Section 56(2)(x) is applicable to property being a capital assets
There are lots of cases now on notional taxation provision as contained in section 56. Question arises as to whether the notional taxation provision is applicable if the assets purchasd is not a capital assets but a stock in trader of buyer.
Section 56(2)(x) [erstshile section 56(2)(vii)] have application to ‘property’ which is in nature of a capital asset of recipient and, thus, when assessee purchased a piece of land as stock-in-trade, the addition made by AO in respect of the purchase of land by invoking provisions of section 56(2)(vii)(b)(ii), was to be set aside.
Here is a judgment by ITAT, Jaipur confirming the same view. In this case before Jaipur ITAT, Assessee was engaged in real estate business & during relevant year, assessee purchased a piece of land as its stock-in-trade. AO invoked provisions of section 56(2)(vii)(b)(ii) adopting full value of sale consideration as adopted by stamp authority and made additions to assessee’s income. Interestingly, ITAT Jaipur has held that provisions of section 56(2)(vii) have application to ‘property’ which is in nature of a capital asset of recipient and, therefore, same would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient. Therefore, the order passed by AO was not sustainable. The case was decided in assessee’s favour. Its an interesting case and so we are producing it in full as under:
IN THE ITAT, JAIPUR ‘SMC’ BENCH
RAMESH C. SHARMA, A.M.
Satendra Koushik v. ITO
IT Appeal No. 392 (Jp.) of 2019
23 April, 2019
Appellant by: Siddharth Ranka, learned AR
Respondent by: Roshanta Meena, JCIT learned DR
This is an appeal filed by the assessee against the order of learned Commissioner (Appeals)-4, Jaipur dated 7-2-2019 for the assessment year 2015-16 in the matter of an assessment order passed under section 143(3) of the Income Tax Act, 1961 (in short the Act).
2. Following grounds have been taken by the assessee :–
1. That on the law and in the facts and in the circumstances of the case the learned lower authorities grossly erred in making an addition of Rs. 34,23,542 under section 56(2)(vii)(b)(ii) of the Income Tax Act on account of suppression of purchase price of land in the hands of the assessee appellant.
1.1 That on the law and in the facts and in the circumstances of the case the learned lower authorities grossly erred in not considering the submissions made by the assessee appellant that the said purchase is stock-in-trade and is not a capital asset and hence provisions of section 56(2)(vii)(b)(ii) are not attracted, has dismissed the appeal of the assessee without even bothering to look at the statutory provision.
1.2 That the learned lower authorities grossly erred in adopting the total purchase price at Rs. 49,23,542 as against total registry value of Rs. 15,00,000 of the land purchased by the assessee appellant.
1.3 That the learned lower authorities grossly erred in relying upon the DLC value adopted by the sub-registrar and in ignoring the facts of the instant case.
1.4 That the learned lower authorities grossly erred in not considering the fact that some litigation is pending in the civil court with relates to the property and the property was under heavy dispute therefore purchased under the actual market value but the learned lower authorities grossly erred in taking it otherwise.
2. The appellant craves to add, alter, modify or amend any ground on or before the date of hearing.
3. Rival contentions have been heard and record perused.
4. The facts in brief are that the assessee is engaged in real estate business and the return of income under section 139(1) of the Act for the assessment year 2015-16 was filed on 26-3-2016 declaring total income at Rs. 8,16,670. In the year under consideration the appellant assessee purchase a piece of land by registered purchase deed and a cheque of Rs. 15 lakhs was issued to the seller, which was not realized till date and payment was not made by the assessee. During the assessment proceedings the assessing officer observed that the assessee has shown the purchase of land in trading account. The assessee appellant has also paid Rs. 3 lakh to the seller and shown the balance of Rs. 12 lakhs in the liability side of balance sheet. The assessing officer invoked the provision of section 56(2)(vii)(b)(ii) of the Act adopting the full value of sale consideration as adopted by the stamp authority and added the difference amount Rs. 34,23,542 in the hand of assessee appellant as deemed income of the assessee under section 56(2)(vii)(b)(ii) of the Act
5. By the impugned order of the learned Commissioner (Appeals), the learned Commissioner (Appeals) confirmed the action of the assessing officer by observing that the property is defined in very specific way in the definition by mentioning “property”, which means both agricultural land and non-agricultural land. Accordingly, the order passed by the assessing officer was confirmed by the learned Commissioner (Appeals).
6. The learned AR vehemently argued that the appellant assessee is engaged in real estate business in Jhunujhunu District and regularly deals in sale and purchase of lands and buildings and hence provisions of section 56(2)(vii)(b)(ii) are itself not applicable in the instant case as the said provision would come into consideration only in case of purchase of capital asset, which is not the case in the instant case. He also read the provisions of section 56(2)(vii)(b) of the Act, which extracted as under :–
(vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1-10-2009 [but before the 1-4-2017] —
(b) Any immovable property,–
(i) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;
(ii) 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:
Provided that where the date of the agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of the agreement may be taken for the purposes of this sub-clause:
Provided further that the said proviso shall apply only in a case where the amount of consideration referred to therein, or a part thereof, has been paid by any mode other than cash on or before the date of the agreement for the transfer of such immovable property;]
(c), (i) to (ii).
Provided that where the stamp duty value of immovable property as referred to in sub-clause (b) is disputed by the assessee on grounds mentioned in sub-section (2) of section 50C, the assessing officer may refer the valuation of such property to a Valuation Officer, and the provisions of section 50C and sub-section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of such property for the purpose of sub-clause (b) as they apply for valuation of capital asset under those sections:
Provided further that this clause shall not apply to any sum —
(a) to (h).
Explanation.–For the purposes of this clause, —
(a) “assessable” shall have the meaning assigned to it in the Explanation 2 to sub-section (2) of section 50C:
(b) “fair markert value” of a property, other than an immovable property, means the value determined in accordance with the method as may be prescribed,
(d) “property” [means the following capital asset of the assessee, namely:–
(i) Immovable property being land or building or both;
(ii) Shares and securities;
(iv) archeological collections;
(viii) any work of art; [or]
(e) “stamp duty value” means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property;]
7. As per the learned AR, the intent is not to tax the transactions entered into the normal course of business or trade, the profits of which are taxable under specific head of income. Our attention was invited to the definition of property, which has been amended to provide that section 56(2)(vii) will have application to the ‘property’ which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient.
8. The learned AR also contended that there is no such allegation of laundering of unaccounted income by the assessing officer, hence invocation of provision of sec. 56(2)(vii) is bad in law. He contended that the assessing officer has not bothered to refer the matter to the DVO, before invoking the provision.
9. On the other hand, the learned DR relied on the orders of the authorities below.
10. I have considered the rival contentions and carefully gone through the orders of the authorities below. The provisions of section 56(2)(vii) were introduced as a counter evasion mechanism to prevent laundering of unaccounted income. The provisions were intended to extent the tax net to such transactions in kind. The intent is not to tax the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income. Therefore, the definition of property has been amended to provide that section 56(2)(vii) will have application to the ‘property’ which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient. However, a property is defined in a very specific way, which includes agricultural and non-agricultural land or both. It appears that the lower authorities have not properly appreciated the relevant provisions of the Act with regard to the land purchased by the assessee, which is part of stock-in-trade. In the substantial interest of justice, we restore the matter back to the file of the assessing officer for deciding the matter afresh after giving due opportunity of hearing to the assessee.
11. In the result, the appeal of assessee is allowed for statistical purpose