ACIT, MUMBAI vs. ASHOK NARENDRA MEHTA, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI “A” BENCH : MUMBAI

BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI ANIKESH BANERJEE, JUDICIAL MEMBER ITA No. 3373/Mum/2024 Assessment Year 2018-19 ACIT, Circle – 19(1) Ashok Narendra Mehta, 5th Floor, Piramal Chambers, 132, 13th Floor, Lalbaug, vs. Siddhesh Darshan, Mumbai. 10th Khetwadi Main Road, Khetwadi, Mumbai PAN : AIVPM9318A (Appellant) (Respondent) For Assessee : Shri Vimal Punmiya, C.A. For Revenue : Shri Manoj Kumar Sinha, Sr.DR Date of Hearing : 13-08-2024 Date of Pronouncement : 28-08-2024 ORDER PER B.R. BASKARAN, A.M :

The Revenue has filed this appeal challenging the order dt. 02-05- 2024passed by the Ld. Commissioner of Income Tax (Appeals)-NFAC, Delhi (in short „Ld.CIT(A)‟) and it relates to AY. 2018-19. Though the Revenue has raised as many as seven grounds, yet all of them are directed against a single issue, viz., the addition of Rs. 1.97 crores made by the AO u/s. 56(2)(x) of the Income Tax Act, 1961 („the Act‟).

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Mumbai. The assessee had purchased tenancy rights by way ofagreement dt. 21-08-2017 for a sum of Rs. 30 lakhs from the previous tenant named Dr. Satyajit Chowdhary. Subsequently, the above said building was taken up for re-development by a builder named M/s. Shreepati Jewels. As per the agreement entered with the above builder, the assessee surrendered the tenancy right to the builder and in lieu thereof, the assessee was given an alternative non-residential premises,bearing address No. 503, 5th Floor, Wing E, Shreepati Jewels Pearl, C P Tank, Mumbai with payment ofadditional cost of Rs. 20 lakhs. The assessee was given76.63 sq. Mtrs., of constructed area in lieu of the old shop admeasuring 14.95 Sq. Mtrs. The AO noticed that the Stamp Authorities have determined the value of the new property at Rs.2,47,93,300/-. The AO noticed that the assessee has paid a sum of Rs. 50 lakhs only [Rs. 30 lakhs to the previous tenant and Rs. 20 lakhs to the builder]. Hence, he took the view that section 56(2)(x) of the Act, will be applicable to this transaction. Accordingly, he assessed the difference amount of Rs.1,97,93,300/- as income of the assessee u/s.56(2)(x) of the Act. 3. Before Ld CIT(A), the assessee contended that the provisions of sec.56(2)(x) of the Act will not be applicable for transactions relating to tenancy rights. The Ld CIT(A) accepted the contentions of the assessee and accordingly deleted the above said addition. Hence the revenue is aggrieved. 4. We heard the parties and perused the record. The question is about the applicability of provisions of sec.56(2)(x) to transfer/surrender of tenancy right. The provisions of Section 56(2)(x) as applicable to AY 2018-19 read as under:- “56(2)(x) where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,— (a)any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;

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(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 which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration.” The term “property” has been defined in clause (d) of sec.56(2)(vii) of the Act as under:- “56(2)(vii)(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;” Since the definition starts with the expression “Property means”, it is an exhaustive definition. The Immovable Property is included in the meaning of the term “Property” for the purposes of sec.56(2)(x) of the Act. Further the term “immovable Property” is defined as “Immovable property being land or building or both. Hence Immovable property would mean only “Land” or “building” or “both”. 5. Hence it is required to be examined whether the provisions of section 56(2)(x) of the Act would be applicable to transfer/surrender of tenancy rights or not? Sec.56(2)(x) is a deeming provision akin to Section 50C of the Act. While the provisions of Section 50C are applicable to the seller of immovable property, the provisions of Section 56(2)(x) are applicable to a buyer. The question as to whether the

