ITAT Mumbai on Section 56(2)(x): No Addition on PAA Without Possession in Redevelopment Cases

Background and Case Overview

The Mumbai Bench of the Income Tax Appellate Tribunal, in the case of Snchalata Heramb Dhayagude Vs Jurisdictional AO Ward 16(3)(1), examined whether notional stamp duty value of a Permanent Alternate Accommodation (PAA) promised under a redevelopment agreement can be taxed under Section 56(2)(x) of the Income Tax Act 1961 in a year when the assessee has not yet received possession of the new flat.

The dispute related to Assessment Year (AY) 2018-19. The assessee, a senior citizen and anesthesiologist, filed a return declaring total income of ₹16,10,510. She and her husband were co-tenants of premises in Savitri Niwas, Dadar, Mumbai. The building went into redevelopment and, under an agreement dated 18.09.2017 with the developer, they were to receive ownership rights in a new flat as PAA in lieu of their existing tenancy.

Pending completion of construction:

  • They were required to vacate the old tenanted premises.
  • They were provided with temporary alternate accommodation.
  • They were entitled to monthly rental compensation of ₹1,39,424.
  • A lump-sum corpus was also contractually payable on delivery of possession of the PAA (but was not received in the relevant year).

The difference between rent received from the developer and rent actually paid for temporary accommodation, aggregating to ₹5,50,725, was offered to tax in equal shares by the assessee and her husband.

It was an undisputed fact on record that the redevelopment building was still under construction during AY 2018-19 and possession of the PAA had not been handed over.

Assessment Proceedings and Additions Made

Properties under Redevelopment

  1. Savitri Niwas (main property)

    • The assessee and her husband were co-tenants of Room Nos. 10 and 11, 3rd Floor, Savitri Niwas, Dadar Matunga Estate, Hindu Colony, Mumbai, with carpet area of 1059.40 sq. ft.
    • Under the redevelopment agreement dated 18.09.2017 with M/s. Sugee Six Developers, they became entitled to a new residential unit with carpet area of 1525.47 sq. ft. on ownership basis as PAA in exchange for surrender of tenancy rights.

  2. Bakul Niwas (separate property of husband)

    • The assessee’s husband was also a tenant in a different building named Bakul Niwas.
    • A separate redevelopment agreement dated 17.03.2016 covered that property.
    • The assessee was not a party to this agreement and had no independent rights in that tenancy.
    • Even for Bakul Niwas, no PAA possession was received in AY 2018-19.

The assessee took the position that no taxable transfer event had occurred in respect of these rights during the year in question.

Invoking Section 56(2)(x) by the Assessing Officer

During scrutiny assessment, the Assessing Officer (AO) invoked Section 56(2)(x) on the footing that:

  • The PAA in Savitri Niwas constituted “immovable property” received by the assessee.
  • The consideration recorded in the redevelopment agreement was effectively treated as nil.
  • The stamp duty value of the PAA exceeded the threshold limit.

The AO, therefore, treated the entire stamp duty value as “income from other sources”, as follows:

  • Stamp duty value of PAA corresponding to Savitri Niwas: ₹2,40,81,500
  • Stamp duty value linked to Bakul Niwas: ₹47,07,000

The AO considered both as covered under Section 56(2)(x) and made a combined addition of ₹2,87,88,500 to the assessee’s income, even though possession of either PAA had not been delivered in the relevant year.

First Appeal before CIT(A)

On appeal, the Commissioner of Income Tax (Appeals) – National Faceless Appeal Centre partly accepted the assessee’s contentions.

Relief Granted

  • Bakul Niwas: Addition of ₹47,07,000 was deleted, primarily on the basis that the assessee was not a party to that redevelopment agreement and had no right or share in that tenancy.
  • Savitri Niwas: Considering that the tenancy and redevelopment benefits were jointly held with the husband, the CIT(A) restricted the addition to 50% of the stamp duty value of Savitri Niwas.

Accordingly: