2011 (9) TMI 1235 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the agreement for sale.
2. Whether the service charges paid by the assessee are deductible in computing capital gains.
3. Whether the payment of service charges amounts to diversion of income by overriding title.

Issue-wise Detailed Analysis:

1. Validity of the Agreement for Sale:
The primary issue was whether the agreement for sale between the assessee's mother and Mr. Suresh H. Mansukhani & Others was valid. The assessee's mother had entered into an agreement on 7.8.1993 to sell her rights in a plot of land at Worli for Rs. 2.75 crores, with specific terms regarding the Indian Navy's occupation of the land. The Assessing Officer (A.O.) doubted the validity of this agreement, arguing that it was not executed as the property was never released by the Indian Navy, and no deed of transfer was completed. The Commissioner of Income Tax (Appeals) [CIT(A)] found the agreement valid, noting that the agreement had two parts: one for the sale of the land and the other for representing the vendor in acquisition proceedings if the land was acquired by the Indian Navy. The CIT(A) concluded that the agreement's second part was acted upon, making the agreement valid despite the non-completion of the sale.

2. Deductibility of Service Charges in Computing Capital Gains:
The A.O. disallowed the deduction of service charges paid by the assessee to Mr. Suresh H. Mansukhani & Others, claiming the payment was bogus and an attempt to divert taxable income. The CIT(A) accepted the assessee's claim, stating that the service charges were a valid contractual obligation inherited by the assessee along with the property. The CIT(A) noted that the agreement required the purchasers to represent the vendor in acquisition proceedings and ensure the compensation was commensurate with the market value, justifying the payment of 1/3rd of the total consideration as service charges. The CIT(A) found that the services were indeed rendered, supported by a letter from the Commissioner, Konkan Division, and the fact that the payees had incurred litigation expenses and filed returns showing the receipt of the money.

3. Diversion of Income by Overriding Title:
The assessee contended that the payment of service charges constituted a diversion of income by overriding title, as the obligation to pay was inherited along with the property. The Tribunal rejected this contention, stating that for the rule of diversion of income by overriding title to apply, the obligation must be a charge on the source of income itself. In this case, the compensation was received by the assessee directly and the service charges were paid separately to discharge a contractual liability, making it an application of income rather than a diversion by overriding title.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, affirming that the agreement for sale was valid and the service charges paid by the assessee were deductible in computing capital gains as they were expenses incurred in connection with the transfer of the property. The Tribunal dismissed the revenue's appeal, concluding that the payment of service charges did not amount to diversion of income by overriding title.