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provisions of Section 50C of the Act would be applicable to transfer of lease hold right came to be examined by the co-ordinate bench in the case of Atul G Puranik vs. ITO (2011) (132 ITD 499) (Mumbai). It was held that the provisions of Section 50C of the Act will not be applicable to lease hold rights. The relevant discussions made by the co-ordinate bench are extracted below:- “11.1 In order to appreciate the rival contentions on this issue, it would be apt to consider the prescription of sec. 50C(1), which is as under : "50C. (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereinafter in this section referred to as the "stamp valuation authority") for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be full value of the consideration received or accruing as a result of such transfer 11.2 On going through the above provision, it transpires that where the full value of consideration shown to have been received or accruing on the transfer of an asset, being land or building of both, is less than the value adopted or assessed or assessable by stamp valuation authority, the value so adopted etc. shall, for the purposes of sec. 48, be deemed to be full value of consideration received or accruing as a result of such transfer. This section has been inserted by the Finance Act 2002 w.e.f. 01-04-2003 with a view to substitute the declared full value of consideration in respect of land or building or both transferred by the assessee with the value adopted or assessed or assessable by stamp valuation authority. But for this provision, there is nothing in the Act, by which the full value of a consideration received or accruing as a result of transfer of land or building or both is deemed to be any amount other than that actually received. From the language of sub-sec. (1), it is clear that the value of land or building or both adopted or assessed or assessable by the stamp valuation authority shall, for the purpose of section 48, be deemed to be the full value of the consideration received or accruing as a result of such a transfer. Two things are noticeable from this provision. Firstly, it is a deeming provision and secondly, it extends only to land or building or both. It is manifest that a deeming provision has been incorporated to substitute the value adopted or assessed or assessable by stamp valuation authority in place of consideration received or accruing as a result of transfer, in case the latter is lower than the former. It is further relevant to note that the

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mandate of sec. 50C extends only to a capital asset which is "land or building or both". It, therefore, follows that only if a capital asset being land or building or both is transferred and the consideration received or accruing as a result of such transfer is less than the value adopted or assessed or assessable by the stamp valuation authority, the deeming fiction under sub-sec. (1) shall be activated to substitute such adopted or assessed or assessable value as full value of consideration received or accruing as a result of such transfer in the given situation. 11.3 It is a settled legal proposition that a deeming provision cannot be extended beyond the purpose for which it is enacted. The Hon'ble Apex Court in CIT v. Amarchand N. Shroff [1963] 48 ITR 59 has considered the scope of a deeming provision and came to hold that it cannot be extended beyond the object for which it is enacted. Similar view has been reiterated by the Hon'ble Supreme Court in CIT v. Mother India Refrigeration Industries (P.) Ltd. [1985] 155 ITR 711/ 23 Taxman 8 by laying down that "legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond their legitimate field". In CIT v. ACE Builders (P.) Ltd. [2006] 281 ITR 210 /[2005] 144 Taxman 855 (Bom), the Hon'ble jurisdictional High Court considered the facts of a case in which the assessee was a partner in a firm which was dissolved in the year 1984 and the assessee was allotted a flat towards the credit in the capital asset with the firm. The assessee showed the flat as capital asset in its books of account and depreciation was claimed and allowed from year to year. In the previous year relevant to asst. year 1992-93, the assessee sold the flat and invested the net sale proceeds in a scheme eligible u/s.54E of the Act and accordingly declared Nil income under the head 'Capital gains'. The AO formed the view that since the block of building ceased to exist on account of sale of flat during the year, the written down value of the flat was liable to be taken as cost of acquisition u/s.54E of the Act. He further held that since the assessee had availed depreciation on such asset, which was otherwise a long-term capital asset, the deeming provision u/s.50 would apply and it would be treated as capital gain on the sale of short-term capital asset and hence no benefit u/s.54E could be allowed. When the matter came up before the Hon'ble Bombay High Court, it was noticed that sub-sections (1) and (2) of sec. 50 contained a deeming provision and such fiction was restricted only to the mode of computation of capital gain contained in sections 48 and 49 and hence it did not apply to other provisions. The assessee was held to be eligible for exemption u/s.54E in respect of capital gain arising out of the capital asset on which depreciation was allowed. 11.4 In view of the aforenoted judgments rendered by the Hon'ble Apex Court and that of the Hon'ble jurisdictional High Court, it is clear that a deeming provision can be applied only in respect of the

