2013 (5) TMI 554 - AT - Income Tax

Disallowance of expenditure in computing the income under the head capital gains - Held that - From the proposition of law laid down in Rama Gowda Vs. M. Varadappa Naidu 2003 (12) TMI 583 - SUPREME COURT and considering the facts of the present case where the title is defective, incomplete or imperfect, the cost of making the title complete and perfect can be treated as the cost of acquisition falling u/s. 48. Even adverse possession is a possession having attached rights. The rights are in the nature of occupation and in case the landlord wants to vacate it he has to take legal recourse. In such circumstances, claim of the assessee allowed as deductible u/s. 48. Appeal of assessee is allowed.

Summary

Issues Involved:
1. Disallowance of expenditure claimed under the head Capital Gains.
2. Determination of whether the sum of Rs. 72,00,000/- payable by the appellant is allowable under section 48(i) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure Claimed Under the Head Capital Gains:
The assessee transferred two flats and incurred expenses claimed as damages and compensation. The Assessing Officer (AO) disallowed the deduction of Rs. 72,00,000/-, arguing it was a penalty and not an allowable expense under section 48(1) of the Income-tax Act, 1961. The AO observed that the assessee violated the agreement with Onkar Management Pvt. Ltd. to sell the property at a higher price to a third party, Mrs. Poonam Agarwal. The CIT(A) upheld this disallowance, stating that the payment was a penalty for breach of contract and not an expense incurred wholly and exclusively in connection with the transfer of the property.

2. Determination of Whether the Sum of Rs. 72,00,000/- Payable by the Appellant is Allowable Under Section 48(i):
The Tribunal examined whether the compensation paid by the assessee could be considered as an expenditure incurred wholly and exclusively in connection with the transfer of property. The Tribunal noted that the assessee had entered into an agreement to sell the flats to Onkar Management Pvt. Ltd. and subsequently transferred the property to Mrs. Poonam Agarwal for a higher consideration. The Arbitrator awarded Rs. 72,00,000/- as compensation for breach of the agreement with Onkar Management Pvt. Ltd.

The Tribunal relied on the Supreme Court judgment in the case of Rama Gowda Vs. M. Varadappa Naidu, which established that possession, even if adverse, carries certain rights that must be legally resolved. The Tribunal also referred to the Supreme Court's decision in RM. Arunachalam Vs. CIT, which held that expenses incurred to clear a mortgage created by the previous owner are deductible under section 48 as the cost of acquisition.

The Tribunal concluded that the payment made to Onkar Management Pvt. Ltd. to settle the dispute and clear the title of the property was necessary to make the title complete and perfect. Therefore, it should be treated as the 'cost of acquisition' under section 48 of the Act.

Conclusion:
The Tribunal allowed the appeal, holding that the sum of Rs. 72,00,000/- paid as compensation was deductible under section 48 of the Income-tax Act, 1961, as it was incurred to make the title of the property complete and perfect. The appeal of the assessee was allowed, and the disallowance made by the AO and confirmed by the CIT(A) was overturned.