2022 (12) TMI 863 - AT - Income Tax

Long term capital gain - allowable expenditure u/s. 48(i) for the purpose of computing the taxable component of long term capital gain - interest payment on security deposit towards clearance of encumbrance with Ramaniyam and payment of compensation to SAE BJT for vacating the land and obtaining its peaceful possession for the purpose of completing the sale transaction - HELD THAT - As conclusions flowing from the explanations and evidences furnished by the assessee in the present case are leading us to consider the doctrine of preponderance of human probabilities and the surrounding circumstances in respect of the claims made. Instead of adopting superficial approach, claim of the assessee is to be examined in the light of real life probabilities which have been so done by the ld. AO. In respect of impugned land on which computation of long term capital gain is the subject matter of this appeal, on one hand it has been said to be used under lease arrangement for the business operations of two concerns (SAE and BJT) wherein the co-owners including assessee have substantive holding/controlling interest and on the other hand the same land is said to be developed under a JDA with one party Ramanaiyam. The same land has been sold in the year under consideration giving rise to long term capital gains to the three co-owners who have attempted to minimize their taxability on the said gains by resorting to the two arrangements relating to the impugned land with SAE BJT and Ramanaiyam, respectively. Claims by the assessee under the arrangements made tantamount to diversion of sale proceeds to which we do not ascribe our views favorably considering the facts and circumstances of the case as discussed above. Thus we set aside the order of ld. CIT(A) and uphold the disallowance made by the ld. AO in respect of claim of deduction made by the assessee towards payment of compensation to SAE and BJT and to Ramanaiyam towards interest for clearance of encumbrance.Appeal of the revenue is allowed.

Summary

Issues Involved:
1. Deduction of interest paid on security deposit to Ramaniyam Real Estate Pvt. Ltd.
2. Deduction of compensation paid to Sri Aravind Enterprises and B.J. Textile Company Ltd.
3. Whether the payments made qualify as expenditure under Section 48 of the Income-tax Act, 1961.

Detailed Analysis:

1. Deduction of Interest Paid on Security Deposit to Ramaniyam Real Estate Pvt. Ltd.
The assessee claimed a deduction for interest paid on a security deposit to Ramaniyam Real Estate Pvt. Ltd., asserting it was for clearing an encumbrance due to the cancellation of a Joint Development Agreement (JDA). The CIT(A) allowed this deduction, considering it as an expenditure incurred wholly and exclusively in connection with the transfer of property under Section 48(i) of the Income-tax Act. However, the Tribunal found that the alleged encumbrance was self-created and not a legitimate charge on the property. The Tribunal noted that no substantial efforts were demonstrated by the assessee to fulfill the JDA conditions, and thus, the interest payment did not qualify as a deductible expense.

2. Deduction of Compensation Paid to Sri Aravind Enterprises and B.J. Textile Company Ltd.
The assessee paid compensation to Sri Aravind Enterprises (SAE) and B.J. Textile Company Ltd. (BJT) for vacating the land and claimed these payments as deductions under Section 48(i). The CIT(A) allowed these deductions, considering them necessary to obtain unencumbered possession of the land for its sale. However, the Tribunal noted that both SAE and BJT were related parties, with the assessee and his family holding significant shares in these entities. The Tribunal concluded that these payments were essentially self-compensations and did not qualify as expenses incurred wholly and exclusively in connection with the transfer of property. The Tribunal also highlighted that the businesses of SAE and BJT were already in a loss scenario prior to the sale, negating the claim that the sale would cause business losses.

3. Qualification of Payments as Expenditure Under Section 48
The Tribunal examined whether the payments made to Ramaniyam, SAE, and BJT qualified as expenditures under Section 48 of the Act. It referred to the legal understanding of 'encumbrance' and found that the payments did not meet the criteria. The Tribunal emphasized that the transactions appeared to be diversions of sale proceeds to related parties rather than legitimate expenditures incurred in connection with the transfer of the property. The Tribunal relied on the principles of 'preponderance of human probabilities' and 'surrounding circumstances' to conclude that the claims made by the assessee were not genuine.

Conclusion:
The Tribunal set aside the order of the CIT(A) and upheld the disallowance made by the AO regarding the deductions claimed for payments to Ramaniyam, SAE, and BJT. It concluded that these payments did not qualify as expenditures under Section 48 of the Income-tax Act, 1961, and were essentially diversions of sale proceeds to related parties. The appeal of the revenue was allowed.