assessee. This incremental rent of Rs.20,000/- was disallowed by the ld. Assessing Officer by treating it as excess rent paid vis-à-vis the old agreement which was confirmed by ld. CIT(A).
8.1. There is nothing brought on record to demonstrate that the rent paid has been in excess as required u/s. 40A(2)(b) without making any independent examination/verification by the ld. Assessing Officer. In the given set of facts, we find it appropriate to remit the matter back to the file of ld. Assessing Officer for the limited purpose of verification of documentary evidences, so as to objectively arrive at any excess payment of rent u/s.40A(2)(b). Needless to say, assessee be given reasonable opportunity of being heard and to make any further submission, if so required. Accordingly, ground no.3 raised by assessee is allowed for statistical purposes.
In the result, appeal of the assessee is allowed for statistical purposes.