2020 (10) TMI 610 - AT - Income Tax

Transfer of property u/s 2(47) - capital gain - As submitted by assessee he only entered into an agreement of sale but had not become the owner of the property nor has any right accrued to him thereon and therefore, there was no capital asset owned by the assessee which has been transferred - HELD THAT - As assessee had entered into an agreement of sale and also had received the possession of the property. In the suit before the City Civil Court, for cancellation of the agreement of sale, the assessee had pleaded that there was transfer of property. The assessee had claimed to have a right in the property by virtue of the agreement of sale with possession. Whether such a right can be considered as a capital asset under the Income Tax Act is the question before us. Meaning of the property of any kind - the AO has brought out the assessment order, the decision of the Hon'ble Court wherein even the right in the property has been held to be a capital asset u/s 2(14) - AO treating the sum of ₹ 60.00 lakhs as received for transfer of right in the capital asset cannot be faulted. Computation of capital gains - AO has allowed indexation of only cost of acquisition which is the sum incurred by the assessee for excavation work - litigation between the assessee and the vendors before the City Civil Court, Secunderabad is not in dispute. Assessee s claim of legal expenses ought to have been allowed - Assessee s claim of expenditure towards watch and ward of the property over a period of 10 yrs also cannot be brushed aside. The assessee had been protecting the property from encroachers for a period of 10 years and therefore, it cannot be ruled that the assessee has not incurred any expenditure towards such work. Therefore, we are of the view that a sum of ₹ 10.00 lakhs would be reasonable expenditure towards legal expenses and also towards watch and ward expenses which is to be allowed from the amount received by the assessee for computing the taxable capital gain. We deem it fit and proper to direct the AO to recompute the capital gain after allowing a sum of ₹ 10.00 lakhs towards the above discussed expenses and the assessee s appeal is therefore, treated as partly allowed.

Summary

Issues:
Assessment year 2005-06 - Reopening of assessment u/s 147 - Taxability of amount received under post decretal agreement - Determination of capital gains - Validity of reassessment proceedings - Existence of capital asset - Allowance of expenses towards legal and watch and ward expenses.

Analysis:
The appeal pertains to the assessment year 2005-06, challenging the order of the CIT (A) regarding the taxability of an amount received under a post decretal agreement. The assessee, a construction company, filed its return belatedly, admitting Nil income. The AO reopened the assessment to verify the taxability of Rs. 60.00 lakhs received under the agreement. The assessee contended that the amount was reimbursement for expenses incurred and not capital gains. The AO, however, held that the amount constituted capital gains. The CIT (A) upheld the AO's order, leading to the current appeal.

During reassessment, it was found that the assessee had entered into an agreement for land purchase, which could not proceed due to legal issues. Subsequently, a post decretal agreement was made for the assessee to vacate the property in exchange for Rs. 60.00 lakhs. The AO treated this amount as capital gains, leading to a tax liability of Rs. 4,47,342. The assessee disputed this, claiming the amount was reimbursement for various expenses. The Tribunal analyzed whether the right in the property constituted a "capital asset" under the Income Tax Act.

The Tribunal observed that the assessee had a right in the property by virtue of the agreement and possession. The AO's treatment of the Rs. 60.00 lakhs as consideration for the transfer of this right was deemed correct. However, the Tribunal allowed certain expenses incurred by the assessee, such as legal and watch and ward expenses, to be deducted from the amount received for computing taxable capital gains. Consequently, the AO was directed to recompute the capital gain after allowing Rs. 10.00 lakhs towards these expenses.

In conclusion, the Tribunal partially allowed the assessee's appeal, emphasizing the inclusion of reasonable expenses in the computation of taxable capital gains. The decision highlighted the importance of considering all relevant expenses incurred by the assessee in such transactions to arrive at a fair tax liability assessment.