2016 (1) TMI 608 - AT - Income Tax

Computation of Long term capital gain - disallowance of amount paid by the assessee out of the sale proceeds of the flat to her son, Mr Ketan C Shah can be allowed as deduction u/s 48(i), being expenditure incurred wholly and exclusively in connection with the transfer of an asset? - Held that - If the assessee himself has created a mortgage or encumbrance and then same consequence shall not follow. Thus, if the assessee acquires a property in inheritance fully or partially with any kind of encumbrance therein, then any obligation amount spent to remove that encumbrance has to be treated as an expenditure wholly connected with the transfer of the property. Here in this case, the encumbrance was in the form of a right and interest of one of her son Mr. Ketan C Shah and if such an encumbrance would not have been removed, that is, amount of share of his right had not been settled or given to him then the property itself would have gone in dispute which could have led to long-drawn litigation within the family and the subsequent purchases would not have got the clear title. This dispute has been resolved through Arbitral Award which itself goes to show that the encumbrance has to be discharged by making the payment to her son from the sale proceed of the flat and this had been eventually done after the property was sold. Thus, in our opinion the payment made by the assessee to her son was purely on account of discharge of the encumbrance on the property which has to be reckoned and treated as expenditure in connection with the property, therefore, deduction of such cost has to be allowed as cost of acquisition while computing the long-termcapital- gain. Accordingly, disallowance of ₹ 40 lakhs as made by the AO and confirmed the CIT(A) is deleted. Disallowances of Indexed Cost of Improvement and Amount paid through the builder to BDP enterprise as reinvestment in flat - So far as other disallowances are concerned, we are in agreement with the finding and conclusion of the CIT(A), as the assessee has failed to furnish any concrete evidence with regard to any of the expenditure or payment made by the assessee which has been claimed towards cost of acquisition. Even before us, the position remains the same, therefore on these two disallowances of Indexed Cost of Improvement and Amount paid through the builder to BDP enterprise as reinvestment in flat the addition gets confirmed. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Rs. 40,00,000/- paid to the assessee's son for surrender of occupancy rights.
2. Disallowance of Rs. 8,27,844/- claimed as Indexed Cost of Improvement.
3. Disallowance of Rs. 4,94,600/- paid to the builder for reinvestment in a new flat.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 40,00,000/- Paid to Assessee's Son:
The assessee challenged the disallowance of Rs. 40,00,000/- paid to her son, Mr. Ketan C Shah, as compensation for surrendering his occupancy rights in the flat. The Assessing Officer (AO) and CIT(A) both disallowed this claim, stating that the son had no legal right or title to the flat, and the payment was not mentioned in the sale agreement. They viewed it as an appropriation of sale proceeds rather than an expenditure incurred wholly and exclusively in connection with the sale.

However, the Tribunal noted that the flat was jointly owned by the assessee and her husband and, upon her husband's death, the property was inherited by the assessee and her two sons. Due to a family dispute, an Arbitration Agreement was entered into, resulting in an award directing the assessee to pay Rs. 40,00,000/- to her son to clear his claim on the property. The Tribunal held that this payment was necessary to remove the encumbrance on the property, thereby facilitating its sale. Citing precedents from the Supreme Court, the Tribunal allowed the deduction of Rs. 40,00,000/- as expenditure incurred wholly and exclusively in connection with the transfer of the property under Section 48(i).

2. Disallowance of Rs. 8,27,844/- Claimed as Indexed Cost of Improvement:
The assessee claimed Rs. 8,27,844/- as the Indexed Cost of Improvement, incurred in the financial year 1983-84. The AO disallowed this claim due to the absence of any supporting evidence. The CIT(A) upheld this disallowance, noting the lack of credible evidence.

The Tribunal agreed with the CIT(A) that the assessee failed to furnish any concrete evidence to substantiate the expenditure claimed for the improvement. Therefore, the disallowance of Rs. 8,27,844/- was confirmed.

3. Disallowance of Rs. 4,94,600/- Paid to Builder for Reinvestment in New Flat:
The assessee claimed Rs. 4,94,600/- paid to BDP Enterprise for making a newly purchased flat habitable. The AO disallowed this claim due to insufficient evidence, and the CIT(A) upheld the disallowance.

The Tribunal found that the assessee did not provide any concrete evidence to support the payment claimed. Therefore, the disallowance of Rs. 4,94,600/- was confirmed.

Conclusion:
The appeal was partly allowed. The Tribunal allowed the deduction of Rs. 40,00,000/- paid to the assessee's son as expenditure incurred wholly and exclusively in connection with the transfer of the property. However, the disallowances of Rs. 8,27,844/- and Rs. 4,94,600/- were confirmed due to a lack of supporting evidence.