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2010 (11) TMI 119 - AT - Income TaxDisallowance of deduction - wholly and exclusively in connection with transfer - sec. 48(i) of the Act - transfer of industrial plots could be registered only after getting no objection certificate from the GIDC, - the payment of non-use penalty of Rs. 21,80,640 was paid - In case plot/shed is not utilized within stipulated time limit extensions may be granted in genuine cases, subject to charging of non-utilization penalty at the rate of 1% for first year, thereafter 2% for the second, 3% for third year and at 4% for subsequent years of the prevailing allotment price for the said year - Held that - The assessee has miserably failed to establish before the lower authorities and even before us that the said amount of penalty towards non-usage charges is an expenditure incurred wholly and exclusively in connection with transfer of two industrial plots allotted by GIDC to the assessee or is part of cost of improvement of the said two plots Appeal is dismissed
Issues Involved:
1. Disallowance of the deduction of Rs. 21,80,640 paid towards non-use charges while computing capital gain. 2. Whether the non-use charges can be considered as cost of improvement. Issue-Wise Detailed Analysis: 1. Disallowance of Deduction of Rs. 21,80,640 Paid Towards Non-Use Charges While Computing Capital Gain: The primary issue revolves around whether the amount of Rs. 21,80,640 paid as a penalty to Gujarat Industrial Development Corporation (GIDC) for non-use of two industrial plots can be deducted as an expenditure incurred wholly and exclusively in connection with the transfer of these plots under section 48(i) of the Income-tax Act, 1961. The assessee claimed this deduction, arguing that the payment was necessary to secure a "no objection" certificate from GIDC, which was required to register the transfer of the plots. The Assessing Officer (AO) initially disallowed this claim, stating that the expenditure was not incurred wholly and exclusively in connection with the transfer. The CIT(A) initially allowed the appeal, but the ITAT remanded the case to the AO for further examination of whether there was any encumbrance on the property sold and the terms and conditions with GIDC. Upon reassessment, the AO again disallowed the claim, referencing several judicial decisions and reiterating that the penalty for non-use was not connected to the transfer of the plots. The CIT(A) upheld this disallowance, emphasizing that the penalty was due to the assessee's violation of the terms of the allotment and not an encumbrance on the property. The CIT(A) concluded that the payment for non-use penalty was not an expenditure incurred wholly and exclusively in connection with the transfer of the plots. The ITAT, upon hearing the appeal, agreed with the AO and CIT(A), noting that the assessee failed to establish that the penalty was an expenditure incurred wholly and exclusively in connection with the transfer. The ITAT highlighted that the payment was to protect the title and possession of the plots, not directly linked to their transfer. The ITAT also referenced the Supreme Court's decisions in similar cases, concluding that the penalty for non-use does not qualify for deduction under section 48(i). 2. Whether the Non-Use Charges Can Be Considered as Cost of Improvement: The assessee alternatively argued that the non-use charges should be treated as the cost of improvement under section 48(ii) of the Act. However, the ITAT rejected this argument, stating that the payment of the penalty for non-usage does not constitute an addition or alteration to the capital asset (the plots) and therefore does not qualify as a cost of improvement as defined under section 55 of the Act. Conclusion: The ITAT dismissed the appeal, upholding the disallowance of the deduction of Rs. 21,80,640 paid towards non-use charges while computing the capital gain. The ITAT concluded that the penalty for non-use was not an expenditure incurred wholly and exclusively in connection with the transfer of the plots and did not qualify as a cost of improvement. Consequently, the appeal was dismissed in its entirety.
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