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situation specifically given and hence cannot go beyond the explicit mandate of the section. Turning to sec. 50C, it is seen that the deeming fiction of substituting adopted or assessed or assessable value by the stamp valuation authority as full value of consideration is applicable only in respect of "land or building or both. If the capital asset under transfer cannot be described as 'land or building or both', then sec. 50C will cease to apply. From the facts of this case narrated above, it is seen that the assessee was allotted lease right in the Plot for a period of sixty years, which right was further assigned to M/s. Pathik Construction in the year in question. It is axiomatic that the lease right in a plot of land are neither 'land or building or both' as such nor can be included within the scope of 'land or building or both'. The distinction between a capital asset being 'land or building or both' and any 'right in land or building or both' is well recognized under the I.T. Act. Sec. 54D deals with certain cases in which capital gain on compulsory acquisition of land and building is charged. Sub-sec.(1) of sec. 54D opens with : "Subject to the provisions of sub-section (2), where the capital gain arises from the transfer by way of compulsory acquisition under any law of a capital asset, being land or building or any right in land or building, forming part of an industrial undertaking…..". It is palpable from sec. 54D that 'land or building' is distinct from 'any right in land or building'. Similar position prevails under the W.T. Act, 1957 also. Section 5(1) at the material time provided for exemption in respect of certain assets. Clause (xxxii) of sec. 5(1) provided that "the value, as determined in the prescribed manner, of the interest of the assessee in the assets (not being any land or building or any rights in land or building or any asset referred to in any other clauses of this sub-section) forming part of an industrial undertaking" shall be exempt from tax. Here also it is worth noting that a distinction has been drawn between 'land or building' on one hand and 'or any rights in land or building' on the other. Considering the fact that we are dealing with special provision for full value of consideration in certain cases u/s.50C, which is a deeming provision, the fiction created in this section cannot be extended to any asset other than those specifically provided therein. As sec. 50C applies only to a capital asst, being land or building or both, it cannot be made applicable to lease rights in a land. As the assessee transferred lease right for sixty years in the Plot and not land itself, the provisions of sec.50C cannot be invoked. We, therefore, hold that the full value of consideration in the instant case be taken as Rs.2.50 crores. 12. To sum up, we hold that capital gain on the transaction of assignment of lease rights in the Plot is to be computed in the year in question by adopting the full value of consideration on 25-08- 2005 at Rs.2.50 crores and the cost of acquisition shall be worked out afresh as per law by the AO by taking the market value of lease rights for sixty years in the Plot as on 16-08-2004.

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lords); and vide agreement executed in the relevant year (AY. 2011- 12), the assessee A.Y. 2011-12 Ashwin Vardhichand Shah had entered into an agreement with Shri Chunnilal and Shri Tejaram for regularizing the tenancy and pursuant to that stamp-duty of two properties (Rs.71,07,480/-) had to be remitted for registration of the agreement. According to the Ld. CIT(A), the Estate of land- lord i.e. Late Jasumathi V Shah (mother of assessee) had given notice for vacating the said premises to the original tenants i.e. TilokChand D Shah and Dinesh Metal Industries who had illegally given away the said properties by way of sub-tenancy, to Shri Chunilal and Tejaram. According to the Ld. CIT(A), since both these sub-tenants were not paying rent to the land-lord, a settlement was finally arrived at in the month of Oct, 2010 and the tenancy of these two persons were recognized by entering into agreement of tenancy by the land-lord [assessee being one among the four (4) co- owner brother]. Therefore, according to Ld. CIT(A), the AO rightly taxed the transfer of tenancy right and dismissed the appeal of assessee. 7. According to assessee, the registered documents in question was evidencing only 'tenancy agreement' terms of which was in accordance to Maharashtra Rent Control Act, 1999 (hereinafter "the MRCA 1999) and the tenancy was governed by MRCA Act, 1999. According to assessee, the AIR information was triggered since assessee registered the tenancy agreement of two floors of property in question to Shri Chunilal & Shri Tejaram as per the MRCA 1999, which makes it compulsory on the part of land-lord to register the tenancy/rent agreement as per Registration Act, 1908. And any failure on the part of the land-lord not to register the tenancy would invite A.Y. 2011-12 Ashwin Vardhichand Shah imprisonment up to 3 months as per section 55 of MRC Act, 1999. Drawing our attention to the tenancy agreement placed at page 32 to 49 PB with Shri Chunilal and page no. 52 to 69 of PB with Shri Tejaram, the Ld. AR submitted that as per the terms of the agreement it can be seen that ownership of the two floors/property in question has not been transferred to Shri Chunilal or Shri Tejaram. According to the Ld. AR, it can be seen that they were only tenants and didn't enjoy the power to sell or mortgage or sub-lease the property (without permission of land-lords). And both the tenancy agreement has incorporated the provision of MRC Act, 1999 which permits the assessee to evict the tenant for failure to pay the rent as per section 15 of MRC Act, 1999. Moreover, according to Ld. AR, there was no consideration passed between land-lord and tenant. Apart from the aforesaid facts and despite assessee pointing out the aforesaid facts, there was no enquiry on the part of AO/Ld. CIT(A) to verify from the tenants (Shri Chunilal or Shri Tejaram) as to whether there was any transaction of the nature of transfer as contemplated u/s 2(47) of the Act. According to Ld. AR without any material to show that tenancy agreement entered into between assessee [who was one of the four owner of the properties (two

