Safe Harbour Benefit Under Section 50C Proviso Available Even After DVO Valuation: ITAT Mumbai Removes Addition Under Section 56(2)(x)
Case Overview
The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, delivered a significant ruling in Jawaharlal Devidas Chhabria Vs ITO, addressing the applicability of tolerance band provisions under the proviso to Section 50C(1) even when the Departmental Valuation Officer (DVO) has been approached for property valuation under Section 50C(2). The Tribunal conclusively held that both mechanisms operate independently within the statutory framework and an assessee can claim safe-harbour benefits despite having obtained DVO valuation.
The dispute centered around an addition made under Section 56(2)(x) of the Income Tax Act 1961, arising from property acquisition where the transaction value was lower than the stamp duty valuation. After the matter was referred to the DVO, the valuation difference substantially reduced, yet an addition was sustained by the first appellate authority. The assessee challenged this before ITAT, arguing that the variance between the actual consideration paid and the DVO-determined value fell within permissible statutory tolerance limits.
Factual Matrix of the Case
Profile of the Assessee
The assessee in this matter is an individual conducting wholesale and retail operations in textiles and fabrics under the trading name M/s Jai Bhagwan Textiles. For Assessment Year 2018-19, the assessee chose presumptive taxation scheme under Section 44AD and computed business income at ₹5,86,570/- by applying the mandated rate of 8%. The income tax return was submitted on 25/07/2018, declaring aggregate income of ₹7,69,790/-.
Property Transaction Details
During the financial year relevant to Assessment Year 2018-19, the assessee, jointly with three other co-owners, acquired immovable property identified as Flat No. 7, 1st Floor, B Wing-A, Param Anand Building, 5th Road, Khar (West), Mumbai–52. The property was subsequently disposed of for total consideration of ₹3,11,00,000/-, wherein the assessee held a 33% ownership stake.
Upon examination of documentation obtained from the Sub-Registrar's office, it was revealed that the stamp duty valuation of the property stood at ₹3,36,56,000/- as opposed to the transaction value of ₹3,11,00,000/-.
Assessment Proceedings
The case was picked up for detailed scrutiny assessment and statutory notices under Section 143(2) read with Section 142(1) of the Income Tax Act 1961 were dispatched to the assessee requesting comprehensive information. The assessee complied with these requirements through electronic filing.
The Assessing Officer observed that since the acquisition cost was lower than the stamp duty valuation, provisions of Section 56(2)(x) of the Income Tax Act 1961 became applicable. The assessee was asked to justify why addition should not be made for the differential amount.
The explanations furnished by the assessee were deemed unsatisfactory by the Assessing Officer. Consequently, an addition of ₹8,51,910 was made, representing the assessee's proportionate share (33%) of the difference between the agreement consideration and the stamp duty valuation under Section 56(2)(x) of the Income Tax Act 1961.
First Appellate Authority Proceedings
Aggrieved by the assessment order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi.
Reference to DVO
During appellate proceedings, the assessee made a request for referring the matter to the Departmental Valuation Officer for independent valuation of the property. The first appellate authority accepted this request and obtained a valuation report.
The DVO, through report dated 08/03/2022, assessed the fair market value of the property at ₹3,16,76,000. This represented a substantial reduction from the stamp duty valuation of ₹3,36,56,000/-.
CIT(A) Decision
After analyzing the DVO's valuation report, the Commissioner computed the difference between the declared consideration (₹3,11,00,000) and the DVO-determined fair market value (₹3,16,76,000) at ₹5,76,000. Considering that the assessee possessed one-third share in the property, the proportionate difference attributable to the assessee was calculated at ₹1,92,000.
The Commissioner directed the Assessing Officer to restrict the addition under Section 56(2)(x) to ₹1,92,000 instead of the originally computed amount of ₹8,51,910.
Though this represented significant relief, the assessee remained dissatisfied and preferred a second appeal before the Income Tax Appellate Tribunal.
Grounds of Appeal Before ITAT
The assessee raised three substantive grounds before the Tribunal:
Ground 1: Nature of Valuation Difference
The assessee contended that the variance between the agreement value and the DVO-determined value constitutes merely an estimated variation stemming from a technical valuation exercise and does not represent genuine income accruing to the assessee. Furthermore, it was argued that the Legislature subsequently recognized permissible valuation variations by introducing safe-harbour limits of 5% and 10% under Section 56(2)(x) in subsequent years, thereby acknowledging that minor differences between stated consideration and valuation do not warrant taxation.