ITAT: Section 56(2)(vii)(b) Not Retrospectively Applicable to Property Purchased Under Pre-Amendment Agreement

Introduction

The Hon’ble Income Tax Appellate Tribunal, Nagpur Bench (‘ITAT’) in the ruling of Bhavesh Suresh Sejpal v. Income Tax Officer, Nagpur[i] addressed the issue of whether the Ld. Assessing Officer (‘AO’) was justified in invoking s. 56(2)(vii)(b) of the Income-tax Act, 1961 (‘Act’), which became effective from 01.04.2014, to tax a property transaction that was governed by a registered agreement dated 29.05.2012. In this case, the ITAT held that s. 56(2)(vii)(b) could not be applied retrospectively to a transaction based on an agreement executed prior to the provision’s commencement date. The judgment reiterates that taxing provisions must be applied prospectively unless the statute clearly provides otherwise.

Facts of the Case

• Bhavesh Suresh Sejpal (‘Assessee’) filed his return of income (‘ITR’) for Assessment Year (‘A.Y.’) 2014-15 under the Act, declaring income of Rs. 2,56,770 after claiming deductions.

• The Assessee jointly purchased an immovable property from M/s. Sri Balaji Betala Infracon, Nagpur (‘Seller’) for a consideration of Rs. 25,92,000 through a registered sale agreement dated 29.05.2012.

• The AO found that the market value of the property, as per the registered sale deed executed on 15.03.2014, was Rs. 42,84,000. Accordingly, the AO concluded that the difference of Rs. 8,46,000 (being the Assessee’s 50% share) should be taxed under s. 56(2)(vii)(b) of the Act.

• Consequently, the assessment was reopened under s. 147 of the Act, and statutory notices were issued under s. 148 of the Act. The Assessee, in compliance, re-filed his ITR on 21.05.2021, and thereafter, the AO issued reasons for reopening the assessment to the Assessee.

• In responses dated 12.10.2021 and 22.10.2021, the Assessee submitted explanations along with the sale agreement and bank statements, contending that the amendments to ss. 50 and 56 of the Act were effective from 01.04.2014, and the date of the agreement should govern the valuation where payment was made through banking channels.

• However, the AO, relying on applicable Central Board of Direct Tax (‘CBDT’) circulars, rejected this contention and sought further clarification. The Assessee reiterated in his reply dated 25.12.2021 that the provisions of s. 56(2)(vii)(b) of the Act would not be applicable in the present case.

• The AO dismissed these arguments and finalised the assessment, making an addition of Rs. 8,46,000 on the ground that s. 56(2)(vii)(b) was applicable for A.Y. 2014–15, and that the Assessee had not disclosed this income under the Act. Consequently, penalty proceedings were initiated under s. 271(1)(c) of the Act.

• The Assessee, being aggrieved from the assessment order, preferred an appeal before the Ld. Commissioner of Income Tax (Appeals) (‘CIT-A’)

• The CIT-A upheld the addition, holding that s. 56(2)(vii)(b) of the Act was applicable for A.Y. 2014-15, and that both the agreement and registration reflected the same stamp duty value of Rs. 42,84,000.

• The Assessee, being aggrieved by the order passed by the CIT-A, preferred an appeal before the ITAT.

Held

• The ITAT allowed the Assessee’s appeal and set aside the order passed by the CIT-A.

• The ITAT relied on its Co-ordinate Bench’s ruling in ACIT v. Sri Anala Anjibabu[ii], which held that provision of s. 56(2)(vii)(b)(ii) of the Act, effective from 01.04.2014, cannot be retrospectively applied to agreements executed prior to that date.

• The Tribunal also referred to the decisions rendered by the Hon’ble Supreme Court of India in K.P. Varghese v. ITO[iii], and the decision of the High Court of Gujarat in the case of  Commissioner of Income-tax vs. Nirmal Textiles[iv], reaffirming that the taxability of a transaction must be determined based on the law in force when the contractual rights crystallised.

• The Tribunal also referred to the decision in D. SN. Malleshwara Rao v. Income Tax Officer[v], which held that taxability must be assessed as per the law existing on the date of the agreement, not the date of registration.

• Accordingly, since s. 56(2)(vii)(b)(ii) of the Act did not exist when the Assessee executed the agreement and paid consideration, the ITAT held that the provision could not be invoked against him, following the settled ratio in M.Siva Parvathi & Others v. Income Tax Officer[vi].

• On this basis, the ITAT concluded that the issue had been consistently adjudicated in favour of the assessee by various benches, and therefore, the order of the CIT(A) was set aside, and the addition was deleted.

Our Analysis

The ITAT in the present decision addressed two key issues: whether s. 56(2)(vii)(b)(ii) would apply based on the date of entering into the contract or the date on which the payment was fulfilled as per the contract, and whether a taxing statute can be invoked retrospectively.

The ITAT ruled in favour of the Assessee, placing heavy reliance on the decision of its Coordinate Bench in the case of ACIT v. Sri Anala Anjibabu (supra), which held that a taxing provision cannot be applied retrospectively when it was not in force at the time of entering into the contract.

It is a well-established rule of interpretation in tax law that statutory provisions apply prospectively unless expressly stated otherwise. The Supreme Court, in CIT v. Vatika Township Pvt. Ltd.[vii] laid down key principles regarding retrospective applicability:

a. A statute should be considered prospectively unless the language clearly indicates otherwise.

b. The principle of fairness is the basis of every legal rule, particularly when the law confers a benefit without a consequent detriment.

c. The retrospective effect can only be given when the statute’s language is unambiguous.

Further, in the case of CIT v. Scindia Steam Navigation Co. Ltd.,[viii] the Supreme Court held that tax liability to pay tax must be computed as per the law in force at the beginning of the AY, unless the statute expressly provides for retrospective application. In the present case, s. 56(2)(vii)(b)(ii) of the Act does not contain any provision for explicit retrospective application.

Thus, the ITAT’s decision reinforces well-established principles of tax law interpretation: tax liability arises based on the law existing on the date of the agreement, not at the time of fulfilling the contractual obligation, and the retrospective application of taxing statutes is not permissible unless explicitly provided.

End Notes

[i] [2025] 173 taxmann.com 489 (Nagpur - Trib.).

[ii] ITA no.415/ Viz./2019.

[iii] (1981) 4 SCC 173.

[iv] [1997] 224 ITR 378 (Gujarat)/[1996] 136 CTR 148 (Gujarat)[14-11-1995].

[v] MANU/IV/0152/2019.

[vi] [2010] 129 TTJ 463 (VISAKHA).

[vii]CIT v. Vatika Township (P) Ltd., (2015) 1 SCC 1.

[viii]  [1961] 42 ITR 589 (SC)[06-04-1961].

Authored by Kushagra Gahlot, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions