Retrospective Application of Section 56(2)(x) Tolerance Band Upgraded to 10%: ITAT Kolkata's Landmark Decision

Introduction

The case of Shri Sandeep Kumar Poddar vs. Income Tax Officer, Ward-44(1), Kolkata adjudicated by the Income Tax Appellate Tribunal (ITAT) "C" Bench in Kolkata on March 13, 2023, marks a significant development in the interpretation of Section 56(2)(x) of the Income Tax Act, 1961. This judgment addresses whether the amendment introduced by the Finance Act, 2020, which increased the tolerance band from 5% to 10%, applies retrospectively to assess the income from immovable property within the relevant assessment year (AY) 2018-19.

Summary of the Judgment

Shri Sandeep Kumar Poddar, the appellant, contested the addition of Rs.4,92,450/- to his total income under Section 56(2)(x) of the Income Tax Act by the Assessing Officer (AO). This addition was based on the discrepancy between the actual consideration (Rs.82,91,250/-) and the stamp duty valuation (Rs.87,83,700/-) of an immovable property, resulting in a 5.93% difference. The appellant argued that the Finance Act, 2020, which increased the tolerance limit from 5% to 10%, should be applied retrospectively, thereby negating the addition. The ITAT Kolkata Bench, after considering relevant precedents and legislative intent, allowed the appellant's appeal, holding that the amendment was retrospective in nature and thus, no addition was warranted as the difference fell within the 10% threshold.

Analysis

Precedents Cited

The judgment extensively references prior decisions to substantiate the retrospective application of the amendment:

Maria Fernandes Cheryl v. ITO (ITA No. 7545/Mum/2014, 2017): This case by the Coordinate Bench of ITAT Mumbai established that the 10% tolerance band should be read retrospectively as a curative measure.
Karb Associates Pvt. Ltd. v. DCIT (ITA No. 1941/Kol/2019, 2021): Reinforced the retrospective applicability of the amended tolerance band, emphasizing fairness and consistency in tax assessments.
Chandra Prakash Jhunjhunwala v. DCIT (ITA No. 2351/Kol/2017): Although initially referenced by the appellant, the AO disregarded this in light of subsequent amendments and interpretations.

Additionally, the judgment refers to CBDT Circular No. 8 of 2018, which rationalizes the amendments in Sections 43CA and 50C, supporting the retrospective application to mitigate hardships in genuine transactions.

Legal Reasoning

The core legal issue revolves around whether the amendment to Section 56(2)(x) enhancing the tolerance limit from 5% to 10% should be applied retrospectively. The ITAT Kolkata Bench analyzed the nature of the amendment, determining it to be clarificatory/curative rather than prospective. This interpretation aligns with the legislative intent to address unintended consequences and provide relief to taxpayers in bona fide transactions.

The tribunal reasoned that the amendment was a response to stakeholder representations and aimed at simplifying compliance without penalizing genuine discrepancies within the prescribed tolerance band. By treating the amendment as retrospective, the tribunal ensured fairness and avoided unjust enrichment through rigid application of outdated provisions.

Impact

This judgment has far-reaching implications for future assessments involving immovable property transactions where discrepancies between actual consideration and stamp duty valuation exist. By affirming the retrospective application of the 10% tolerance band, the decision:

Enhances taxpayer assurance regarding the applicability of current laws to previous assessments.
Encourages accurate disclosure without the fear of retrospective penalties for minor discrepancies.
Sets a precedent for interpreting similar legislative amendments as retrospective when identified as curative.

Moreover, it reinforces the principle that amendments aimed at rectifying legislative oversights or providing relief should be interpreted in a manner that upholds justice and equity.

Complex Concepts Simplified

Section 56(2)(x) of the Income Tax Act

Section 56(2)(x) addresses cases where a taxpayer receives immovable property without adequate consideration. If the stamp duty valuation exceeds the actual consideration by more than the prescribed tolerance band (originally 5%, amended to 10%), the excess amount is treated as "Income from Other Sources" and is taxable.

Tolerance Band

The tolerance band is the allowable percentage difference between the actual transaction value and the stamp duty valuation of a property. If the difference remains within this band, it is considered acceptable, and no additional tax is levied.

Retrospective Application

Retrospective application refers to the enforcement of a law or amendment on events that occurred before the law was enacted. In this context, it means applying the 10% tolerance band to transactions assessed before the amendment was introduced.

Conclusion

The ITAT Kolkata's decision in Shri Sandeep Kumar Poddar vs. ITO serves as a pivotal interpretation of Section 56(2)(x) concerning the retrospective application of the enhanced tolerance band. By recognizing the amendment as clarificatory and retroactively applicable, the tribunal upheld the principles of fairness and legislative intent, thereby providing much-needed relief to taxpayers engaged in genuine property transactions. This judgment not only aligns with established jurisprudence but also paves the way for more equitable tax assessments in the future.