2009 (10) TMI 618 - AT - Income Tax

Computation of LTCG - transfer of property - Application of section 50C - Change in the provisions between the dates when the transactions were entered into - assessees entered into an agreement in August, 2001 for sale of impugned property. However, the actual registration of sale could be completed only in October, 2004 for certain reasons. At the time of entering into the agreement, s. 50C was not in the statute book and the same was introduced only w.e.f. 1st April, 2003. - Held that - the assessees herein have fulfilled a contractual obligation in October, 2004, which they are bound by law to carry out as per the sale agreement entered in August, 2001. We have already stated that the delay in carrying out the contractual obligations has occurred for genuine causes and for reasons beyond the control of the assessees. The provisions of s. 50C cannot be applied to the sale agreement as the said section was not available in the statute book at that time. Even otherwise, as stated earlier, there is no suppression of actual consideration. Consequently, since the final registration of the sale is only in fulfilment of the contractual obligation, the logical conclusion is that the provisions which do not apply at the time of entering into the transaction initially would not also at the time the transaction is completed. Application of income or division of sale consideration - Held that - The undisputed fact is that the assessees had to make payment to the Masetty family as well as to Smt. A. Chittamma, since both of them also claimed themselves to be the legal heirs of Shri P. Venkateswara Rao. Thus by raising such a claim, they have created an encumbrance over the impugned property. There cannot be any dispute that once an encumbrance is created over a property, its sale cannot be completed unless the said encumbrance is cleared of, as there will always be a threat of litigation. - Payment made to Masetty family and Smt. A. Chittamma allowed. Expenses incurred on vacation of premises, court expenses and commission for arranging sale etc. - held that - a reasonable estimate should be made towards the expenses and the same should be allowed in computation of capital gains. On a conspectus of the matter, we are of the view that an estimate of Rs. 8 lakhs towards the payment made to the tenants and brokers would meet the ends of justice and we order accordingly. Regarding adoption of cost as on 1st April, 1981 - As observed by the learned CIT(A), the assessees could not produce any evidence to show that the impugned property could have fetched more value than the cost certified by the Jt. Sub-Registrar - Decided against the assessee. Regarding indexation benefit - CBDT Circular No. 636 dt. 31st Aug.- indexation is to be allowed in respect of the period of holding the asset and not in relation to the individuality of the assessee - as per provisions of s. 2 (24A), in determining the period for which any capital asset is held by the assessee, in the case of capital asset which becomes the property of the assessee by way of succession, inheritance etc., the period for which the asset was held by the previous owner shall also be included - it is a settled proposition that when two views are possible, the view which is in favour of the assessee has to be adopted Regarding exemption u/s 54 - Held that the learned CIT(A) restricted the exemption under s. 54 of the Act to Rs. 27.48 lakhs and rejected the claim of the assessee for exemption for the second house, by following the decision of Special Bench of Mumbai Tribunal in the case of ITO vs. Ms. Sushila M. Jhaveri (2007 -TMI - 59614 - ITAT BOMBAY-I ) - Decided against the assessee

Issues Involved:
1. Applicability of Section 50C of the Income Tax Act to the transfer of property.
2. Disallowance of payments made to Masetty family and A. Chittamma.
3. Disallowance of other expenses and cost of improvement.
4. Extent of constructed area on the sold property.
5. Adoption of cost as on 1st April 1981 for computation of capital gains.
6. Indexation benefit from the financial year 1989-90 or 1st April 1981.
7. Exemption under Section 54 for investment in a second residential house.

Issue-wise Detailed Analysis:

1. Applicability of Section 50C:
The Tribunal analyzed whether Section 50C, which mandates adoption of the value assessed by the stamp valuation authority if it is higher than the sale consideration, applies to the transfer of the impugned property. The assessees argued that the sale agreement was entered into before Section 50C was enacted and that the delay in registration was due to reasons beyond their control. The Tribunal, referencing the Supreme Court's decision in K.P. Varghese and other cases, concluded that the provisions of Section 50C should not apply as the transaction was bona fide and there was no suppression of actual consideration.

2. Disallowance of Payments to Masetty Family and A. Chittamma:
The Tribunal considered whether payments made to the Masetty family and A. Chittamma, who claimed to be legal heirs and created encumbrances on the property, should be deductible. The Tribunal referenced judicial precedents, including the Madras High Court's decision in Bradford Trading Co. (P) Ltd. and the Supreme Court's decision in V. Jaganmohan Rao, and concluded that such payments were necessary to remove encumbrances and hence deductible.

3. Disallowance of Other Expenses and Cost of Improvement:
The Tribunal upheld the disallowance of Rs. 5 lakhs paid to M/s Sai Srinivas Enterprises and Rs. 2 lakhs for cost of improvement, as the assessees failed to substantiate these claims with evidence. However, for expenses related to vacation of premises and commission for arranging the sale, the Tribunal allowed a reasonable estimate of Rs. 8 lakhs, considering the circumstantial evidence.

4. Extent of Constructed Area:
The Tribunal upheld the tax authorities' decision to restrict the constructed area to 2,000 sq. ft. in the ground floor and 1,000 sq. ft. in the first floor, as disclosed in the registered sale deed, due to lack of other evidence.

5. Adoption of Cost as on 1st April 1981:
The Tribunal upheld the adoption of Rs. 150 per sq. yd. as the cost as on 1st April 1981, based on the certificate from the Joint Sub-Registrar, as the assessees failed to provide evidence supporting a higher value.

6. Indexation Benefit:
The Tribunal upheld the CIT(A)'s decision to allow indexation benefit from 1st April 1981, referencing the provisions of Section 49(1)(iii)(a) and judicial precedents that support the inclusion of the period the asset was held by the previous owner for indexation purposes.

7. Exemption under Section 54 for Second Residential House:
The Tribunal upheld the CIT(A)'s decision to restrict the exemption under Section 54 to one residential house, following the Special Bench decision in Ms. Sushila M. Jhaveri, which interpreted "a residential house" to mean one single residential unit. The Tribunal distinguished this case from the Karnataka High Court's decision in D. Ananda Basappa, noting that the facts were different.

Conclusion:
The appeals of the assessees were partly allowed, providing relief on some issues such as the applicability of Section 50C and payments made to remove encumbrances. However, the appeals of the Revenue were dismissed, and the decisions of the CIT(A) on other issues were upheld.

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