2016 (5) TMI 429 - AT - Income Tax

Disallowance of exemption u/s 54EC - Treatment to capital gains - LTCG or STCG - Held that - As per agreement of sale deed executed on 7.3.1973 which has been duly registered with the Sub-registrar of Assurance, Mumbai under S-2489/82 in the name of the assessee, the assessee has acquired right in the property from the date of agreement to sale dt. 7.3.1973. We also find that on 24.1.1983 assessee obtained an order and injunction against the vendor preventing the vendor from alienating, encumbering, transferring parting with the possession of the suit property. The order of the Hon ble Court clearly evidences that the court accepted assessee s claim, right title and interest in the property conferred upon vide agreement dated 1973. In view of the above, it is clear that right of assessee in the property is existed since from 1973. Clause 2(a) of Consent Term in the Suit before Hon ble Bombay High Court also clarifies that agreement of 1973 was valid. Accordingly, we do not find any infirmity in the action of CIT(A) for treating capital gains as long term capital gains. Accordingly, we do not find any infirmity in the action of CIT(A) for treating capital gains as long term capital gains. Indexation - deduction paid to partner to remove encumbrance disallowed - Held that - CIT(A) has allowed indexation from 19.7.1981 in place of date of acquisition of property in the year 1973. Since the property was acquired vide agreement of sale deed executed on 7.3.1973 which was duly registered with the Sub-registrar, we direct the AO to allow indexation by taking fair market value as on 1.4.1981. As per Sec. 2(29A) and 2(42A) holding period will be counted from the date from which assessee held the asset i.e. when right in capital asset was vested to assessee which is from the date of allotment or agreement for sale. It does not require that property should be conveyed. Even if the land was purchased, but not conveyed in the name of the assessee it will not affect the holding period of asset. As per Sec. 48 if the expenditure is incurred wholly and exclusively in connection with transfer of capital asset, in that situation expenditure is allowable. The above condition is satisfied in present case because one can sell the property only when the property is free from encumbrance. In the instant case, in a firm, if any partner disagrees to sell the property, the firm cannot sell the property which it is intending to sell. To sort out such a problem and to make property, which is intended to be sold, without any encumbrance, it is necessary to settle the difference between the partners by either convincing the partner for selling the property or to retire the said partner by paying his dues and claim. Thus, the assessee firm in order to clear the encumbrance on property has paid Smt. Sushila Devi ₹ 54 lakhs in addition to credit balance in her capital. Only after that assessee been able to file the consent term before the Hon ble High Court on same day i.e. 21.12.2005. otherwise neither consent term will be filed nor assessee before court gets the property conveyance. Hence, it is paid wholly and exclusively for the purpose of sale of capital asset. In view of the above, there is no justification in the order of lower authorities for enhancing capital gains by not allowing deduction paid to partner to remove encumbrance.

Summary

Issues involved:
Cross-appeals on ITA No. 3084/Mum/2011 & 3866/Mum/2011, cross objection CO No. 14/Mum/2012 by the assessee against the order of CIT(A)-27, Mumbai for A.Y 2007-08 regarding the order passed u/s 143(3) of the Income Tax Act, 1961.

Detailed Analysis:

1. Capital Gains Classification:
The case involved the conversion of a property from a capital asset to stock in trade, leading to capital gains and business profits upon sale. The Assessing Officer (AO) treated the asset as a short-term capital asset, disallowing the claim for deduction u/s 54 EC. However, the CIT(A) classified the asset as long-term, allowing indexation from 19.7.1981. The ITAT upheld the CIT(A)'s decision, considering the agreement of sale deed from 7.3.1973 and the injunction obtained by the assessee in 1983 as evidence of ownership since 1973.

2. Encumbrance Compensation Deduction:
The AO disallowed the deduction of ?54 lakhs paid to remove encumbrances on the property, considering it as short-term capital gains. The ITAT disagreed, stating that the payment was wholly and exclusively for the purpose of selling the capital asset, satisfying the conditions under Sec. 48. The payment was deemed necessary to resolve issues with a partner and clear encumbrances, allowing the property to be sold.

3. Penalty Imposition:
An appeal was filed against the penalty imposed under Sec. 271(1)(c) of the Act for the disallowed deduction of ?54 lakhs. As the ITAT allowed the deduction in the quantum appeal, the penalty was deemed unjustified, and the AO was directed to delete it.

In conclusion, the ITAT dismissed the revenue's appeal, partially allowed the assessee's appeal and cross-objection, and directed the deletion of the penalty imposed. The decision was based on the ownership evidence from the agreement of sale deed and the injunction obtained, along with the justification for the encumbrance compensation deduction as a necessary expense for the sale of the capital asset.