Loading judgment…
Facts
The assessee, a tenant since 1992, converted his tenancy rights into ownership rights for a consideration. The Stamp Duty Valuation Authority assessed the property's fair market value higher than the consideration paid. The AO treated the difference as income under section 56(2)(x)(b)(B) of the Income Tax Act, 1961.
Held
The Tribunal held that the conversion of tenancy rights to ownership rights is not the receipt of 'immovable property' as defined under section 56(2)(x)(b)(B) of the Act. The assessee merely acquired ownership of the property he already occupied as a tenant, rather than acquiring a new immovable property.
Key Issues
Whether the conversion of tenancy rights into ownership rights for a consideration amounts to the 'receipt of immovable property' under section 56(2)(x)(b)(B) of the Income Tax Act, 1961, making the difference between the stamp duty value and the consideration taxable.
Sections Cited
56(2)(x)(b)(B), 2(47), 234B, 234C
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI B.R. BASKARAN & SHRI SANDEEP SINGH KARHAIL
The present appeal has been filed by the assessee challenging the impugned order dated 21/07/2023, passed under section 250 of the Income Tax Act, 1961 ("the Act") by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Center, Delhi, [“learned CIT(A)”], for the assessment year 2020–21.
In this appeal, the assessee has raised the following grounds: –
“1. In the facts and in the circumstances, of the case the learned A.O. Erred in considering the present case of conversion as a transfer U/s. 2(47) of the Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023 income tax act, 1961 and the learned Commissioner of Income tax (Appeals) erred in confirming the same.
2. Without prejudice to the above, in the facts and circumstances of the case and in law, the Ld. AO as well as the Ld. CIT(A) erred in not appreciating that the terms 'transfer' and 'received' are totally different having different connotations under the Act and therefore cannot be used interchangeably as has been done in the present case.
In the facts and in the circumstances, of the case the Ld. CIT(A) erred in confirming the action of the Ld. AO in invoking the provision of 56(2)(x), in the present case, without appreciating that:
(i) The said section is not at all applicable in the present case;
(ii) The appellant has not received any land, building or cash so as to be able to invoke section 56; and;
(iii) In any case nothing is received in the relevant assessment year so as to be chargeable to tax in the relevant year;
4. Without prejudice to the above, if the argument of the Ld. AO is accepted then the entire transaction cannot be charged to tax at all since it is in the nature of acquisition of a capital asset and not sale of a capital asset.
5. In the facts and in the circumstances, of the case the Ld. CIT(A) erred in not accepting the valuation report of government approved valuer Dadbhawala Architect, Engineers & Valuers Pvt. Ltd. as furnished by the Appellant without giving any reasons whatsoever.
6. In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming the action of the Ld. AO in levying interest u/s 234B and 234C of the Act.
7. Your appellant prays that returned income be accepted and the addition made to the declared income be deleted in the interest of justice and/or appropriate relief.
8. The Appellant craves leave to add, amend, alter, delete or modify all or any of the above grounds of appeal.”
3. The solitary dispute raised by the assessee is against the addition made under section 56(2)(x) of the Act.
The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is an individual and for the year under consideration filed its return of income on 18/08/2020 declaring a total
Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023 income of Rs.12,91,760. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) and section 142(1) were issued and served on the assessee. During the year under consideration, the ownership rights of the property, viz. Flat No. 24 Floor No. 5VA, Ram NamMansion, Block No. 6, Cinema Road, Dhobi Talao, Mumbai-400020, was transferred to the assessee. Since the stamp duty valuation authority assessed/adopted the fair market value of the said property at Rs.1,38,70,000, the assessee was asked to explain the difference in the purchase consideration. In response, the assessee submitted that he has not purchased any additional immovable property during the year under consideration and his landlord has only converted his 25 years old tenancy in respect of the tenanted residential flat into ownership by executing a Deed for Conversion of tenancy rights into ownership rights. It was further submitted that since he was staying in the tenanted premises prior to 1995, his landlord was desirous to convert the tenancy into ownership for monetary consideration. The assessee submitted that he has duly shown the said transaction in his balance sheet and return filed for the year under consideration. The assessee was asked to show cause as to why the addition of Rs.1,13,70,000, being the difference in the fair market value adopted by the stamp duty valuation authority and the consideration paid by the assessee, be not made under section 56(2)(x)(b)(B) of the Act. In response, the assessee submitted the valuation report by an independent valuer. As
per the valuation report, the market value of the immovable property was determined at Rs.2,53,38,057 and in order to drive the value of the cost of conversion of tenancy into ownership, the valuation was adopted at Rs.
Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023 25,23,806, i.e. 10% of Rs. 2,53,38,057. The assessee further submitted that section 56(2)(x)(b)(B) is not applicable in the present case as he has not received any immovable property, but it is a mere conversion of one class of rights (tenancy rights) in the property to another class of rights (ownership rights) in the same property.
5. The Assessing Officer (“AO”) vide order dated 26/09/2022 passed under section 143(3) read with section 144B of the Act did not agree with the submissions of the assessee and also did not accept the valuation report submitted by the assessee on the basis that in the valuation report, it has been mentioned that the tenant is eligible to take concession of 10% at the time of valuation of the immovable property. However, the valuer has considered the cost of conversion of tenancy rights into ownership rights at 10% of the market value of the property instead of considering 90% of the same after granting a concession of 10%. The AO further held that the purchase transaction, i.e. conversion of tenancy rights into ownership rights are covered under the definition of “transfer” as provided in section 2(47) of the Act. The AO held that as per the provisions of section 56(2)(x)(b)(B) of the Act, the difference of the fair market value of the purchased or transferred immovable property as adopted/assessed by Stamp duty authority and purchase consideration as mentioned in the purchase deed should be treated as income chargeable to tax under the head “income from other sources”. The AO held that the assessee has duly received property from an earlier owner and therefore the case of the assessee clearly falls under section 56(2)(x)(b)(B) of the Act, as the assessee has now received
Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023 absolute rights in the property by way of transfer of the property and has now become the owner of the property.Accordingly, the AO considered a sum of Rs.1,13,70,000 (i.e. Rs.1,38,70,000 minus Rs.25,00,000) as income under the head “income from other sources” as per the provisions of section 56(2)(x)(b)(B) of the Act on account of purchase/conversion of tenancy rights into ownership rights of the immovable property. Since the report from theDepartment Valuation Officer (“DVO”) was not received till the passing of the assessment order, the AO held that as and when the DVO’s report is received, the value as determined by the DVO shall be considered and addition under section 56(2)(x)(b)(B) of the Act shall be modified accordingly.
6. The learned CIT(A), vide impugned order, held that the purchase transaction, i.e. conversion of tenancy rights into ownership rights, is duly covered under the definition of “transfer” as provided in section 2(47) of the Act. The learned CIT(A), accordingly, upheld the invocation of provisions ofsection 56(2)(x)(b)(B) of the Act in the present case. Further, the learned CIT(A) directed the AO to consider the valuation report of the DVO and make appropriate adjustments. Being aggrieved, the assessee is in appeal before us.
We have considered the submissions of both sides and perused the material available on record. In the present case, the assessee is an individual and from the year 1992 was residing atFlat No. 24 Floor No. 5VA, Ram Nam Mansion, Block No. 6, Cinema Road, Dhobi Talao, Mumbai-400020 as a tenant under what is popularly known as Pagdi system of tenancy. In Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023 the said building, apart from the assessee, other tenants were also residing for a very long time. The landlord of the property, i.e. Tarabhai Bhatia Family Trust, converted the tenancy rights of various tenants, who were staying in the tenanted premises prior to the year 1995, into ownership rights including that of the assessee. As a consideration for the conversion of tenancy rights into ownership rights, during the relevant assessment year, the assessee paid Rs.25,00,000 to the landlord. There is no dispute among the parties regarding the aforementioned basic facts of the present case.
As is evident from the record, during the assessment proceedings, it was noticed that the stamp duty valuation authority had assessed the fair market value of the said property at Rs.1,38,70,000. Accordingly, the assessee was asked to show cause as to why the difference between the consideration paid by the assessee in respect of the aforesaid transaction and the valuation made by the stamp duty authority be not considered as income of the assessee under the head “income from other sources” under section 56(2)(x)(b)(B) of the Act. It is the plea of the assessee that section 56(2)(x)(b)(B) of the Act is not applicable to the present case, since the consideration of Rs.25,00,000 was paid by the assessee merely for the conversion of tenancy rights into ownership rights and he has not received any immovable property during the year under consideration. It is further the claim of the assessee that he has merely secured the balance rights in the property, which was always in his possession since the year 1992. Thus, it is the claim of the assessee that he has not received any immovable
Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023 property and has only received additional rights in the property. It is further the plea of the assessee that the term “immovable property” has been defined to mean land or building or both and the same does not include any rights in the land or building. Thus, it was submitted that the conversion of rights is different from the purchase of property. On a without prejudice basis, the assessee furnished the report from an independent valuer, whereby the cost of conversion of tenancy rights into ownership rights was determined at Rs.25,33,806.Since the consideration paid by the assessee was near to the aforesaid amount, the assessee claimed it to be a justifiable consideration. However, the AO did not agree with the contention of the assessee and made the addition under section 56(2)(x)(b)(B) of the Act by applying the rate determined by the DVO.
