Section 56(2)(x)

Section 56(2)(x) — the law in short

What the courts have decided on section 56(2)(x), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• DCGT v BPL Ltd Supreme CourtHelps taxpayer
  The shares are listed but locked in. Do I value them at the market quotation?
  No. Shares that cannot be traded because they are under a lock-in are not 'quoted' shares, whatever the exchange certifies, because there are no current transactions in the ordinary course of business on which a quotation could be based. The valuation has to be made in accordance with the restriction and not by ignoring it, and the Revenue's appeal was dismissed.
• Kale v Deputy Director of Consolidation Supreme CourtHelps taxpayer
  Our family settled a property dispute orally and only filed a memorandum with the authorities. Someone now says the settlement is void because it was never registered. Is it?
  No. The Supreme Court upheld an oral family arrangement of 1956 that had been acted on for seven years. Because the settlement itself was oral and the petition later filed before the Assistant Commissioner was only a memorandum for the information of the court, it created no rights in immovable property and did not require registration under section 17(1)(b) of the Registration Act. A party who took benefit under the arrangement cannot afterwards resile from it. The Court also held that a party with no subsisting legal title can still be a party, because antecedent title is assumed where the others relinquish in his favour.
• Tamal Kundu v Additional/Joint/Deputy/Assistant Commissioner of Income Tax High CourtHelps taxpayer
  I paid the whole price and took possession of a factory under an agreement for sale in December 2016, but the sale deed was only registered in March 2018. Can the department tax the stamp-value difference under section 56(2)(x) in the later year?
  No. The Calcutta High Court held that where the entire consideration is paid on the date of the agreement for sale, possession of the property is handed over, and the buyer starts running the business on it, the transfer takes place then and not on the later registration of the sale deed. Section 2(47)(ii) covers extinguishment of the vendor's rights, and section 2(47)(vi) covers any transaction that has the effect of enabling the enjoyment of immovable property. So the purchase of the rice mill fell in the previous year relevant to assessment year 2017-18, and the section 56(2)(x) addition made in assessment year 2018-19 could not stand. The Tribunal's order was set aside.
• DCIT, Central Circle 8(3), Mumbai v Sanjana Cryogenic Storages Ltd ITATHelps taxpayerNo later treatment found
  The Approving Panel held that my client's arrangement is NOT an impermissible avoidance arrangement, but the Assessing Officer has taxed the same transaction under another section anyway. Can he do that?
  The Mumbai Tribunal did not decide the wide question, but it held that the Assessing Officer could not, while giving effect to the statutory process under section 144BA, proceed on a factual premise diametrically opposed to the findings returned by the Approving Panel on the very arrangement referred to it. It then dismissed the Revenue's appeal on the narrower ground that a company buying back its own shares, which must then be extinguished, does not 'receive' property within section 56(2)(x) at all.
• Firey Ram Bhati v ITO — rural agricultural land is not a 'capital asset', so the deeming provision in section 56(2)(x) cannot be invoked on a purchase below circle rate ITATHelps taxpayerNo later treatment found
  My client, a farmer, bought agricultural land well below circle rate with his land-acquisition compensation. The officer has added the difference under section 56(2)(vii)(b). Is agricultural land within the charge at all?
  The Delhi Bench held it is not. Following its own coordinate-bench decision in Ramanarayan, and on the footing that the lower authorities had never doubted that what was bought was agricultural land, the Bench allowed the appeal and deleted the addition of Rs 61,02,500. The reasoning is that agricultural land of that description falls outside the definition of capital asset, and 'property' in the Explanation to the clause means the listed capital asset of the assessee.
• Madhur Coal Mining Pvt Ltd v DCIT (ITAT Kolkata) — s.50D used to substitute fair market value where shares were sold to group companies below value ITATHelps departmentUnder appeal
  My company sold unquoted shares of group companies below their Rule 11UA value in a year before section 50CA existed. The Assessing Officer has invoked section 50D and substituted fair market value. Can he do that when I have disclosed an actual sale price?
  On these facts the Tribunal held he could. It upheld the section 50D addition for AY 2015-16 — a year before section 50CA was on the statute book — because the assessee produced no share purchase agreement, no sale deed and no valuation report to show that the price stated in the return had actually been received from the related-party buyers, so the consideration was treated as not ascertainable within section 50D.
