ITAT: Transferor Not Liable Under Section 56(2) for Undervalued Property Sale to Spouse; Liability Rests with Buyer
Pranav B Prem
The Chennai Bench of the Income Tax Appellate Tribunal (ITAT), comprising Shri SS Viswanethra Ravi (Judicial Member) and Shri Amitabh Shukla (Accountant Member), has held that a transferor cannot be made liable under Section 56(2) of the Income Tax Act, 1961, in cases where an undervalued sale of immovable property is made to the spouse, as the liability under this provision rests with the recipient of the property.
Background of the Case
The assessee, Shri M. Mahadevan, popularly known as 'Hot Breads Mahadevan,' is engaged in the business of establishing restaurants and bakeries in India and abroad under various brands. A search and seizure operation under Section 132 of the Act was conducted on him, following which assessments under Section 153A for Assessment Years (AY) 2013-14 to 2018-19 and under Section 143(3) for AY 2019-20 were completed, determining his residential status as "Resident in India" and bringing his global income to tax in India.
The Assessing Officer (AO) observed that the assessee, while claiming to be a Non-Resident in his tax returns, had actually stayed in India for periods sufficient to satisfy the conditions of Section 6(1)(a) and 6(1)(c) of the Act, thereby rendering him a resident for tax purposes. Additionally, the AO concluded that a slump sale transaction involving the transfer of the fine dining division of Oriental Cuisines Private Limited (OCPL) to Cool Cream Milano Private Limited (CCMPL) — both companies where the assessee held interests — was part of a scheme to avoid taxes.
A significant issue pertained to the subsequent sale of a property at 71, Cathedral Road, Chennai, originally part of the OCPL's assets, which was eventually sold by OCPL to the assessee’s wife, Ms. Badrunissa, at a value substantially lower than its estimated market value. The AO contended that this undervalued sale constituted a colourable device intended to avoid tax liability and proposed to treat the notional gain arising from the transaction as income in the hands of the assessee under Section 56(2) of the Act.
Tribunal’s Observations
The Tribunal examined the applicability of Section 56(2) concerning the transaction. It was observed that the undervalued purchase of the property by the assessee’s wife may attract tax liability under Section 56(2) in her hands as the recipient of the property. However, the Tribunal categorically held that the same liability could not be imposed on the assessee as the transferor.
The Bench opined: “The hypothesis propounded by the Ld. AO is flawed and not supported by the statutory stipulations governing the matter. It is true that the wife of the assessee has acquired a property for an amount significantly lower than its actual reported value. However, the said transactions would make the wife of the assessee liable for additional taxation within the meanings of Section 56(2). Stretching the transaction and implicating assessee into it does not appear to be the correct line of action.”
The Tribunal thus upheld the finding of the Commissioner of Income Tax (Appeals) [CIT(A)] on this point, ruling that any taxability arising from the undervaluation should be fastened upon the buyer (the assessee’s wife) and not upon the transferor (the assessee).
Other Issues
Regarding the issue of the assessee's residential status and taxability of his global income, the Tribunal concurred with the AO's finding that the assessee satisfied the criteria under Section 6 of the Act to be treated as a resident for tax purposes. The Tribunal set aside the CIT(A)’s order granting the status of Non-Resident to the assessee and restored the AO’s determination, thereby bringing the assessee’s global income to tax in India.
On the issue of the long-term capital gains adjustment made by the AO, the Tribunal found that the AO’s computation of notional gains — calculated by comparing the market value of the Cathedral Road property with the consideration received — was misconceived in the context of taxing the transferor under Section 56(2). However, the Tribunal left the door open for the Revenue to take appropriate action under Section 56(2) against the recipient of the property (the assessee’s wife).
In conclusion, the Tribunal partly allowed the Revenue's appeal. It upheld the AO's finding on the assessee's residential status and the taxability of his global income. However, it confirmed the CIT(A)'s decision that the addition made on account of the undervalued property sale to the assessee’s wife under Section 56(2) could not be sustained in the assessee's hands. The Tribunal directed the AO to afford an opportunity of hearing to the assessee and verify relevant documents for granting credit of taxes paid abroad in accordance with law.
Appearance
Counsel for Appellant/ Assessee: G. Gireesh
Counsel for Respondent/ Department: C. Vatchala
Cause Title: Deputy Commissioner of Income Tax, Central Circle, Chennai V. M. Mahadevan
Case No: ITA No.1824/Chny/2024
Coram: SS Viswanethra Ravi [Judicial Member], Amitabh Shukla [Accountant Member]
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