ITAT Applies 10% Tolerance u/s 56(2)(x) Retrospectively to Property

In a recent and impactful decision, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that the 10% variation tolerance under Section 56(2)(x) of the Income Tax Act should be applied retrospectively. This interpretation has helped reduce a major tax addition levied in a property valuation case involving NRB Developers for the Assessment Year 2018–19.

Case Summary

NRB Developers had acquired a commercial property from Lotus Griha Nirman Pvt. Ltd., located in a project named “Lous Link Square”, measuring 6,180 sq. ft. The transaction value was ₹8.19 crore, and the deal was booked in March 2010. Importantly, the entire payment was made through official banking channels, ensuring transparency.

However, during registration, the stamp duty authority valued the same property at ₹9.04 crore higher than the declared consideration. Due to this difference, the Assessing Officer invoked Section 56(2)(x) and treated the excess amount as income in the hands of the buyer, leading to a huge addition in the taxpayer’s income.

Tribunal’s Stand: Retrospective Application Allowed

The ITAT analyzed the case in depth and referred to the legislative amendment introduced through the Finance Act, 2020, which increased the acceptable difference between transaction value and stamp duty value from 5% to 10%. Though this change officially came into effect from 1st April 2021, the tribunal clarified that its spirit and purpose are to offer relief to genuine buyers — and therefore, it can be applied to earlier years as well.

The Tribunal observed:

• The property deal was genuine, with full payment through bank transfers.

• The gap in valuation was due to external market conditions and time gaps, not manipulation.

• Since the intent of the amendment was to ease hardships, it is reasonable to apply it retrospectively.

Thus, ITAT reduced the income addition significantly by applying the 10% safe harbor retrospectively.

Understanding Section 56(2)(x) – A Quick Guide

Section 56(2)(x) covers situations where a person receives property for free or at a price lower than the stamp duty value. The difference is treated as “Income from Other Sources” and is taxable.

• Earlier, any difference over 5% between the purchase price and stamp value was taxed.

• From FY 2020–21, this limit was raised to 10% to support fair market practices.

• This ruling now suggests that even earlier transactions may claim this benefit, provided they are legitimate.

Key Takeaways from the ITAT Ruling

• Retrospective relief under the 10% variation rule is now judicially accepted.

• Transactions done with bank transparency and proper documentation can now claim exemption from harsh tax treatment.

• The ruling sets a positive precedent for real estate investors, developers, and businesses facing similar additions.

Expert Insight

This case brings welcome clarity for those involved in property transactions, especially where slight variations in stamp duty value and market rate occur. The ITAT’s judgment reaffirms that tax law should support genuine transactions, and technical valuation differences shouldn’t result in unjust taxation.

Conclusion

The ITAT’s ruling in favor of NRB Developers showcases a balanced and fair approach toward property valuation under income tax law. By allowing the 10% tolerance retrospectively, it gives real relief to taxpayers and may guide future assessments.

If you’ve been impacted by similar property value disputes or income additions under Section 56(2)(x), this decision could be beneficial for your case.