• DCIT v Ashish Jugalkishor Bhala ITATCuts both ways
  I bought unquoted shares from family members at Rs 540 when the officer's rule 11UA working says Rs 661. Can a discount for lack of marketability and the company's real position be brought into the valuation?
  On these facts, yes. The Pune Tribunal upheld the Commissioner (Appeals), who had accepted the assessee's second valuation report and deleted the addition of Rs 1,44,42,560 under section 56(2)(x). The first appellate order accepted the valuer's figures for two parcels of land, worked out on stamp duty and IGR rates, allowed the provision for gratuity as a liability because most employees had crossed five years of service, and allowed a discount of fifteen per cent for lack of marketability given the difficulty of realising an industrial site with a working plant on it. The Tribunal found the order detailed and speaking, noted that the Departmental Representative brought no contrary material, and followed its own earlier order in a companion case.
• Clayking Minerals LLP v ITO ITATCuts both waysNo later treatment found
  I bought agricultural land below the jantri rate. Can s.56(2)(x) apply when the land is not even a capital asset?
  Yes on this bench's reasoning, though it never decided whether this land was agricultural at all. Proceeding on an assumption for argument's sake that the land qualified as agricultural, the Tribunal held that s.56(2)(x) speaks of 'any immovable property' and does not exclude agricultural land; the exclusion of rural agricultural land from 'capital asset' in s.2(14) protects the seller's capital gain, not the buyer. On the second point it held that where the buyer disputes the stamp duty value the Assessing Officer has to refer the valuation to the Departmental Valuation Officer, and restored the matter to him for that reference. The addition was not deleted.
• NFAC Delhi v NRB Developers ITATCuts both waysNo later treatment found
  The stamp duty value is above what I paid for the property. Does the 10% tolerance cover my earlier year?
  Yes. Only the amount by which the difference exceeds the 10% tolerance band can be added under s.56(2)(x), and the increase of the band from 5% to 10% is clarificatory, so it applies to earlier assessment years as well.
• Raunaq Prakash Jain v ITO ITATHelps taxpayerNo later treatment found
  I sold Bitcoin in FY 2020-21, before the VDA regime — capital gains or income from other sources?
  Capital gains, for that year. For AY 2021-22 Bitcoin was a capital asset under s.2(14), so the gain fell under the capital gains head and not s.56, and a holding period of more than three years made it long-term and eligible for s.54F relief on reinvestment in property. This decides only years before the virtual digital asset regime took effect on 1 April 2022; for years inside that regime s.115BBH governs and this answer does not carry across.
• Narain Lal Agrawal v DCIT ITATHelps taxpayerNo later treatment found
  We booked a flat in 2014, paid part of the price by cheque, and registered the deed in 2019 when the circle rate had risen sharply. Is the builder's allotment letter an 'agreement' for the provisos to s.56(2)(x)?
  On these facts the Jaipur bench held that it is. The allotment letter identified the property, fixed the total consideration and set out the terms of payment, was signed by both sides, and both sides then performed on it, part of the price having been paid by account payee cheque on or before the date of that agreement. That satisfied the two conditions in the provisos to s.56(2)(x)(b) - an agreement fixing the consideration on an earlier date, and part payment by a prescribed banking mode on or before that date - so the stamp duty value on the allotment date, not the registration date, was the relevant figure. The Tribunal declined to treat the label 'allotment letter' as decisive and allowed the appeal, directing deletion of the addition of Rs 58,36,000.
• Alrameez Construction P Ltd v CIT/NFAC ITATHelps taxpayer
  The only addition is the gap between the stamp duty value and my price. Can that carry a s.270A penalty?
  No, on this Tribunal's reasoning, and note the facts it rests on. The Tribunal read s.270A as dealing with deemed income only where the addition is made under s.115JB or s.115JC, so an addition under s.43CA read with s.56(2)(x) falls outside the under-reporting scheme; where a deeming provision applies the assessee has no option but to accept the difference, so neither concealment nor under-reporting can be established. Two further grounds carried the result: the notice never said which limb of s.270A was charged, and the assessment order itself recorded that the assessee had accepted the addition to buy peace. The penalty of Rs. 20,843 was deleted; the addition of Rs. 1,34,100 stands.
