No Tax on Stamp Duty Difference for Builders: Landmark ITAT Bangalore Ruling Explained

 No Tax on Stamp Duty Difference for Builders: Landmark ITAT Bangalore Ruling Explained

Introduction

In a significant judgment, the Income Tax Appellate Tribunal (ITAT) Bangalore has clarified that the difference between the stamp duty valuation and the actual purchase price of land acquired by a builder is not taxable under Section 56(2)(vii)(b)(ii) of the Income Tax Act, 1961. The case, Mithun Kerur vs. Income Tax Officer, pertains to the Assessment Year 2015-16 and provides clarity on the applicability of Section 56 in real estate transactions involving stock-in-trade.

Facts and Issues of the Case

The assessee, Mr. Mithun Kerur, a real estate developer, purchased a parcel of land from his cousin for ₹13,95,000. However, the stamp duty valuation of the property was ₹37,28,000, leading to a difference of ₹23,33,000. The Assessing Officer (AO) treated this difference as taxable income under Section 56(2)(vii)(b)(ii), which deals with the taxation of immovable property received for inadequate consideration. The AO’s addition was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

Observations by the Tribunal

Upon appeal, the ITAT Bangalore observed that the property in question was acquired as stock-in-trade for the assessee’s real estate business. The tribunal emphasized that Section 56(2)(vii)(b)(ii) is applicable when an individual or Hindu Undivided Family (HUF) receives immovable property for inadequate consideration, and it does not extend to transactions where the property is acquired as stock-in-trade. The tribunal also noted that the entries in the books of accounts, which recorded the property as a capital asset, are not decisive in determining the nature of the asset.

Applicable Law

Section 56(2)(vii)(b)(ii) of the Income Tax Act was introduced to prevent the understatement of consideration in property transactions. However, this provision specifically applies to individuals and HUFs receiving immovable property for inadequate consideration, and not to properties acquired as stock-in-trade. Furthermore, judicial precedents have established a “safe harbour” threshold, wherein minor differences between the stamp duty valuation and the actual consideration (typically up to 10%) are not subjected to tax under this section. This principle was upheld in cases like Sri Sandeep Patil vs. Income Tax Officer, where the tribunal ruled in favor of the assessee when the difference was less than 10%

Conclusion

The ITAT Bangalore’s decision in Mithun Kerur vs. ITO reinforces the principle that Section 56(2)(vii)(b)(ii) does not apply to properties acquired as stock-in-trade by builders or developers. This judgment provides clarity for real estate professionals and ensures that genuine business transactions are not unduly taxed due to differences in stamp duty valuations. It also underscores the importance of considering the nature of the asset and the intent behind its acquisition, rather than solely relying on book entries or stamp duty valuations.

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