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flats)] and the two persons, were in the nature of transfer, AO/Ld CIT(A) erred in holding that the agreement was sham or colourable device to avoid tax. Therefore, it was urged that the action of AO/Ld. CIT(A) to bring in deeming section 50C of the Act to tax the transaction is erroneous. The Ld. AR cited the following decisions in support of his aforesaid contention, which are as under: - (1) Atul G. Puranik v ITO (ITAT Mumbai) (2011) 11 taxmann.com 92 Section 50C of the Act applies only to a capital asset, being land or building or both, it cannot be made applicable to lease rights in a land.As the assessee transferred lease right for sixty years in the Plot and not land itself, the provisions of section 50C of the Act cannot be invoked. A distinction has been drawn between 'land or building' on one hand and 'or any rights in land or building' on the other. Considering the fact that we are dealing with special provision for full value of consideration in certain cases u/s 50C of the Act, which is a deeming provision, the fiction created in this section cannot be extended to any asset other than those specifically provided therein.

(2) ACIT v M/s. Munsons Textiles (ITAT Mumbai) Only for the limited purpose of computation of capital gain in respect of sale of land and building, stamp duty value has to be substituted for sale consideration in view of specific provisions of section 50C of the Act. Therefore, provisions of section 50C of the Act cannot be applied in case of transfer of tenancy rights in respect of land or building or both. (3) DCIT v Tejinder Singh (2012) 19 taxmann.com 4/50 SOT 391 The Tribunal held that the phrase 'land or buildings or both' will not include rights in land or building or both such as tenancy rights. (4) Kishori Sharad Gaitonde v ITO (ITAT Mumbai) ITA No.1561/M/09 In case of Kishori Sharad Gaitonde v ITO (ITAT Mumbai) ITA No. 1561/M/09 take a same view that section 50C of the Act not applied on tenancy right. Observation of Tribunal is as follows: Section 50C of the Act does not apply to "rights" in land and building like tenancy rights The assessee, a tenant in a flat, sold tenancy rights for Rs.30 Lakhs and offered long-term capital gains on the basis that the said sum was the consideration. The AO took the view that as the market value adopted the Sub-Registrar was Rs.33,11,200/- the

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said market value had to be adopted as the consideration u/s 50C of the Act. This was confirmed by the Ld. CIT(A). On appeal by the Ld. Assessee, held allowing the appeal; (i) Section 50C of the Act is a deeming provision and incorporates a legal fiction that if the consideration received on transfer of land or building is less than the stamp duty value, the said stamp duty value shall be deemed to be the full value of consideration for purposes of computing capital gains; (ii) It is trite law that a legal fiction cannot extend beyond the purpose for which it is enacted. As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent is impermissible. The statute has to be interpreted on the basis of the language used. No words can be added and only the language used can be considered so to ascertain the proper meaning and intent of the legislation. (Las on interpretation discussed in detail); (iii) Section 50C of the Act does not apply to all capital assets but only to "land or building". A tenancy right is not "land or building" (It is "rights" in building). Consequently, section 50C of the Act has no application and the capital gains have to be computed on the basis of the actual consideration and not the stamp duty value. 8. In the light of the aforesaid discussion, we find that there is no material on record to find that the registered agreement between parties be treated as sale/transfer of properties in question. Assessee is A.Y. 2011-12 Ashwin Vardhichand Shah one of four (4) co-owners of two flats and from the averments of the registered tenancy agreement, the Ld. DR could not show that title of the property has been passed on to the tenant;(Shri Chunnilal or Shri Tejaram). From the terms of the agreement between the assessee who was one of the four (4) owners of the facts in question, we find it is a tenancy agreement and the terms of the agreement shows that provisions of MRC Act, 1999 are incorporated and therefore applies to the agreement between parties. Moreover, there was no evidence of any consideration being passed between the assessee and Shri Chunnilal and Shri Tejaram. The agreement between parties was for giving the flats in question on rent. Thus, the Ld. CIT(A) erred to upholding the action of the AO who erroneously treated the transaction of tenancy/rental agreement to be that of transfer of property without any material to hold otherwise. Therefore, in the facts and circumstances of the case in hand, we are inclined to delete the addition made by AO, that also by applying section 50C of the Act, which deeming provision in no case is applicable to the facts of the case.”

