Delhi Tribunal clarifies applicability of Section 56(2)(vii)(b) to leasehold rights

Background

In a recent ruling, the Delhi Income-Tax Appellate Tribunal (“The Tribunal”) adjudicated the case of Rajesh Kumar Sharma¹ (“the assessee”) arising from the order passed by the CIT(A)/NFAC, Delhi dated 03.08.2023 for Assessment Year 2016–17. The assessment was framed under Section 147 of the Income-tax Act, 1961 (“the Act”).

The dispute pertains to the addition made by the Assessing Officer on account of the difference between the actual purchase price of a residential flat and the value adopted by the stamp valuation authority, invoking the provisions of Section 56(2)(vii)(b) of the Act.

Facts of the case

• The assessee has entered into a sale deed for purchase of a residential flat during the previous year 2015-16 for a consideration of INR 33,76,625 which involved lease rights.
• The stamp duty valuation of the said property was INR 55,72,000.
• The Assessing Officer (AO) treated the difference of INR 21,95,375 as income under Section 56(2)(vii)(b) of the Act, contending that the stamp duty value exceeded the actual consideration.
• The CIT(A)/NFAC upheld this view, holding that 56(2)(vii)(b) applied to this transaction.
• Aggrieved by the above order, the assessee appealed before the Tribunal.

Key Issues

1. Whether the provisions of Section 56(2)(vii)(b), which apply to transfer of immovable property being land or building or both shall also apply to transactions involving leasehold rights in immovable property?

Key Takeaways

1. Application of the Principle of Beneficial Interpretation in Tax Law

• The Tribunal noted from the sale/lease deed that the transaction involved leasehold rights, not ownership of land or building.
• Section 56(2)(vii)(b) refers specifically to immovable property being land or building or both as defined under Explanation (d)(i) of that section.
• The provision deals with the same matter (pari materia) as Section 50C, which also applies only to transfer of land or building, and not to transfer of leasehold interests.
• The Revenue relied upon Vidarbha Veneere Industries Ltd. vs. ITO², where the Bombay High Court held that lease rights could also fall within the ambit of such deeming provisions.
• The assessee, however, relied on V.S. Chandrashekar vs. ACIT³, wherein the Karnataka High Court held that leasehold rights are distinct from land or building, and therefore Section 50C would not apply.
• The Tribunal, in the absence of any binding precedent from the Delhi High Court, relied on the Karnataka High Court’s view, which was favourable to the assessee, applying the principle as laid by the Supreme Court ruling in CIT vs. Vegetable Products Ltd⁴, which states that in an instance of conflicting hon’ble non-jurisdictional high courts’ decisions, a view which favours the assessee ought to be adopted.
• Accordingly, the Tribunal held that Section 56(2)(vii)(b) is not applicable in the present case and directed deletion of the addition of INR 21,95,375.

Conclusion

In this ruling, by taking reliance on Karnataka High Court decision, the Delhi ITAT underscores that leasehold rights and ownership rights are legally distinct concepts and deeming provisions such as Sections 50C and 56(2)(vii)(b) cannot be extended beyond their clear statutory language. This ruling reinforces that deeming provisions which create artificial income for taxation must be interpreted narrowly and strictly, and in cases of interpretational doubt, the taxpayer is entitled to the benefit of that ambiguity.

Kretha Comments

In the present case, the Tribunal was confronted with conflicting judicial opinions on whether the deeming fiction under Section 56(2)(vii)(b) could be applied to leasehold rights. In the absence of a binding precedent from the Delhi High Court, the Tribunal adopted the interpretation that was favourable to the assessee, in line with the Supreme Court’s settled principle that where two views are possible, the one beneficial to the taxpayer must be preferred. By doing so, the ITAT not only upheld the doctrine of beneficial interpretation but also emphasised that taxation cannot rest on presumption or extended construction.

1. TS-1301-ITAT-2025(DEL) ↩︎
2. (2025) 174 taxmann.com 223 (Bom.) ↩︎
3. (2021) 129 taxmann.com 273 (Kar.) ↩︎
4. (1973) 88 ITR 192 (SC) ↩︎