Bought Property Before 2009 but Registered Later? Why Section 56(2)(vii)(b) Shouldn't Tax Your Old Deal

Why Property Transaction Dates Matter for Section 56(2)(vii)(b)

Section 56(2)(vii)(b) of the Income-tax Act, 1961, taxes buyers on the difference between the stamp duty value (SDV) of property and the price they pay, if the agreement value is lower. This provision, introduced by the Finance (No. 2) Act, 2009 and effective from 1 October 2009, aims to curb tax evasion via undervalued property sales. However, many buyers agree to purchase property (and even pay in advance) years before formal registration. This timing gap raised a contentious issue: can tax be levied on the SDV on the later registration date, even if the deal was struck before the provision existed?

The recent ITAT Mumbai case of Rekha Harkishan Jagwani clarifies this for taxpayers.

Case Facts: When Did the Transaction Really Occur?

• Allotment and Payment: The buyer received an allotment letter and paid Rs. 30,00,000 by cheque in April 2007 for a property priced at Rs. 1,18,00,000.
• Registration: The sale deed was formally registered in May 2013, at the agreed price.
• Tax Scrutiny: The Assessing Officer (AO) claimed that since registration happened in 2013 (after section 56(2)(vii)(b) was in force), the 2013 SDV (Rs. 4,37,53,790) should apply. The Rs. 1,59,76,895 difference was added to the buyer’s taxable income as ‘income from other sources’.

ITAT’s Core Ruling: No Retrospective Effect

The ITAT Mumbai disagreed with the AO. Here’s why:

• No Retrospective Taxing: The law cannot levy tax on transactions that took place before the provision existed. The relevant date is when the transaction was initiated (when the rights were created, payment made, and the deal crystallised)—in this case, April 2007.
• Contemporaneous Evidence: The buyer produced the original allotment letter and a bank statement confirming payment in 2007—proving the transaction’s substance pre-dated the law.
• Legal Principle: Deeming provisions like section 56(2)(vii)(b) (which create notional income for tax) are presumed prospective unless the legislature explicitly states otherwise. Applying them to old contracts is not permitted.
• Proper Reference Date: The SDV applicable is the rate as of transaction/allotment, not at registration, if substantial rights and consideration passed earlier.

What This Means for Other Property Buyers

Many property transactions, especially in under-construction or booked projects, involve an up-front agreement and payment long before the flat is registered. This judgment:

• Offers clear protection to those who booked property (with proof of payment/allotment) before 1 October 2009, even if registration was delayed.
• Prevents tax demands on “deemed income” where the deal was genuine and well-documented.

What Kind of Documentation is Needed?

To benefit from this principle, buyers must demonstrate that their contractual rights and substantial payment for the property predated section 56(2)(vii)(b) coming into force. Useful documents include:

• Allotment letter
• Receipts and bank statements showing payment
• Any correspondence confirming booking date and payment schedule

Practical Steps for Taxpayers and Advisers

1. Review Booking Records: Check allotment and advance payment dates versus the law’s effective date.
2. Preserve Evidence: Keep all documentary proof of transaction initiation.
3. Cite Precedents: When facing additions under section 56(2)(vii)(b) for old deals registered later, cite this ITAT Mumbai order and present your evidence.
4. Consult Experts: In complex cases or where the paperwork is unclear, get professional advice—especially if you’re being asked to pay tax on a ‘notional’ gain from a transaction that pre-dates the law.

Example Scenario

Suppose you booked a flat in March 2008 (with an allotment letter and payment) but the sale deed was registered in 2015. The circle rate in 2015 is much higher than your original price. According to this ITAT Mumbai order, so long as you have clear documentation, section 56(2)(vii)(b) should not apply.

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Key Takeaways for Property Buyers

• If you agreed to buy and paid for property before 1 October 2009, later registration won’t trigger tax on undervaluation under section 56(2)(vii)(b).
• Always gather and preserve allotment letters, payment proofs and correspondence.
• The decisive date for tax is when the contract was finalised, not the registration date.
• This protection only applies if the payment and transaction documentation are clear and predate the law’s introduction.
• Taxpayers in similar disputes can refer to this ITAT Mumbai order for relief.