The ITAT has deleted an addition of ₹3.89 crore under Section 56(2) of the Income Tax Act, holding that the anti-evasion provision does not apply to transfers of leasehold rights, which are distinct from land or building transactions.
ITAT Excludes Leasehold Rights from s. 56(2) Undervaluation Tax
The Income Tax Appellate Tribunal (ITAT) has deleted an addition of ₹3.89 crore made under Section 56(2)(vii) of the Income Tax Act, 1961, ruling that the provision does not apply to the acquisition of leasehold rights. The department had invoked the anti-avoidance clause, alleging undervaluation in the purchase of long-term lease rights, and treated the differential as "income from other sources."
The tribunal held that Section 56(2)(vii) specifically targets transactions involving land or buildings, as defined under the Explanation to the section. Since leasehold rights constitute a personal property interest and do not amount to transfer of immovable property title, the provision is inapplicable. The ITAT relied on the plain language of the statute and decisions such as CIT v. Shree Balaji Plotment Pvt. Ltd. to affirm that only outright transfers of capital assets classified as land or buildings attract the provision.
"The expression 'land or building' cannot be extended to include leasehold rights by judicial interpretation. The legislature has not brought leasehold within its ambit."
The ruling provides clarity for transactional structuring involving leasehold interests, especially in commercial real estate and infrastructure projects. Taxpayers and advisors may now distinguish between leasehold acquisitions and freehold transfers for purposes of Section 56(2) compliance. However, scrutiny may continue under other provisions such as Section 69, if unexplained expenditures are alleged.
Citations
- CIT v. Shree Balaji Plotment Pvt. Ltd. [2017] 394 ITR 187 (Raj)
