ITAT Mumbai Rules Section 56(2)(x) Cannot Apply to Trading Inventory: Key Insights from Ketan Himatlal Mehta Case
Background of the Dispute
The Income Tax Appellate Tribunal bench in Mumbai addressed a significant appeal in the matter of Ketan Himatlal Mehta Vs DCIT. The dispute arose from an order dated 26 March 2024 issued by the National Faceless Appeal Centre, which had sustained an assessment completed under Section 143(3) read with Section 144B of the Income-tax Act, 1961 for Assessment Year 2020–21.
The core issue involved an addition amounting to ₹18,48,70,810 made under Section 56(2)(x) of the Act. The tax authority contended that immovable property was acquired at a price significantly below its stamp duty valuation, triggering the provisions of this section.
Facts Leading to the Assessment
An individual assessee submitted a return declaring total income of ₹55,48,740 for the year under consideration. The case was picked up for detailed scrutiny primarily to examine the acquisition of property at a consideration lower than the corresponding stamp duty value.
Property Acquisition History
The property in question comprised land situated in Dahisar, Mumbai. The assessee's position was that this land was originally purchased in 2013 by a partnership entity named Vanshree Developers for a total sum of ₹12 crore. This transaction was documented through a registered agreement and the property was shown as business inventory in the firm's accounting records.
Following the reconstitution of the partnership and the subsequent demise of the other partner, the assessee emerged as the sole surviving partner, thereby obtaining complete ownership of the land.
Dispute Resolution Through Court Intervention
A title dispute subsequently emerged with a legal heir of the previous owner. This dispute was eventually resolved through consent terms filed before the Bombay High Court. As per the settlement agreement, the assessee consented to make an additional payment of ₹9 crore.
A conveyance deed was executed on 19 September 2019 for ₹9 crore, at which time the stamp duty value stood at ₹27.19 crore.
Assessment Authority's Position
The Assessing Officer adopted the stamp duty value of ₹27.19 crore. After reducing the book value of ₹8.70 crore from this amount, an addition of ₹18.48 crore was made under Section 56(2)(x) of the Act.
The first appellate authority confirmed this addition. The CIT(A) held that the 2013 agreement could not be relied upon for purposes of Section 56(2)(x) since it was not executed with the present seller. Additionally, statutory conditions for adopting an earlier agreed consideration were not fulfilled. The CIT(A) also rejected the submission that the partnership firm and the assessee should be treated as one entity.
Contentions Before the Tribunal
Assessee's Arguments
Before the Tribunal, the assessee advanced a crucial argument that the land was maintained as trading inventory as part of real estate development operations and therefore Section 56(2)(x) had no application.
The assessee relied upon multiple Tribunal decisions supporting the principle that Section 56(2)(x) applies exclusively to property held as capital asset and not to stock-in-trade. Reference was made to the balance sheet for the relevant year which classified the asset under "Other Current Assets" rather than "Capital Assets".
The assessee placed reliance on:
- Satendra Kaushik v. ITO 106 taxmann.com 244 (Jaipur)
- Mubarak Gafur Korabu v. ITO 117 taxmann.com 828 (Pune)
- CBDT Circular No. 1/2011
Strong reliance was also placed on the coordinate bench decision in Commercial Development Corporation Vs. NFAC/ITO Ward 24(1)(1) [ITA No.3755/Mum/2024, dated 28/10/2024, Assessment Year 2018-2019].
Revenue's Stance
The Revenue contended that the financial statements produced were unaudited and required thorough verification before any conclusion could be drawn about the nature of the asset.