Before proceeding further, it is relevant to note the provisions of section 56(2)(x)(b) of the Act, which is relevant for the adjudication of the dispute at hand. Section 56(2)(x)(b) of the Act reads as under: -
“(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :—
(i) ……… (ii) …… ………. (x) where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,— (a) ……. (b) any immovable property,—
(A) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;
(B) for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:—
Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023
(i) the amount of fifty thousand rupees; and (ii) the amount equal to five per cent of the consideration:
………………..
Explanation.—For the purposes of this clause, the expressions "assessable", "fair market value", "jewellery", "property", "relative" and "stamp duty value" shall have the same meanings as respectively assigned to them in the Explanation to clause (vii).”
For completion, it is also pertinent to note the meaning of the term “property” as provided in the Explanation to section 56(2)(vii) of the Act and the same reads as follows: - “Explanation.—For the purposes of this clause,— (a) …….; (b) ………; (c) ………; (d) "property" means the following capital asset of the assessee, namely:—
(i) immovable property being land or building or both; (ii) shares and securities; (iii) jewellery; (iv) archaeological collections; (v) drawings; (vi) paintings; (vii) sculptures; (viii) any work of art; or (ix) bullion;
Therefore, as per section 56(2)(x)(b)(B) of the Act, if any person receives any immovable property from any person or persons on or after 01/04/2017 for consideration, the stamp duty value of such property as exceeds such consideration shall be considered as its income from other sources, if the amount of such excess is more than the higher of the amount of Rs. 50,000 and the amount equal to 5% of the consideration. Thus, for Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023 the applicability of the provisions of section 56(2)(x)(b)(B) of the Act, it is firstly relevant that the person receives the immovable property on or after 01/04/2017; secondly, the same is received for a consideration which is less than the stamp duty value of such property; and thirdly, such excess should be more than the amount as noted above. Here it is also pertinent to note that while assigning the meaning to the term “property” in the Explanation to section 56(2)(x) r/w the Explanation to section 56(2)(vii) of the Act, the term “immovable property” has been defined to mean land or building or both. In our view, it will not cover the improvement of right which is already held by the assessee. Therefore, from the bare reading of the aforesaid provisions of the Act, it is discernible that receipt of immovable property for the purpose of section 56(2)(x)(b) of the Act only includes within its ambit receipt of land or building or both. In other words, section 56(2)(x)(b) of the Act cannot be so exhaustively interpreted to even cover the transaction of improvement of any right in the immovable property.
In the light of the aforesaid analysis of the provisions of section 56(2)(x)(b) of the Act, in the present case it needs to be examined whether, pursuant to the Deed for Conversion dated 05/12/2019 entered into between the landlord, i.e. Tarabhai Bhatia Family Trust, and the assessee as a tenant, the assessee received an immovable property or merely a right (i.e. the ownership right) in the immovable property which was in his possession since 1992 as a protected tenant. The aforesaid examination is relevant as the Hon’ble Courts have recognised the transfer of ownership
Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023 rights by a protected tenant and the transfer of ownership by the protected tenant differently.
In CIT v/s Abrar Alvi, [2001] 117 Taxman 95 (Bombay), the taxpayer, who was a tenant sold a building and the dispute arose regarding the cost of acquisition of the said property. The appellate authority overruled the decision of the AO and came to the conclusion that the taxpayer was a tenant, and thus valued the cost of acquisition at a nominal amount of Rs. 2,500. In further appeal, the Tribunal concluded that what was transferred was not the tenancy rights but the building itself and, therefore, what was to be allowed as a deduction for working out the capital gains was not the cost of tenancy but the cost of ownership rights. The Hon’ble Jurisdictional High Court dismissed the appeal filed by the Revenue and held that this is a pure finding of fact, which requires no interference.
