2017 (8) TMI 403 - AT - Income Tax

Disallowance of the cost of acquisition/cost of improvement - amount paid to the sister in law of the appellant as per the decree of the court - Held that - When the assessee was to step into the shoes of her vendor, Ajit Vohra for all intents and purposes she could not have acquired a better title than Ajit Vohra had, the cost of acquisition of the property in question is required to be taken accordingly. So, merely deciding the issue on the basis of recital in the sale deed that property in question is free from all encumbrances, is incorrect interpretation of the legal proposition. In these circumstances, we are of the considered view that the Assessing Officer/Commissioner of Income-tax (Appeals) have erred on facts and in law disallowing the claim of the assessee that the amount of ₹ 1,20,00,000 belonged to the sister-in-law of the assessee, namely, Sheetal Girdhar for the purpose of computing the long-term capital gain. Identical issue has already been decided in the case titled as ITO v. Taj Services P. Ltd. 2011 (9) TMI 1140 - ITAT MUMBAI wherein it was decided that where compensation paid to a party for surrendering its pre- existing rights in property in question was inextricably connected with transfer of property as one of the conditions for sale of such property, such compensation was deductible from the sale consideration. - Decided in favour of assessee Exemption under section 54 - investment from the sale proceeds of the property - joint ownership - Held that - From the amended provision of section 54 which came into effect from April 1, 2015 held roll over relief under section 54(1) is available if the investment is made in one residential house situated in India and earlier the expression used was a residential house . The amended provisions contained under section 54(1) of the Act have been interpreted in favour of the assessee in the case of CIT v. Khoobchand M. Makhija 2013 (12) TMI 1525 - KARNATAKA HIGH COURT , Thus we are of the considered view that the assessee is entitled for exemption under section 54(1) of the Act qua two residential houses i.e. built up plot No. 59, Block-A, Sector-52, Noida, jointly in the name of Smt. Rama Vohra, Sh. Ajit Vohra and Sh. Punit Vohra of ₹ 86,70,991 and Flat No. 407, Tower-2, Sector-9, Vaishali Extn., Ghaziabad of ₹ 52,87,200. So, grounds determined in favour of the assessee. Exemption qua vacant residential plot purchased for the purpose of constructing a residential house - disallowance made on the ground that the assessee has failed to produce any evidence of his intention to construct a house on a plot of land - Held that - In the given circumstances, when it is not in dispute that the assessee has invested the capital gain in a residential plot purchased for the purpose of constructing of a residential house but has not constructed the residential house, the decision rendered by co-ordinate Bench in the case of Prasad Nimmagadda (2013 (5) TMI 74 - ITAT Hyderabad ) is applicable to the facts of this case. So, the Assessing Officer is directed to allow the exemption claimed by the assessee for the year under assessment and the Assessing Officer is further directed to verify whether the assessee has offered the capital gain for taxation at the end of the period of three years from the date of transfer of the original assets and in case the assessee s claim found to be incorrect then the Assessing Officer is to bring the capital gain to tax in the said years. - Decided in favour of assessee.

Summary

Issues Involved:

1. Legality of additions/disallowances made by the Assessing Officer (AO) and upheld by the Commissioner of Income-tax (Appeals).
2. Disallowance of the cost of acquisition/cost of improvement of ?1,20,00,000 paid to the sister-in-law of the appellant.
3. Jurisdiction of Income-tax authorities versus civil court in respect of the claim of the sister-in-law.
4. Overriding title and diversion of income at the source.
5. Disallowance of deduction of ?52,87,200 invested in a residential house in Ghaziabad.
6. Jurisdiction of the Commissioner of Income-tax (Appeals) in disallowing the benefit of deduction allowed by the AO.
7. Disallowance of the claim of ?1,34,89,114 invested in a residential plot for constructing a residential house.
8. Justification and basis of disallowances made.
9. Consideration of evidence and material on record.
10. Validity of disallowance of payment as cost of acquisition or improvement.
11. Charging of interest under sections 234A, 234B, 234C, and 244A of the Income-tax Act.

Detailed Analysis:

Ground No. 1: General Nature

Ground No. 1 is general in nature and hence does not require adjudication.

Grounds Nos. 2, 3, 4, 8, 9, and 10: Sale Consideration and Cost of Acquisition

The primary issue is whether the sale consideration of the property transferred to the assessee should be taken at ?4,00,00,000 or ?2,80,00,000 after deducting the share of the sister-in-law, Smt. Sheetal Girdhar. The property was originally owned by Shri O. P. Vohra and inherited by Shri Ajit Vohra, the husband of the assessee, through a will dated September 6, 2000. One of the sisters, Smt. Sheetal Girdhar, challenged this will by setting up another will dated February 1, 2002 in her favor.

The AO and Commissioner of Income-tax (Appeals) took the sale consideration at ?4,00,00,000, asserting that the property was transferred free from all encumbrances. However, the Tribunal found that the property was subject to litigation and compromise, wherein 30% of the sale proceeds (?1,20,00,000) was agreed to be paid to Smt. Sheetal Girdhar. The Tribunal held that this amount should be considered part of the cost of acquisition, thus reducing the sale consideration to ?2,80,00,000.

The Tribunal relied on precedents where compensation paid for surrendering pre-existing rights in property was deductible from the sale consideration. Hence, the Tribunal determined these grounds in favor of the assessee.

Grounds Nos. 5 and 6: Exemption under Section 54

The assessee claimed exemption under section 54 for investments in multiple properties. The Commissioner of Income-tax (Appeals) allowed exemption only for one property. The Tribunal noted that the amendment to section 54, limiting the exemption to one residential house, came into effect from April 1, 2015, and was not applicable to the assessment year in question (2011-12).

The Tribunal cited the Karnataka High Court's decision in CIT v. Khoobchand M. Makhija, which interpreted "a residential house" to include multiple properties. Therefore, the Tribunal allowed the exemption for two residential houses, determining these grounds in favor of the assessee.

Ground No. 7: Exemption for Residential Plot

The assessee claimed exemption for a vacant residential plot intended for constructing a house. The AO disallowed this claim, and the Commissioner of Income-tax (Appeals) upheld the disallowance, citing lack of evidence of intention to construct a house.

The Tribunal referred to a decision by the Hyderabad Tribunal in Sri Prasad Nimmagadda v. Deputy CIT, which held that capital gains are taxable only at the end of three years if the house is not constructed within that period. The Tribunal directed the AO to allow the exemption for the assessment year and verify the assessee's compliance at the end of the three-year period. Thus, this ground was determined in favor of the assessee.

Ground No. 11: Consequential Nature

Ground No. 11, related to the charging of interest under various sections, was deemed consequential and required no separate adjudication.

Conclusion

The Tribunal allowed the appeal of the assessee, providing relief on multiple grounds related to the computation of long-term capital gains and exemptions under section 54 of the Income-tax Act. The order was pronounced on June 16, 2017.