No undervaluation trigger under IT Act (Section 56) when asset acquired from Government undertaking at lower value

 Recently, the Hon’ble Income-tax Appellate Tribunal, Kolkata (‘ITAT’), in the case of Kanha Villa LLP (‘the Appellant’), deleted an addition of Rs. 6.59 crore made under Section 56(2)(x) of the Income-tax act, 1961 (‘the Act’), which was based on an enhanced valuation by the District Valuation Officer (‘DVO’) for a property acquired from West Bengal Infrastructure Development Corporation Ltd. (‘WBIDCO’), a state government undertaking. The Hon’ble ITAT held that since the transaction was directly with the State Government entity, there could be no undervaluation or suppression of the purchase price. Accordingly, the addition made on the grounds of undervaluation or suppression of purchase price was deleted.

In the instant case, the Appellant purchased an immovable property, Synthesis Business Park, from WBHIDCO, a State Government entity, for Rs. 4.76 crore. During assessment, the Assessing Officer (‘AO’) referred the property’s valuation to DVO, who assessed its value at Rs. 11.36 crore, substantially higher than the purchase price. Based on this, the AO made an addition of Rs. 6.59 crore under Section 56(2)(x) of the Act, alleging undervaluation of the property. The assessee contended that the transaction was directly with a State Government entity and therefore there could be no suppression or undervaluation of consideration.

The Hon’ble ITAT observed that, as the property had been purchased directly from WBIDCO, a State Government undertaking, there was no basis to allege undervaluation or suppression of the purchase price. Accordingly, the Tribunal held that the addition of Rs. 6.59 crore made by the Assessing Officer on the strength of the District Valuation Officer’s enhanced valuation was unsustainable. The ITAT further noted that the lower authorities had erred in dismissing the appeal without adequately considering the appellant’s submissions and without affording a proper opportunity of personal hearing. In view of these findings, the Tribunal allowed the appeal, deleted the addition made under Section 56(2)(x), and condoned the delay in filing the appeal.

This judgment establishes a significant precedent that property transactions conducted directly with a Government entity cannot be presumed to involve undervaluation or suppression of the purchase price for tax purposes. It reinforces the principle that in such government-related dealings, additions under Section 56(2)(x) based on higher valuations by authorities like the DVO should be carefully scrutinized and cannot be automatically sustained. Consequently, the ruling provides taxpayers clarity and relief from arbitrary valuation adjustments in similar cases, ensuring fair treatment and procedural fairness in income tax assessments.