On the other hand, in CIT v/s Dr. D.A. Irani, [2000] 111 Taxman 600 (Bom.), the facts before the Hon’ble Jurisdictional High Court were as follows: - “2. This reference pertains to the assessment year 1977-78. The assessee jointly with his mother held a flat in Shanti Kutir, Bombay, admeasuring about 1,800 sq. ft. The said flat was originally taken on lease in the year 1962-63 by the father of the assessee for residential purposes on a monthly rent of Rs.
Since then it was in occupation of the assessee’s father as a tenant and after his death on 26-3-1974, in the occupation of the assessee and his mother. In May 1974, the existing tenants of the building Shanti Kutir formed a society and entered into an agreement with the landlord for the purchase of the building. The ownership of the building was transferred to the society in January 1976. The assessee and his mother, like all other tenants, jointly paid Rs. 46,287 towards the purchase price of the flat in their occupation and thereby became the owner thereof. After about four months of the purchase of the said flat, in May 1976, the assessee and his mother sold the said flat to Mr. & Mrs. V.V. Dalal for Rs. 1,80,000 and handed over vacant possession thereof to the said purchasers. In the assessment of the assessee under the Act for the assessment year Page | 10
Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023
1977-78, the ITO computed capital gains from the sale of the said flat at Rs. 1,31,213 by deducting Rs. 46,287, being the purchase price and Rs. 2,500 being legal expenses incurred in connection therewith from the sale consideration of Rs. 1,80,000 and assessed the same as short-term capital gain from the sale of the flat because the flat had been sold within 4 to 5 months of the purchase. The assessee was aggrieved by the above order of the ITO. According to the assessee, the sale of the flat by the assessee comprised of two capital assets, viz., occupancy right and the remaining rights of owner including title. It was contended by the assessee that the tenancy right was acquired by the father of the assessee in year 1962-63 and the ownership right was acquired by the assessee and his mother in January 1976. …..” (Emphasis supplied)
Rejecting the submission of the taxpayer, the Hon’ble Jurisdictional High Court observed as follows: -
“4. We have carefully considered the submissions of Mr. Desai, the learned counsel for the revenue. We find force in the same. The Tribunal, in our view, was wrong in holding that even after the purchase of the flat by the lessee, the leasehold right subsisted in the lessee. Because, once the lessee purchases the leased property from the owner, the lease is extinguished as the same person cannot at the same time be both landlord and tenant. The doctrine of merger applies resulting in ‘drowning’ and ‘sinking’ of inferior right into superior right. There is a complete union of the interest of the lessor in the lessee in such a case and the tenancy comes to an end. This principle has been statutorily recognised in section 111(d) of the Transfer of Property Act, 1882, which specifically provides for determi- nation of lease in case the interests of the lessee and the lessor in the whole of the property become vested at the same time in one person in the same right.
From the above discussion, it is clear that the asset transferred, in the instant case, was the flat acquired by the assessee by purchase from the owners with all the rights and interest therein including the occupancy right. The assessee was owner of the flat and not a tenant. The fact that the assessee was in occupation of the flat as a tenant before its purchase is wholly irrelevant because on purchase there was a union of the interests of the lessor and the lessee and the tenancy was existinguished. The said flat having been sold within 4 to 5 months of its purchase, the capital gain arising there from was rightly held by the ITO to be a short-term capital gain. The Tribunal was not justified in reversing the said finding of the ITO.