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We notice that the above said decision was followed by another co- ordinate bench in the case of Bombay Drugs Distributors vs. ACIT (ITA No. 3619/Mum/2023 dated 19-02-2024). 7. We notice that the Ld CIT(A) has also taken identical view by following other decisions rendered by the Tribunal. The discussions made by Ld. CIT(A) are extracted below:- “xiii. The appellant assesse has placed reliance upon I cited following decisions in support of his contentions: a. In this regard reference is made to a decision of the ITAT, Mumbai in the case of Atul G. Parik V. ITO 132 ITD 499 (Mum) wherein in the context of section 50C, in which section also similar language has been used, it was held that transfer of leasehold rights in land is not covered u/s.50C, b. The Kolkatta Tribunal in case of DCIT V/s. Tejinder Singh 19 taxmann.com 4 (Kol.) held that section 50C not applicable to transfer of tenants rights. c. The aforesaid position of law has also been upheld by the Bombay High Court in the case of CIT V/s. Greenfield Hotel and Estates Pyt. Ltd. 389 ITR 68 (Born). Similarly in many cases where assessee has transferred booking of a fat with the builder, issue has arisen whether the same is a separate right/property than the flat when actually received. d. It has to operate within the realm of realities otherwise, there will be absurdities/ prevensities (Sri Palaniappan Lakshumanan Chettiar V/s. CIT (ITA No.2129/Chny/2019). Thus the deoming proyisions under the Income Tax Act cannot be interpret undefined terms given therein-.#1*,,, T,c4N*4 xiv. Considering the above facts and discussion at point no.-(i) to (xiii) and the relevant case laws cited by the appellant assessee, this Appellate authority has gone through this issue w.r.t the contentions of both the Assessing officer and the Appellant assesse. It is found that, the contention of the appellant assesse in its case is correct w.r.t the non- applicability of section 56(2)(x) of the Act as this section is not found applicable in case of Tenancy rights. Thus, this Appellate authority finds force in the submissions of the appellant considering the facts of case and the various decisions of higher courts cited by him / placed reliance upon. Whereas, on the other hand while considering the contention of the Assessing officer w.r.t the deemed applicability of the sec. 56(2)(x) in the case of appellant, it is seen that, the AO's contention on one side that the assessee has acquired a new property tenancy right in Rs 20,00,000/-. But, then the Stamp duty value of Rs. 2.47 crores is also not found correct (as already discussed in above para's). Thus, the Assessing officer has not been able to justify its stand for invoking this section 56(2)(x) of the Income-tax Act,1961.”

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related to tenancy right held by the assessee, the provisions of sec.56(2)(x) will apply to the same. We noticed that the value determined by the stamp authorities for 824.24 sq.ft was Rs.2,47,93,300/-. Hence proportionate value for 71.24 sq.ft will work out to Rs.21,42,913/-. The assessee has paid a consideration of Rs.20,00,000/-. Hence there is a difference of Rs.1,42,913/- and the said difference works out to 7.14% of the consideration paid by the assessee. As per sec. 56(2)(x)(b)(ii), the difference of upto 5% has to be ignored. The said tolerance limit was increased to 10% w.e.f. 01-04- 2021. In the case of Maria Fernandez Cheryl vs. ITO (123 taxmann.com 252), the Co-Ordinate Bench has held that the amended tolerance limit of 10% shall be applicable from the date of insertion of sec.50C of the Act. The ratio of above said decision would be equally applicable in the present case also. Since the difference between the actual consideration and stamp duty valuation is less than 10% of the consideration, there is no requirement of making any addition u/s. 56(2)(x) of the Act. 11. In view of the discussions made supra, the order passed by Ld. CIT(A) does not call for any interference.

Order pronounced in the open court on 28th August, 2024.

Sd/- Sd/- [ANIKESH BANERJEE] [B.R. BASKARAN] JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated: 28-08-2024 TNMM

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Copy to :

Dy./Asst. Registrar, ITAT, Mumbai