S. 50C Not Applicable to Transfer of Life Interest in Property: ITAT Deletes ₹80.04 lakh Addition [Read Order]

The Income Tax Appellate Tribunal ( ITAT ) ruled that Section 50C of the Income Tax Act, 1961 is not applicable where the subject matter of transfer is only a life interest in the property. The bench deleted an addition of ₹80.04 lakh.

Vanraj Ranchhoddas Merchant filed an appeal at the Mumbai Bench against the order passed by the Commissioner of Income Tax (Appeals) [CIT(A)] arising out of re-assessment proceedings for Assessment Year 2011-12. The assessee had filed his return of income declaring total income of ₹4.70 lakh, which was initially processed under Section 143(1) of the Income Tax Act, 1961.

The Assessing Officer (AO) reopened the assessment under Section 147 of the Income Tax Act, 1961 alleging that the assessee had assigned his 10% undivided life interest in ancestral trust property situated in Mumbai for a consideration of ₹28 lakh, whereas the stamp duty authority had valued the entire property at a substantially higher amount.

The AO treated the transaction as a transfer of immovable property and invoked Section 50C of the Income Tax Act, 1961 by adopting the stamp duty valuation as the full value of consideration. In the first appeal, the CIT(A) upheld the applicability of Section 50C but directed the AO to adopt the value determined by the Departmental Valuation Officer at ₹80.04 lakh instead of the stamp duty value. Aggrieved by the continued application of Section 50C, the assessee approached the ITAT.

The appellant contended that the transaction involved only the transfer of a life interest in property held under a family trust, and not the transfer of land or building. It was argued that Section 50C of the Income Tax Act, 1961 is a deeming provision applicable strictly to transfer of land or building and cannot be extended to transfer of limited or determinable rights in immovable property.

The Bench comprising Beena Pillai, Judicial Member, and Makarand Vasant Mahadeokar, Accountant Member, held that the true nature of the interest transferred must be examined to determine the applicability of Section 50C of the Income Tax Act, 1961.

The Tribunal found that the assessee had transferred only his life interest, which was limited, determinable, and extinguishable upon death, while ownership of the land and building continued to vest in the trust. The Tribunal observed that a life interest is fundamentally distinct from ownership or leasehold rights and does not amount to transfer of land or building.

The Tribunal ruled that Section 50C, being a deeming provision, must be construed strictly and applies only when the capital asset transferred is land or building. Since the assessee had transferred only a limited life interest and not the immovable property itself, the invocation of Section 50C was held to be legally unsustainable.

Accordingly, the Tribunal deleted the addition of ₹80.04 lakh sustained by the CIT(A) and allowed the appeal on merits.

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