In view of the above, we answer the question referred to us in the negative, i.e., in favour of the revenue and against the assessee.” (Emphasis supplied)
Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023
The coordinate bench of the Tribunal in Mrs. Nila V. Shah v/s Commissioner of Income-tax (Appeals), XXV, [2012] 21 taxmann.com 324 (Mum.), after considering the aforesaid decisions, held that where the taxpayer hadan office premise in a property on tenancy basis for last 30 years and she had purchased said office from the owner through open bidding and not through ownership right, cost of acquisition of office premises would be cost, which was incurred for acquiring it. The relevant findings of the coordinate bench, in the aforesaid decision, are reproduced as follows: –
“8.2 After holding that the sale of office amounted to Long Term Capital Gain, the second issue which comes for our consideration is to what would be the cost of acquisition of the said property. The appellant's claim is that, since she was a tenant for the last 30 years, therefore, she had a tenancy right which was exchanged for the ownership right vide agreement dated 10.06.1999 and therefore, the cost of the premises has to be taken by including the tenancy right in the cost of acquisition. Accordingly, the appellant took the market value as on 10.06.1999 as the cost of acquisition, which has been estimated by the approved valuer at Rs. 10,04,475/-. In support of this, heavy reliance has been placed on the judgment of Hon'ble Jurisdictional High Court in the case of Abrar Alvi (supra). First of all, the said judgment cannot be held to be applicable as that was a case where the ownership right was itself bought instead of the property and in the case of the appellant, the property itself was purchased through open bidding and not through ownership right. To this extent, the finding of the CIT (Appeals) are correct. As already stated above, the appellant had purchased the said property for a sum of Rs. 4,75,000/- which included the proportionate cost of new building. In such a situation, the cost of tenancy right cannot be taken into consideration, firstly, there was no surrender of tenancy rights and secondly, as per the sub section 2 of section 55, the cost of acquisition of tenancy right has to be taken at Nil. Even from the plain reading of the agreement dated 10.06.1999, it is evident that the appellant had bought the property and not the ownership right and once this is a factual position, then it cannot be held that the some cost should be assigned on the tenancy right also. The judgment of Hon'ble Jurisdictional High Court in the case of Dr. D.A. Irani (supra) also gets squarely applicable, wherein it has been held that even if the assessee was tenant before its purchase, it becomes wholly irrelevant because at the time of purchase, tenancy gets extinguished and hence the value has to be assessed from the date of acquisition of the property. Therefore, the cost of acquisition for the purpose of indexation has to be taken at Rs. 4,75,000/- and not Rs. 10,04,475/- as has been contented by the appellant. Page | 12
Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023
Thus, the finding of the CIT (Appeals) on this issue is upheld. We accordingly hold that the cost of acquisition should be taken at Rs. 4,75,000/-.” (Emphasis supplied)
Therefore, from a careful perusal of the aforesaid decisions, it is clearly evident that the transfer of ownership rights is distinguished by the Hon’ble Courts from the transfer of ownership by the protected tenant. Dr. D.A. Irani (supra) and Mrs. Nila V. Shah (supra) are the cases where the taxpayer purchased the tenant premises from the owner and thus there was a transfer of ownership by the erstwhile tenant. However, in the present case, vide Deed for Conversion dated 05/12/2019 the assessee did not purchase the ownership of the Flat No. 24 Floor No. 5VA, Ram Nam Mansion, Block No. 6, Cinema Road, Dhobi Talao, Mumbai-400020 and merely his tenancy rights were converted to ownership rights, for which the assessee paid Rs. 25,00,000 to the landlord. This fact is further evident from clauses 6 and 7 of the Deed for Conversion, forming part of the paper book from pages 86 to 134, wherein it has been provided that the assessee shall have the ownership rights only in respect of the Flat in his occupation and possession and is not entitled to any separate rights in the Land or the Building in any manner whatsoever. Thus, we agree with the submissions of the assessee that if the assessee had purchased an immovable property, then he would have entered into a Deed of Conveyance, however, in the instant case the parties entered into a Deed for Conversion. Further, the fact that while computing the fair market value of the subject property, the DVO considered 30% of the gross value as the fair market value of the subject property also supports the case of the assessee as in the case of purchase of ownership entire 100% would have been considered as fair market value. Page | 13
Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023 Having considered the peculiar facts of the present case in light of the various judicial pronouncements as noted above and also in light of the detailed analysis of the provisions of section 56(2)(x)(b) of the Act, we are of the considered view that since the assessee, being a protected tenant since 1992, has merely acquired an ownership right of the Flat earlier occupied by him as a protected tenant and not any immovable property vide Deed for Conversion dated 05/12/2019, therefore section 56(2)(x)(b) of the Act is not applicable to the present case. Further, reliance on the definition of the term “transfer” as provided in section 2(47) of the Act is immaterial in the instant case as no addition on account of capital gains was made either in the hands of the assessee or the landlord. Accordingly, the impugned addition made by the AO and upheld by the learned CIT(A) under section 56(2)(x)(b) of the Act is directed to be deleted. As a result, the grounds raised by the assessee are allowed.
In the result, the appeal by the assessee is allowed.
Order pronounced in the open Court on 22/10.2024