2025 (9) TMI 1249 - AT - Income Tax

Additions under s.56(2)(x) not automatic; assessee can dispute s.50C value if DVO within 20% and s.270A penalty not automatic

Narayanbhai Shivabhai Patel Versus Income Tax Officer, Ward – 1, Gujarat

ITAT allowed the assessee's appeal, holding that additions under section 56(2)(x) are not automatic and the assessee may dispute stamp duty value under ... Penalty proceedings u/s 270A - assessee, as a co-owner, had purchased two properties at a consideration which was lower than the stamp duty value of the properties - AO invoked the provisions of Section 56(2)(x) and the difference between the stamp duty value and the purchase price was considered as income of the assessee HELD THAT:- The addition made u/s 56(2)(x) of the Act is not absolute addition, as the assessee has an option to dispute the stamp value of the property on the grounds mentioned in Section 50C and, thereafter, the AO is required to refer the matter to the Valuation Officer. If the value as determined by the Valuation Officer is within 20% of the purchase consideration, then no addition is required to be made u/s 56(2)(x) of the Act. Therefore, no penalty u/s 270A can be automatically levied for all the additions made u/s 56(2)(x) of the Act. Also value determined by the DVO is also an estimate, based on the sale consideration of other properties in the same vicinity or on the basis of other yardsticks as prescribed. Therefore, any addition made under Section 56(2)(x) of the Act on the basis of difference in the stamp duty value and the purchase price or between the value determined by the DVO and the purchase consideration, cannot be considered as underreporting of income by the assessee so as to invoke the provisions of Section 270A of the Act. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an addition made under the deeming provision of Section 56(2)(x) of the Income Tax Act can constitute 'under-reported income' attracting penalty under Section 270A. 2. Whether the exceptions to 'under-reported income' contained in Section 270A(6) - in particular clauses (a), (b) and (d) - apply where the addition arises from a difference between stamp duty valuation (or DVO valuation) and purchase consideration under Section 56(2)(x) / Section 50C regime. 3. What is the relevance of the assessee having not referred the matter to the Valuation Officer under Section 50C / the nature of DVO valuation as an estimate, in determining liability for penalty under Section 270A. 4. Whether decisions concerning penalty under Section 271(1)(c) are germane to the question of penalty under Section 270A where the addition is by virtue of Section 56(2)(x). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether addition under Section 56(2)(x) constitutes under-reported income for Section 270A Legal framework: Section 56(2)(x) deems certain receipts (including difference between stamp duty value and purchase consideration) to be income. Section 270A penalises under-reporting or misreporting of income and prescribes exceptions in sub-section (6). Precedent treatment: Decisions relied upon by the assessee were predominantly in the context of Section 271(1)(c) and therefore not directly on point for Section 270A. A coordinate bench decision dealing with Section 270A held that additions under Section 56(2)(x) did not fall within under-reporting/misreporting for penalty purposes. Interpretation and reasoning: The Court examined the nature of a deeming provision under Section 56(2)(x) and recognised that such additions are not absolute or conclusive determinations of actual taxable income. The statutory scheme allows the assessee to challenge the stamp duty value under Section 50C and have the matter referred to the Valuation Officer (DVO). Given that the DVO's determination itself is an estimate based on comparable sales or prescribed yardsticks, an addition made by reference to stamp duty value or a DVO report does not ipso facto establish deliberate under-reporting by the assessee. Ratio vs. Obiter: Ratio - additions made solely by virtue of Section 56(2)(x) / stamp duty valuation do not automatically qualify as under-reported income for imposition of penalty under Section 270A. Obiter - comparative remarks about the non-applicability of Section 271(1)(c) authorities to Section 270A fact patterns. Conclusion: Penalty under Section 270A cannot be automatically imposed where the addition arises from Section 56(2)(x) without independent satisfaction that there was under-reporting or misreporting by the assessee. Issue 2 - Applicability of Section 270A(6) exceptions (notably clauses (a), (b) and (d)) to Section 56(2)(x) additions Legal framework: Section 270A(6)(a) excepts from under-reported income amounts for which the assessee offers an explanation that the assessing authority (or appellate authorities) is satisfied is bona fide and for which all material facts have been disclosed. Clause (b) relates to estimates where accounts are correct and complete but the method prevents deduction of income. Clause (d) excludes additions made in conformity with arm's length price determined by the TPO where prescribed documentation was maintained. Precedent treatment: The Court considered the logic of clause (d) (TP/ALP context) and observed