2014 (11) TMI 1161 - AT - Income Tax

Disallowances in respect of capital gains - allowable expenditure u/s 48 - legal right in the compensation amount - Diversion By Overriding Title - Held that - It is an obligation created as part of the agreement and there is no dispute that the amounts are collected from the buyers and paid to the developer. Since, these amounts are included in the sale consideration, assessee can certainly claim the amount in order to arrive at full value of consideration. Since, there is contractual obligation to pay the above amounts, Ld. CIT(A) is correct in allowing the amounts. Hon ble A.P. High Court in the case of CIT vs. Manohar Rao, Managing Director 1984 (10) TMI 35 - ANDHRA PRADESH High Court considered the scope of full value of consideration in a case and held that capital gain had to be computed by taking into account only the amount which was actually received by assessee. In that case, assessee owns 4.27 gts of land, had entered into an agreement to sell the land at ₹ 25,000 per acre. Subsequent to that, the land was acquired by Government and only an amount of ₹ 2,20,220 was received by assessee. As assessee has entered into agreement, assessee paid an amount of ₹ 1,05,220 immediately on receipt of compensation to the agreement holder and offered the balance amount of ₹ 1,20,000 as capital gain. Considering the facts of the case and the fact that there is a legal right in the compensation amount, Hon ble High Court held that this is a case of diversion of income by overriding title. Since, in assessee s case also there is contractual right in paying amounts, we confirm the order of Ld. CIT(A) and dismiss Revenue grounds.

Summary

Issues:
1. Disallowance of deduction directed by Ld. CIT(A) of Rs. 31,32,000 from full value of consideration.
2. Interpretation of legal constraints under sec. 48 of the I.T. Act regarding capital gains.

Analysis:
1. The appeal by the Revenue challenged the order of Ld. CIT(A) regarding the deduction of Rs. 31,32,000 from the sale consideration received by the assessee from the sale of land and flats. The Revenue contended that the disallowances in respect of capital gains were not justifiable under sec. 48 of the I.T. Act. The Ld. CIT(A) allowed the deduction based on the obligations created between the builder and the landowner as per the agreement. The Ld. CIT(A) considered the documents submitted by the appellant, confirming the obligation to collect charges from buyers and remit them to the builder. The Ld. CIT(A) concluded that the disallowed amount was not actually received by the appellant and hence should not be considered as income, directing the Assessing Officer to deduct it from the full value of consideration. The Tribunal upheld this decision citing the contractual obligation and the precedent set by the Hon'ble A.P. High Court in a similar case.

2. The second issue revolved around the interpretation of legal constraints under sec. 48 of the I.T. Act concerning capital gains. The Revenue argued that the Assessing Officer should not have allowed deductions beyond the purview of sec. 48. However, the Ld. CIT(A) and the Tribunal found merit in the appellant's claim based on the contractual obligations established in the agreement. The Tribunal referred to a previous case where the Hon'ble A.P. High Court had considered the scope of full value of consideration and held that capital gains should be computed based on the amount actually received by the assessee. Drawing parallels with this precedent, the Tribunal dismissed the Revenue's appeal, confirming the allowance of deductions as per the contractual obligations outlined in the agreement.

In conclusion, the Tribunal upheld the decision of Ld. CIT(A) to allow the deduction of Rs. 31,32,000 from the full value of consideration, emphasizing the contractual obligations established in the agreement between the builder and the landowner. The judgment highlighted the importance of considering actual receipts in computing capital gains and reiterated the significance of honoring contractual rights in such matters.