The ITAT Mumbai Special Bench in Shreyas Naynesh Modi vs ITO examined whether the 10% safe harbour under section 56(2)(x) applies to valuation determined by the Departmental Valuation Officer (DVO) or only to stamp duty value (SDV). The assessee purchased property below SDV but close to DVO value, with a difference of about 6.09%. Despite this, the Assessing Officer taxed the difference without granting safe harbour relief, and the CIT(A) upheld the addition citing prospective applicability. The Tribunal held that once a DVO reference is made, its valuation substitutes SDV, and safe harbour must logically apply. Emphasizing that valuation is inherently subjective and the provision is curative, the Bench adopted a liberal interpretation. It ruled that if the variation between actual consideration and DVO value is within 10%, no addition under section 56(2)(x) is warranted, thereby granting relief to the assessee.
Core Issue :The central issue before the Special Bench was whether the 10% safe harbour tolerance provided under section 56(2)(x) of the Income-tax Act can be applied with reference to the Fair Market Value (FMV) determined by the Departmental Valuation Officer (DVO), or whether such tolerance is strictly confined only to the Stamp Duty Value (SDV) as per the statutory language.
Facts of the Case
The assessee, an individual, purchased a residential flat in Mumbai for a consideration of ₹2.65 crore during the relevant assessment year 2018–19. The stamp duty valuation of the said property, however, stood significantly higher at ₹3.79 crore. The assessee had also obtained a valuation report from a registered valuer estimating the property’s market value at ₹2.50 crore. During scrutiny assessment proceedings, the assessee disputed the stamp duty valuation and requested a reference to the DVO under the provisions of the Act. The DVO, upon examination, determined the fair market value of the property at ₹2.81 crore. Notably, the difference between the actual consideration paid by the assessee and the DVO-determined FMV worked out to approximately 6.09%, which was within the tolerance band of 10%.
Despite this, the Assessing Officer proceeded to invoke section 56(2)(x) and made an addition of ₹16.13 lakh, treating the differential amount between the DVO valuation and the actual consideration as income from other sources.
Findings of the Assessing Officer
The Assessing Officer held that section 56(2)(x) creates a deeming fiction whereby any immovable property purchased for a consideration lower than its fair market value is liable to tax in the hands of the purchaser to the extent of the differential amount. The AO considered the DVO’s valuation as the appropriate benchmark for determining FMV once a reference had been made. Since the purchase consideration was lower than the value determined by the DVO, the difference was brought to tax. The AO did not extend the benefit of the safe harbour tolerance of 10%, effectively adopting a strict interpretation of the provision.
Findings of the CIT(A)
On appeal, the Commissioner of Income Tax (Appeals) upheld the addition made by the AO. The CIT(A) primarily relied on the temporal applicability of the safe harbour provision introduced by the Finance Act, 2018, observing that the 10% variation tolerance was applicable prospectively from assessment year 2019–20 onwards. Since the year under consideration was AY 2018–19, the CIT(A) held that the assessee was not entitled to claim the benefit of such tolerance. Accordingly, the addition made by the AO was confirmed without examining the broader interpretational aspects of the provision.
Findings of the ITAT (Special Bench)
The Special Bench undertook a detailed examination of the statutory framework, legislative intent, and judicial precedents governing sections 50C, 43CA, and 56(2)(x), which are cognate provisions dealing with deemed valuation in property transactions. The Tribunal noted that the safe harbour provision was introduced as a measure to mitigate genuine hardship arising from minor variations between actual consideration and deemed valuation, acknowledging that such variations can occur due to multiple practical factors such as location, property characteristics, and market conditions.
The Bench observed that valuation, whether by stamp authorities or by the DVO, inherently involves estimation and cannot be expected to be mathematically precise. In this context, once a reference is made to the DVO, the valuation determined by the DVO effectively substitutes the stamp duty value for all practical purposes. Therefore, there is no rational basis to deny the benefit of the safe harbour tolerance when the variation is computed with reference to DVO valuation.
The Tribunal further emphasized that the safe harbour provision is beneficial and curative in nature, and hence deserves a purposive and liberal interpretation rather than a narrow or literal one. It was also noted that the deeming fiction embedded in section 56(2)(x) must be carried to its logical conclusion, which includes applying all associated relief provisions once the substitution of value takes place.
The Special Bench also addressed the argument regarding prospective applicability and observed that the issue before it was confined to the applicability of safe harbour vis-à-vis DVO valuation, and not strictly limited to the question of retrospectivity. It concurred with earlier coordinate bench decisions which had extended the benefit of safe harbour to DVO-determined values.
Accordingly, the Tribunal held that where the difference between the actual consideration and the DVO-determined FMV is within 10%, no addition under section 56(2)(x) is warranted.
Cases Relied Upon
The Special Bench placed reliance on several judicial precedents which supported a liberal interpretation of valuation provisions and the application of safe harbour tolerance. Key decisions included Jayarajbhai A. Jodhani vs DCIT, Rama Jogi Reddy Sanepalli vs ITO, and B.S. Sanjay (HUF) vs ITO, wherein it was held that the safe harbour tolerance applies even with reference to DVO valuation.
Further support was drawn from High Court rulings such as CIT vs Raman Kumar Suri, which recognized that safe harbour provisions are intended to alleviate hardship in genuine transactions, and Dr. Rajivraj Ranbirsingh Choudhary vs ACIT, which held that curative provisions should be applied retrospectively. The Tribunal also acknowledged the general principle that valuation reports are inherently opinion-based and subject to variation, as observed in various judicial pronouncements.
Final Outcome
In conclusion, the Special Bench answered the reference in favour of the assessee and held that the 10% safe harbour tolerance under section 56(2)(x) is equally applicable to the valuation determined by the DVO. Consequently, where the variation between the purchase consideration and DVO valuation falls within the permissible limit, no addition can be made under the deeming provisions. The matter was thereafter remanded to the Division Bench for disposal in accordance with this legal position.
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