2021 (7) TMI 915 - HC - Income Tax

Expenditure incurred in connection with transfer of the capital asset - compensation by the appellant to the lessee can be claimed as expenses - assessee had executed a lease deed in favour of the lessee on 22.02.1996 for a period of 40 years in respect of land measuring 29,845 square feet - HELD THAT - As pertinent to mention here that the assessee for the AY 2007-08 had offered an income of ₹ 10,05,000/- from the lessee under the head of 'House Property', which was accepted by the AO and the aforesaid rental income was taxed. Subsequently, it is not open for the AO to deny the existence of the aforesaid transaction in the subsequent Assessment Year. As pertinent to note that lease deed was executed in the year 1996 in favour of the lessee and was cancelled in the year 2009 after a period of 13 years. The reference to the lease deed is found even in the registered sale deed dated 13.05.2009. The lessee had offered the amount received by it as income in its return. The amount was paid by the assessee and was an expenditure incurred wholly and exclusively for transfer of an asset and therefore, it is deductible u/s 48 - The findings recorded by the authorities under the Act is perverse. Substantial question are answered in favour of the assessee and against the revenue.

Summary

Issues:
1. Deductibility of compensation amount under Section 48 of the Income Tax Act, 1961.
2. Genuineness of the transaction and payment of compensation for surrender of land.
3. Adjudication of interest levy under Section 234B and 234C of the Act.

Analysis:

Issue 1: Deductibility of compensation amount under Section 48
The appellant, a private limited company, paid a compensation of ?1 Crore to a lessee to vacate leased premises. The Assessing Officer disallowed this amount, claiming it was not deductible under Section 48 of the Income Tax Act, 1961. The appellant argued that the compensation was a genuine expense related to the transfer of a capital asset. The High Court found that the compensation was incurred wholly and exclusively for the transfer of the asset and hence deductible under Section 48. The court noted that the authorities' findings were deemed perverse, and substantial questions of law were answered in favor of the assessee.

Issue 2: Genuineness of the transaction and payment of compensation
The appellant leased out land to a lessee, later paying compensation to cancel the lease and selling a portion of the property. The Assessing Officer found the transaction non-genuine as the lessee remained in possession post-sale. However, the court observed that the lease cancellation occurred after 13 years, with the lessee acknowledging the income received. The court deemed the compensation expenditure valid under Section 48, disagreeing with the authorities' findings and ruling in favor of the appellant.

Issue 3: Adjudication of interest levy under Section 234B and 234C
The appellant raised concerns about the tribunal not adjudicating the levy of interest under Section 234B and 234C of the Act. However, the court did not provide detailed analysis or ruling on this specific issue in the judgment.

In conclusion, the High Court allowed the appeal, quashing the tribunal's order related to the substantial legal questions involved in the case. The court upheld the deductibility of the compensation amount paid by the appellant and emphasized the genuineness of the transaction despite the Assessing Officer's contrary findings.