Facts of the Case:
The assessee, an individual failed to file its return for AY 2015-16. The case of the assessee was reopened as the department received some information regarding the purchase of an immovable agricultural land for consideration of Rs.11,00,000/- jointly with another person. The assessee’s share of investment was Rs.8,15,340/-. The stamp duty valuation of the property was Rs.1,88,98,000/-. A notice u/s 148 of the Act was issued and the assessee filed its return of income declaring income of Rs. 4,96,270/-. During the course of the assessment proceedings, the Assessing Officer (“AO”) accepted the source of such investment however invoked the provisions of section 56(2)(vii)(b) of the Act making an proportionate addition of Rs.59,32,667/-.
Contention of Assessee:
The Assessee contended that the subjected land is a rural agricultural land situated beyond 6 KM from municipal limits and therefore by virtue of section 2(14) of the Act the subjected land is outside the definition of capital asset.
The Assessee further contended that Explanation (d) to Section 56(2)(vii)(b) defines “property” to mean a capital asset and since rural agricultural land is not a capital asset, Section 56(2)(vii)(b) cannot apply.
Contention of Revenue:
The Revenue contended that Section 56(2)(vii)(b) of the Act applies to “any immovable property” received for inadequate consideration and therefore the term “immovable property” is not restricted to capital assets only. Agricultural land is immovable property and therefore falls within the scope of Section 56(2)(vii)(b) of the Act.
The Revenue further contended by placing reliance on ITO v. Trilok Chand Sain wherein it has held that classification under Section 2(14) of the Act is irrelevant for Section 56(2)(vii)(b) of the Act.
Ruling:
The Hon’ble Tribunal, upon a conjoint reading of Section 56(2)(vii)(b) of the Act and Section 2(14)(iii) of the Act, categorically held that the impugned addition was unsustainable in law. The Tribunal observed that Explanation (d) to Section 56(2)(vii)(b) of the Act restricts the scope of the deeming fiction to “capital assets” as defined under Section 2(14) of the Act.
Rural agricultural land, being specifically excluded from the ambit of “capital asset” under Section 2(14)(iii) of the Act, falls outside the charging framework of Section 56(2)(vii)(b) of the Act. The deeming provision cannot be extended to a class of property which the Legislature has consciously kept beyond the definition of capital asset.
On facts, it was established that the land in question was situated beyond 6 kilometres from the notified municipal limits and did not satisfy the prescribed population threshold. Consequently, it qualified as rural agricultural land within the meaning of Section 2(14)(iii) of the Act.
In view of the above statutory position, the Tribunal held that the machinery provisions under Section 56(2)(vii)(b) of the Act were inapplicable, and accordingly deleted the addition of Rs. 59,32,667/-, thereby allowing the appeal of the assessee.
Editors Note:
The ruling strengthens the jurisprudence that absence of a charging mechanism cannot be cured by interpretative expansion of a deeming provision.
The judgment will have persuasive value in cases under:-
- Section 56(2)(vii)(b) (pre-2017)
- Section 56(2)(x) (post-2017)
- where rural agricultural land is involved.
It reinforces statutory coherence and prevents indirect taxation of assets consciously excluded by Parliament.
Citation:- Shri Vikas Agarwal v ITO (ITA No. 6268/Del/2025) of Hon’ble Delhi Tribunal