Applicability of 5% Tolerance u/s 56(2)(x): ITAT Rules Amendment Curative, Applies Retrospectively [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) allowed the appeal, holding that the 5% tolerance under Section 56(2)(x) of Income Tax Act,1961,was a curative amendment and applied retrospectively.

Lakhdhir Virji Gala,appellant-assessee, had filed his return of income on 22.07.2018, declaring Rs. 6,57,930 as total income under the heads ‘business income’ and ‘income from other sources’. The case was selected for scrutiny, and notices under Sections 143(2) and 142(1) were issued.

During assessment, the Assessing Officer(AO) noted that the assessee, along with Smt. Pushpa Kumari Lakhdhir Gala, had purchased Flat No. 3207, 32nd Floor, Sky City, Borivali, Mumbai, for Rs. 2,71,01,140, while the stamp duty value was Rs. 2,82,71,148.

The difference of Rs. 11,70,008 led to an addition of Rs. 5,85,004 under Section 56(2)(x), being 50% of the differential value. The assessment was completed under Section 143(3) read with Section 144B on 27.04.2021, determining total income at Rs. 12,42,930.

On appeal, the Commissioner of Income Tax (Appeals)[CIT(A)] upheld the addition, holding that the amendment brought by the Finance Act, 2018 to Sections 43CA, 50C, and 56 applied from 01.04.2019 (A.Y. 2019-20 onwards). Relying on Circular No. 8/2018, the CIT(A) rejected the appellant’s claim regarding the 5% tolerance limit.

Aggrieved by this finding, the assessee filed a further appeal before the tribunal.

The assessee counsel argued that the difference between the stamp duty value and the sale price was due to RERA, as the government had not updated the conversion from carpet to built-up area. He further submitted that the 5% tolerance limit under Section 56(2)(x) should apply, even to the year under consideration, as it was a beneficial amendment.

The counsel also said that Section 56(2)(x) was a deeming provision and the amendments to Sections 50C and 56(2) applied to the year in question, relying on several decisions, including Nisha Gupta vs. ITO and the Supreme Court ruling in CIT vs. Vatika Township Pvt. Ltd., which supported retrospective application of beneficial amendments.

The Departmental Representative, however, argued that Circular No. 8/2018 made the amendments effective only from 01.04.2019 (AY 2019-20 onwards) and supported the lower authorities’ orders.

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The two member bench comprising Kavitha Rajagopal (Judicial Member) and Prabhash Shankar (Accountant Member) considered the submissions and records. The key issue was whether the 5% tolerance under the Finance Act, 2018, amending Sections 43CA, 50C, and 56, applied retrospectively. It was noted that coordinate benches had previously held that this 5% tolerance was curative and therefore applicable to earlier assessment years.

It was further observed that when the difference between the stamp duty value and the sale price was less than 5%, no addition could be made under Section 56 read with Section 50C. The benefit of the tolerance band was to be extended retrospectively, as the amendment in the Finance Act, 2018, effective from 01.04.2019, was beneficial in nature.

Relying on the decision in Joseph Mudaliar vs. DCIT (ITA No. 6912/Mum/2019, order dated 14.09.2021), which had examined the issue in detail, and noting the absence of contrary decisions from the revenue, the tribunal allowed the assessee’s appeal.

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