Facts of the Case

• The assessee, as b co-owner, purchased two properties at consideration amounts lower than the SDV of those properties.
• The AO invoked section 56(2)(x) treating difference between the SDV and the purchase price as income and completed the assessment/s 143(3), also initiated penalty u/s. 270A for underreporting of income.

Arguments of the Appellant (Assessee)

1. The sole basis of levy of penalty u/s 270A of the Act was the deeming provision u/s 56(2)(x) of the Act, which cannot be considered as any under-statement of income by the assessee.
2. The Ld. AR further submitted that the assessee’s case was covered under the exception as provided u/s 270A(6) of the Act, as the assessee had explained that the properties were acquired at less than stamp value rate for the reason that they did not bear clear title to fetch the market value as decided by the State Government.
3. He submitted that considering the bona-fide explanation of the assessee and that all the material facts were duly disclosed in the return of income, the imposition of penalty u/s 270A of the Act was not proper.

Arguments of the Respondent (Revenue)

1. The assessee did not bring any evidence on record to establish the defect in the title of the lands and, therefore, it was not covered in the exceptions provided u/s 270A(6) of the Act.
2. The assessee did not contest the valuation of the stamp duty adopted by the authorities. Therefore, the provisions of Section 56(2)(x) of the Act was squarely applicable and the addition as made by the AO was also not contested by the assessee. Considering these facts, the Assessing Officer had rightly imposed the penalty under section 270A of the Act for underreporting of the income.

Decision of the Court

• Disclosure of material facts and explanation– the tribunal noted that the assessee disclosed all material facts regarding the purchase price being less than SDV and provided explanation for the same; however the AO did not find the explanation bona-fide due to a lack of supporting evidences.
• Nature of addition u/s 56(2)(x)- addition made u/s 56(2)(x) is not an absolute addition, as the assessee is entitled to dispute the SDV as per section 50C, requiring the AO to refer the matter to the Valuation Officer(DVO).

Penalty not sustainable u/s 270A- The provision of Section 270A(6)(d) of the Act stipulates that the amount of under-reported income on the basis of addition made in conformity with ALP determined by the TPO, does not qualify for imposition of penalty u/s 270A of the Act. Following the same rationale, the amount of under-reported income determined on the basis of the report of the DVO also cannot qualify for imposition of penalty u/s 270A of the Act. Merely because the assessee didn’t opt to refer the matter to the Valuation Officer, it doesn’t make a case fit for imposition of penalty u/s 270A of the Act.

Significant takeaways from judgment

Since addition u/s. 56(2)(x) are dependent on valuation disputes u/s. 50C, it does not amount to under-reporting/ misreporting of income u/s 270A of the Act.