2025 (7) TMI 1042 - AT - Income Tax

Addition under section 56(2)(vii)(b) deleted for property purchase as provision effective from A.Y. 2014-15, not applicable to A.Y. 2012-13

Hifzur Rehman Ansari Versus ITO Ward-20 (1) (5), Mumbai

ITAT Mumbai held that addition under section 56(2)(vii)(b) for inadequate consideration in property purchase was deleted as this provision was effective ... Addition against purchase of Mithaiwala Building u/s 56(2)(vii)(b) - HELD THAT:- A plain reading of section 56(2)(vii)(b) of the Act confirms that the provision relating to the taxation of immovable property received for inadequate consideration was inserted by the Finance Act, 2013, and is effective from A.Y. 2014–15. Therefore, the application of the said provision to the assessee’s case for A.Y. 2012–13 is patently unlawful and devoid of legal basis. Accordingly, the additions made by the Ld. AO are hereby deleted. Income from house property - deemed rent as added back with the total income of the assessee - AO has estimated 8% of the value of the said properties as deemed rental income - HELD THAT:- AR has not furnished any contrary valuation or evidence to dispute the basis adopted by the Ld. AO. We are of the view that the determination of deemed rental income must be made in accordance with the provisions of Section 23 of the Act. Accordingly, the Ld. AO is directed to determine the annual lettable value of the property and adopt the same as per law. Furthermore, as the income pertains to the head 'Income from House Property,' the assessee shall be eligible for deduction under Section 24 of the Act. The issue is therefore remanded to the file of the AO for recomputation of income in light of the above observations. AO shall ensure that a reasonable opportunity of being heard is granted to the assessee during the course of the proceedings. Addition towards loans - no evidence regarding the creditworthiness of the loan creditors - addition made as assessee failed to produce the requisite documents during the course of assessment proceedings - HELD THAT:- We find that the assessee had partially complied with the requirements during assessment proceedings but failed to produce critical documents concerning the creditworthiness of the loan creditors as called for. Accordingly, we deem it appropriate to set aside this issue to the file of the Ld. AO for fresh adjudication in accordance with law. It is clarified that the assessee shall be afforded a reasonable opportunity of being heard and is expected to remain diligent and fully co-operative during the course of the set aside proceedings to facilitate expeditious disposal of the assessment. ISSUES: Whether Section 56(2)(vii)(b) of the Income Tax Act, 1961 applies to purchase of immovable property before Assessment Year 2014-15. Whether the additions made under Section 56(2)(vii)(b) for undervalued immovable property purchases are justified for AY 2012-13. Validity of reopening assessment under Section 148 of the Income Tax Act without providing recorded reasons or fresh tangible material. Whether the Assessing Officer erred in making additions on unexplained loans without sufficient evidence of creditworthiness. Proper determination and computation of deemed rental income under Section 23 of the Income Tax Act and entitlement to deductions under Section 24. Whether simultaneous issuance of two notices under Section 148 is permissible. RULINGS / HOLDINGS: The Court held that the provisions of Section 56(2)(vii)(b) relating to taxation of immovable property received for inadequate consideration were introduced by the Finance Act, 2013 and are applicable only from AY 2014-15 onwards; thus, the application of these provisions to AY 2012-13 is 'patently unlawful and devoid of legal basis.' The additions of Rs. 34,70,000/- and Rs. 18,97,250/- under Section 56(2)(vii)(b) for undervalued purchase of immovable properties for AY 2012-13 were deleted accordingly. The reopening of assessment under Section 148 was upheld as valid because it was based on recorded reasons supported by an investigation report, and the assessee failed to request recorded reasons or object to reassessment during proceedings, thus not complying with the principles established in GKN Driveshafts (India) Ltd vs ITO. The additional grounds challenging the jurisdiction of the Assessing Officer to reopen assessment and issue notices under Section 148 were rejected as lacking merit. The addition of deemed rental income was remanded for recomputation in accordance with Section 23, directing the Assessing Officer to determine the annual lettable value and allow deductions under Section 24, ensuring the assessee is given a reasonable opportunity of being heard. The addition of Rs. 30,00,000/- on account of unexplained loans was set aside to the file of the Assessing Officer for fresh adjudication, with directions to provide the assessee a reasonable opportunity to produce evidence of creditworthiness and cooperate fully. Grounds relating to simultaneous issuance of two notices under Section 148 and certain other additions were either dismissed or not pressed. RATIONALE: The Court applied the statutory framework of the Income Tax Act, 1961, particularly Sections 56(2)(vii)(b), 23, 24, 143(3), 147, and 148. It relied on the legislative history clarifying that the amendment to Section 56(2)(vii)(b) by the Finance Act, 2013 is prospective from AY 2014-15, and thus cannot be applied retrospectively to AY 2012-13. The Court emphasized adherence to procedural safeguards mandated by the Supreme Court in GKN Driveshafts (India) Ltd vs ITO, requiring recorded reasons for reopening assessments and the presence of fresh tangible material, noting the assessee's failure to request recorded reasons or object to reopening. The Court recognized the Assessing Officer's reliance on investigation reports as valid grounds for reopening and additions, rejecting the assessee's contention of absence of fresh tangible material. Regarding deemed rent, the Court underscored the need for assessment in accordance with Section 23 and allowed for standard deductions under Section 24, remanding the issue for proper determination. The Court allowed the assessee an opportunity to substantiate the creditworthiness of loan creditors during reassessment, reflecting principles of natural justice and fair procedure. No dissent or doctrinal shift was indicated; the Court's approach was consistent with established legal principles and precedents.