analogies to valuations by the DVO under Section 50C. The Court distinguished precedents on Section 271(1)(c) and relied on coordinate bench reasoning that treated Section 56(2)(x) additions as falling outside the scope of under-reporting for Section 270A. Interpretation and reasoning: The Court held that where the assessee discloses material facts and offers bona fide explanation for the lower purchase price (e.g., title defects or other bona fide reasons), such amounts may fall within the exception of Section 270A(6)(a). Further, since DVO valuations are themselves estimates analogous to TP determinations, the rationale underlying Section 270A(6)(d) suggests that additions based on DVO/stamp valuations should not be treated automatically as under-reporting. Clause (b) was noted as relevant where additions are based on estimates despite correct and complete accounts; that principle supports excluding DVO-based or stamp-value additions from penal consequences if the methodology yields an estimate rather than proof of deliberate understatement. Ratio vs. Obiter: Ratio - where the assessee has disclosed material facts and given a bona fide explanation for discrepancy between stamp duty value and purchase price, the amount may fall within the exception of Section 270A(6)(a), and DVO/stamp-based estimates should not automatically attract penalty given the analogous rationale of Section 270A(6)(d). Obiter - expansive comparison between DVO valuations and transfer-pricing ALP determinations to support the analogy. Conclusion: The exceptions in Section 270A(6), particularly (a) and by analogy (d) (and (b) where applicable), can apply to additions arising from Section 56(2)(x)/Section 50C valuations; absence of an AO's independent satisfaction that the assessee's explanation is not bona fide is fatal to imposition of penalty. Issue 3 - Effect of non-reference to Valuation Officer and nature of DVO valuation as estimate Legal framework: Section 50C/related provisions permit challenge to stamp duty valuation and reference to Valuation Officer; the DVO's report is an administrative valuation based on comparables. Precedent treatment: The Court noted statutory mechanisms allowing reassessment of stamp duty value and that valuation officers use estimation methods; prior decisions have acknowledged the estimate/nature of such valuations. Interpretation and reasoning: The Court held that merely because an assessee did not seek reference to the Valuation Officer does not, by itself, establish mens rea or deliberate under-reporting. The DVO/stamp valuation is an estimate; therefore an addition based on those figures does not conclusively prove that the assessee under-reported income. Penal consequences should not follow automatically where the statutory dispute resolution mechanism (reference to DVO) exists and the assessee has offered explanation and disclosed material facts. Ratio vs. Obiter: Ratio - failure to invoke the Section 50C/DVO remedy is not sufficient ground, standing alone, to sustain penalty under Section 270A where the addition arises from valuation estimates; the AO must independently be satisfied of lack of bona fides. Obiter - procedural observations on valuation methodology of DVOs. Conclusion: Non-reference to the Valuation Officer does not, per se, justify a penalty under Section 270A where the addition is valuation-based; the nature of DVO/stamp valuations as estimates militates against treating such additions as automatic under-reporting. Issue 4 - Relevance of authorities on Section 271(1)(c) to Section 270A disputes arising from Section 56(2)(x) additions Legal framework: Section 271(1)(c) deals with penalty for concealment or furnishing inaccurate particulars; Section 270A is a separate code dealing specifically with under-reporting and misreporting with enumerated exceptions. Precedent treatment: The Court observed that many cases cited by the assessee dealt with Section 271(1)(c) and are not directly relevant to Section 270A issues; only decisions squarely addressing Section 270A and Section 56(2)(x) are germane. Interpretation and reasoning: The Court explained that differing statutory language and scheme render precedents under Section 271(1)(c) of limited utility in adjudicating Section 270A disputes. Reliance must be placed on authorities that interpret the specific mandate and exceptions of Section 270A. Ratio vs. Obiter: Ratio - authorities on Section 271(1)(c) cannot be mechanically applied to Section 270A matters; the distinct statutory scheme requires separate analysis. Obiter - commentary on why certain cited authorities are inapposite. Conclusion: Decisions under Section 271(1)(c) are generally not determinative of penalty questions under Section 270A where the addition originates from Section 56(2)(x); only Section 270A-specific jurisprudence and reasoning are controlling. Final disposition The Court concluded that no penalty under Section 270A was leviable because the addition arose from the deeming provision of Section 56(2)(x) and the assessee had disclosed material facts and offered bona fide explanation; absent independent satisfaction of mala fides or misreporting by the assessing authority, imposition of penalty was not justified. The penalty under Section 270A was therefore quashed.