ITAT Mumbai Clarifies Tax Impact of Flat Registration Done Only for Mortgage Purposes

The Mumbai Bench of the Income Tax Appellate Tribunal in Akshay Manoj Pagdhare Vs ITO examined an important issue: can mere registration of an under-construction flat, carried out only because a bank insists on it for creating a mortgage, be treated as a fresh “receipt” of immovable property for the purposes of Section 56(2)(x) of the **Income Tax Act 1961`?

The Tribunal held that, in principle, where an assessee has already acquired enforceable rights in a flat on the basis of an allotment letter and has paid the full purchase price, a later registration done solely to enable a bank mortgage does not automatically amount to a new acquisition of property that would invite tax under Section 56(2)(x). However, as the lower authorities had not fully examined the underlying documents, the matter was remanded to the Assessing Officer for a fresh, fact-based determination.

Background of the Dispute

Facts relating to the flat purchase and payments

  1. The assessee booked a residential flat in an under-construction project.
  2. The initial booking amount was paid on 11.10.2016, and on the same day, the builder issued an allotment letter confirming the allotment of the specific flat.
  3. The assessee then continued to make payments towards the purchase of this flat from 11.10.2016 to 23.06.2017, and, as per the record, the entire agreed purchase consideration of Rs. 1,02,00,000/- was paid within this period.
  4. The project remained under construction, and possession was actually handed over only on 15.10.2021, which falls in A.Y. 2022-23.

Thus, by the end of June 2017, the assessee had already paid the full agreed price and held valuable rights in the under-construction property, based on the allotment letter and payments.

Subsequent mortgage and registration

  • On 31.03.2020, the assessee sought to raise funds by availing a mortgage loan against his existing rights in the flat.
  • The lending bank made registration of the agreement for the flat a pre-condition for sanctioning the mortgage loan.
  • Consequently, the agreement relating to this already allotted flat was registered in A.Y. 2020-21.
  • During this registration, the stamp duty valuation authority adopted a higher value of Rs. 1,22,98,200/- as on the date of registration, which exceeded the originally agreed price of Rs. 1,02,00,000/-.

Assessment and addition under Section 56(2)(x)

  • The assessee filed a return declaring total income of Rs. 16,26,690/- for A.Y. 2020-21.
  • The case was selected for limited scrutiny under CASS on the specific point of investment in immovable property.
  • During assessment proceedings, the Assessing Officer (Ld. AO) noticed the difference between:
    • Agreed purchase consideration: Rs. 1,02,00,000/-
    • Stamp duty valuation: Rs. 1,22,98,200/-
  • Treating the registration in A.Y. 2020-21 as the relevant point of “receipt” of the property, the Ld. AO invoked Section 56(2)(x) and taxed the difference of Rs. 20,98,200/- as “income from other sources”, alleging that the flat had been received for inadequate consideration.
  • The AO also initiated penalty proceedings under Section 270A for alleged misreporting of income.

Proceedings before CIT(A)

  • The assessee challenged this addition before the NFAC / CIT(A).
  • The core contention was that the right in the flat had already accrued in October 2016 through the allotment letter, and that the entire consideration was paid between 2016–2017, long before registration.
  • It was argued that:
    • The flat was never “received” at a discount in A.Y. 2020-21.
    • The registration in 2020-21 was a mere procedural formality insisted upon by the bank to facilitate a mortgage, and not a fresh transaction of purchase or transfer.
  • Despite these submissions, the CIT(A) upheld the assessment order and confirmed the addition under Section 56(2)(x).

Aggrieved, the assessee carried the matter in further appeal to the ITAT Mumbai.