CIT(A) enhancement under section 251(2) deleted for violating procedural requirements and security deposit not taxable under section 56(2)(vii)(a)

ITAT Mumbai allowed the assessee's appeal against CIT(A)'s enhancement under section 251(2) adding Rs. 25 lakh under section 56(2)(vii)(a). The tribunal held that CIT(A) failed to provide reasonable opportunity of showing cause before enhancement, violating section 251(2) procedure. More importantly, the amount received as security deposit under development agreement was not "without consideration" as required under section 56(2)(vii)(a), making the provision inapplicable. The addition was deleted on merits.

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Issues involved:
The appeal challenges an order passed u/s 250 of the Income Tax Act, 1961 by the Commissioner of Income Tax (Appeals) for the assessment year 2011-12.

Enhancement of Assessment u/s 251(2) of the Act:
The first issue raised by the assessee challenges the enhancement of assessment by the Commissioner of Income Tax (Appeals) in contravention of section 251(2) of the Act. The assessee also contests the addition of Rs. 25 lakh under section 56(2)(vii) of the Act.

The Assessing Officer determined long-term capital gains of Rs. 95,69,037 taxable in the hands of the assessee due to a development agreement with a developer. However, the Commissioner (Appeals) deleted this addition based on the agreement's non-fulfillment by the developer. Subsequently, the Commissioner directed the AO to tax Rs. 25 lakh as "income from other sources" under section 56(2)(vii)(a) of the Act, which the assessee contested for lack of compliance with section 251(2) of the Act.

The Tribunal found that the Commissioner did not grant a reasonable opportunity to the assessee before making the impugned enhancement under section 56(2)(vii)(a) of the Act, thus not complying with section 251(2) of the Act. The Tribunal deemed this as an irregularity and directed the issue to be restored for de novo adjudication after granting the assessee an opportunity to show cause against the enhancement.

Merits of the Addition under Section 56(2)(vii)(a) of the Act:
Regarding the merits of the addition, the Tribunal considered the Rs. 25 lakh received as a security deposit under the development agreement. The Tribunal noted that as per section 56(2)(vii)(a) of the Act, any sum exceeding Rs. 50,000 received without consideration is taxable. However, in this case, the amount was received as a security deposit under a development agreement, not without consideration. Therefore, the Tribunal held that the impugned enhancement under section 56(2)(vii)(a) of the Act was not sustainable and directed the addition to be deleted.

In conclusion, the appeal by the assessee was allowed, and the impugned addition under section 56(2)(vii)(a) of the Act was directed to be deleted.

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