The Income Tax Appellate Tribunal, Mumbai, has clarified that the enhanced 10% tolerance band under Section 56(2)(x)(b) of the Income Tax Act, 1961, applies retrospectively to transactions occurring before the Finance Act, 2020 amendment. This ruling provides critical relief to taxpayers in real estate transactions where stamp duty valuation exceeds consideration by less than 10%.
Background & Facts
The Dispute
The appellant, an individual, acquired a flat in Mumbai jointly with his brother through M/s Krypton Constructions & Developers. The property was allotted on 23/06/2007 for a total consideration of INR 2,25,00,000, with the appellant holding a 45% share. An Agreement for Sale was executed on 18/03/2020. The Stamp Duty Authority valued the property at INR 8,05,39,971 on that date, resulting in a differential of INR 5,80,69,971. The Assessing Officer (AO) applied Section 56(2)(x)(b) to the appellant’s 45% share, making an addition of INR 26,131,471 to his income for AY 2020-21.
Key Facts
- The appellant paid INR 10,00,000 via cheque dated 20/06/2007 as initial payment
- The appellant and his brother held equal rights to the two flats (Flats No. 2101 and 2201)
- The Departmental Valuation Officer (DVO) assessed the Fair Market Value (FMV) of the two flats at INR 2,46,31,300 on 05/04/2023
- The excess of FMV over purchase consideration was INR 21,31,300
- This excess constituted 5.93% of the total consideration (INR 2,25,00,000)
- The DVO’s valuation was used in the brother’s assessment under Section 56(2)(vii)(b), resulting in an addition of INR 21,31,300
- The Finance Act, 2020 increased the tolerance limit from 5% to 10% w.e.f. 01/04/2021
Procedural History
- 11/02/2021: Assessee filed return declaring income of INR 18,58,530
- 23/06/2007: Allotment letter issued for flats
- 18/03/2020: Agreement for Sale executed
- 29/09/2022: AO passed assessment order under Section 143(3) read with Section 144B, making addition of INR 26,131,471
- 13/11/2025: CIT(A) upheld the addition
- 02/04/2026: Hearing before ITAT Mumbai
- 08/04/2026: ITAT Mumbai delivered order
Relief Sought
The appellant sought deletion of the addition of INR 26,131,471 under Section 56(2)(x)(b), arguing that the excess of FMV over consideration (INR 21,31,300) was less than 10% of the purchase consideration and therefore protected under the amended tolerance band.
The Legal Issue
The central question was whether the amendment increasing the tolerance limit under Section 56(2)(x)(b) from 5% to 10% by the Finance Act, 2020, applies retrospectively to transactions occurring before 01/04/2021, particularly when a DVO valuation has already been obtained.
Arguments Presented
For the Appellant
The learned Authorized Representative argued that the DVO’s valuation of INR 2,46,31,300 was binding and applicable to both co-owners. The excess of INR 21,31,300 over the purchase consideration of INR 2,25,00,000 amounted to only 5.93%, which is below the 10% threshold introduced by the Finance Act, 2020. Relying on Sandeep Kumar Poddar v. ITO and Maria Fernandes Cheryl v. ITO, the appellant contended that the amendment was clarificatory and curative in nature, and therefore must be applied retrospectively to all pending assessments, regardless of the date of transaction.
For the Respondent
The Departmental Representative relied on the lower authorities’ orders and argued that the amendment was prospective only, as it was introduced with effect from 01/04/2021. The contention was that the AO was bound by the stamp duty value on the date of agreement (18/03/2020), and the DVO’s report, though available later, could not override the statutory valuation regime in force at the time of transaction.
The Court's Analysis
The Tribunal examined the legislative intent behind the amendment to Section 56(2)(x)(b) and its relationship with Section 50C and Section 43CA. It noted that the original 5% tolerance band under Section 50C was introduced in 2003 to accommodate genuine variations in property pricing due to factors like plot shape, location, and market conditions. The CBDT had consistently acknowledged that minor discrepancies between consideration and stamp duty value do not indicate tax evasion.
"The rigour of section 50C(1) was thus relaxed, and very thoughtfully so, to take these bona fide cases of small variations between the stated sale consideration vis-à-vis stamp duty valuation, out of the scope of adjustments contemplated in the computation of capital gains under this anti-avoidance provision."
The Tribunal held that the increase from 5% to 10% was not a substantive change but a curative amendment to address the unintended hardship caused by the original 5% limit. It emphasized that the rationale for the tolerance band - recognizing legitimate market variations - remained unchanged since 2003. Therefore, the amendment merely clarified the existing legislative intent.
The Tribunal further observed that the DVO’s valuation, being a statutory determination under Section 50C(2), was equally applicable to both co-owners. Since the excess was below 10%, the anti-avoidance provision under Section 56(2)(x)(b) could not be invoked. The Tribunal followed its own coordinate bench decisions in Maria Fernandes Cheryl and Karb Associates, which had held that such amendments are retrospective.
The Court rejected the Revenue’s argument that the amendment was prospective only, stating that such an interpretation would violate the principle of equality before law and create arbitrary outcomes for similarly situated taxpayers.
The Verdict
The appeal was allowed. The Tribunal deleted the addition of INR 26,131,471 made under Section 56(2)(x)(b) of the Income Tax Act, 1961. The Tribunal held that since the excess of Fair Market Value over purchase consideration (INR 21,31,300) was 5.93% - less than the 10% tolerance limit - no addition was warranted. The order of the CIT(A) dated 13/11/2025 was set aside, and the assessment was directed to be reopened to reflect the deletion.
What This Means For Similar Cases
Retrospective Application of Tolerance Bands Is Now Settled
- Practitioners can now confidently argue that any assessment involving stamp duty valuation disputes for FY 2017-18 onwards must apply the 10% tolerance band if the DVO report shows excess below threshold
- This applies even if the transaction occurred before 01/04/2021, provided the assessment is pending or under appeal
DVO Valuations Are Binding Across Co-Owners
- When a DVO valuation is obtained for a jointly owned property, it must be applied uniformly to all co-owners, regardless of individual shares
- The AO cannot selectively apply the valuation to one co-owner while ignoring it for another
Procedural Compliance Is Non-Negotiable
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Assessing Officers must refer disputed valuations to DVO under Section 56(2)(x)(b) proviso before making additions
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Failure to do so renders the addition legally unsustainable, even if the stamp duty value exceeds consideration
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Always request DVO valuation when stamp duty value exceeds consideration by more than 5%
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File appeals citing Maria Fernandes Cheryl and Karb Associates for any pending cases involving transactions between 01/04/2017 and 31/03/2021
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Ensure DVO reports are formally placed on record and not ignored merely because they were received post-assessment