• Joseph Mudaliar v DCIT (ITAT Mumbai) — the section 50C tolerance band read into the buyer's charge under section 56(2)(vii)(b), and applied to AY 2015-16 ITATHelps taxpayer
  I bought flats slightly below the stamp duty value and the Assessing Officer has added the difference in my hands under section 56(2)(vii)(b). There is no tolerance band in that clause. Can I still claim the section 50C margin?
  The Tribunal held that you can. It read the exception in the third proviso to section 50C(1), and the corresponding exception in section 56(2)(x)(b)(B) and the first proviso to section 43CA, into section 56(2)(vii)(b)(ii), on the reasoning that the buyer and the seller stand on the same footing and there cannot be two different fair market values for the same property. It then applied a ten per cent margin to AY 2015-16, holding the Finance Act 2018 amendments curative and beneficial and therefore retrospective, and deleted the whole addition of Rs.23,30,694.
• Sudhir Menon HUF v ACIT ITATCuts both waysSuperseded by amendment
  I took up a rights issue at face value. Is the gap from book value taxable in my hands?
  Not on the proportionate part. Where further shares are offered to existing shareholders pro-rata to their holdings, there is only an apportionment of the value of the existing holding over more shares and nothing is received. Anything allotted beyond the proportionate entitlement is a different matter and can be taxed.
• Statutory position — Rule 11UA(2) to (4) as substituted with effect from 25 September 2023: five further methods for non-resident subscriptions, price matching, and a ten per cent safe harbour CBDT Circulars & InstructionsCuts both waysNo later treatment found
  My client's start-up took money from an overseas investor. Which valuation methods are open under Rule 11UA, and is there any tolerance if the issue price is a little above the valuation?
  Sub-rules (2) to (4) of Rule 11UA were substituted for the old sub-rule (2) by the Income-tax (Twenty-first Amendment) Rules, 2023, with effect from 25 September 2023. For consideration received from a resident, the fair market value of unquoted equity shares may be taken at the assessee's option under sub-clause (a) (the adjusted book-value formula), (b) (merchant banker's Discounted Free Cash Flow), (c) (venture-capital price matching) or (e) (price matching against a notified entity); where the consideration is from a non-resident, sub-clauses (a) to (e) are all available, and sub-clause (d) opens five further merchant-banker methods — Comparable Company Multiple, Probability Weighted Expected Return, Option Pricing, Milestone Analysis and Replacement Cost. Sub-rule (4) is a safe harbour: where the issue price exceeds the value so determined by not more than ten per cent of the valuation price, the issue price is deemed to be the fair market value.
• Statutory position — the inadequate-consideration margin in section 56(2)(x)(b): none before AY 2019-20, five per cent from AY 2019-20, ten per cent from AY 2021-22 CBDT Circulars & InstructionsCuts both ways
  The stamp duty value of the flat my client bought exceeds the price by about eight per cent. Is there a tolerance band, and what was it in the year of my assessment?
  There is, but only from AY 2019-20, and its size changed. Item (B) of section 56(2)(x)(b) was substituted by the Finance Act 2018 with effect from 1 April 2019 to charge the excess only where it is more than the higher of Rs 50,000 and five per cent of the consideration, and the word 'five' was substituted by 'ten' by the Finance Act 2020 (Act No. 12 of 2020) with effect from 1 April 2021. For AY 2018-19 and earlier there was no percentage band at all under this clause: any excess over Rs 50,000 was chargeable.
• Statutory position — section 49(4): the amount charged under section 56(2)(x) becomes the cost of acquisition on a later sale CBDT Circulars & InstructionsCuts both ways
  The Assessing Officer has charged my client under section 56(2)(x) on the stamp-duty difference. When he sells the property, does he pay capital gains on that same amount all over again?
  No. Section 49(4) provides that where the capital gain arises from the transfer of a property the value of which has been subjected to income-tax under clause (vii), clause (viia) or clause (x) of section 56(2), the cost of acquisition of that property is deemed to be the value taken into account for the purposes of that clause. The amount already taxed as income from other sources therefore comes back as cost, and is not taxed a second time as capital gain.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.