2023 (12) TMI 52 - AT - Income Tax

Capital gain computation - Denial of expenses incurred towards removal of encumbrances and indexation thereon for the purposes of determination of tax liability towards capital gain - HELD THAT - Revenue Authorities have questioned the bona fides of the cost of removal of encumbrances in the absence of any direct evidence except for Rs. 15 lakh paid to one Shri Rajender Kumar. On perusal of bank statement, it is noticed that between the period October 2010 to March 2011 certain withdrawals have been identified in the name of several parties. Other similar entries in the name of other occupants are also discernible. We take note of the plea on behalf of the assessee that an amount of Rs. 15 lakh paid to Shri Rajender Kumar has been accepted by the CIT(A) to have been incurred cost of removal of encumbrances. Thus, the cost of removal of encumbrances per se is not in doubt and rather has been accepted on first principles. The quantum of payment to various parties is put under cloud by the Revenue on account of lack of corroboration. Appraisal of bank statement gives an unflinching impression that several parties as named on behalf of the assessee have been paid costs against their respective names. The payments have been made on various dates close to each other to several parties. Thus, the facts when read in conjunction, there appears to be ring of truth in the version of the assessee towards incurring of cost of encumbrances. While holding so, one needs to bear in mind the ground realities prevalent in the indian-socio-ecostructure. One cannot deny that a large population of India stays unauthorizely in the land parcel belonging to others and move out of such land parcels only on payment of some sort of compensation. The legal remedy for removal of the encroachments, at times, is quite slow and it takes many years through such course. The land owners are thus compelled to pay compensation by force of circumstances to obtain clean possession for sale/use. One cannot put blinkers on such unstated but prevalent eco-system. Thus, where at least one party has accepted the factum of receipt of compensation and payments to other parties are also reflected in the bank statement of the assessee company to be the beneficiary of payments, the plea of the assessee requires a benign consideration. Coupled with this, we note that the payments have been made and accounted for in the Financial Year preceding to the Financial Year 2011-12 in question. Thus, the costs incurred and accounted for in an earlier year cannot be ordinarily visited for a review. We are inclined to accept the plea of the assessee for deduction of cost of encumbrances as claimed. Hence, we set aside the order of the CIT(A) and reverse the disallowance carried out by the Assessing Officer on this score. Assessee appeal allowed.

Summary

Issues involved:
The disallowance of expenses incurred towards removal of encumbrances for the purpose of determining tax liability towards capital gain.

Summary:
The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) concerning the disallowance of Rs. 2,12,29,422 claimed as deduction for indexed cost of improvement. The assessee, engaged in real estate business, declared capital gains from the sale of land parcel and claimed deduction for expenses incurred in removing encumbrances on the land. The Assessing Officer disallowed the deduction, leading to an enhanced capital gain. The CIT(A) granted partial relief based on the evidence provided by the assessee, but the assessee appealed to the Tribunal challenging the partial relief granted.

Detailed Judgment:
The assessee contended that the expenses incurred for removing encumbrances were disallowed by the Assessing Officer and partially accepted by the CIT(A). The assessee had purchased land where certain persons claimed rights of possession, leading to encumbrances. Negotiations were conducted with these claimants, and a total of Rs. 2,02,43,749 was paid by the assessee for removal of encumbrances. The cost was reflected in the balance-sheet of the preceding financial year. The assessee sold a portion of the land in the relevant assessment year and claimed deduction for the cost incurred in removing encumbrances. The Revenue Authorities questioned the legitimacy of these expenses due to lack of direct evidence, except for a payment of Rs. 15 lakh to one claimant, Shri Rajender Kumar.

Upon review of the bank statement, it was observed that withdrawals were made in the names of various parties during the period when the expenses were claimed to have been incurred. The Tribunal noted that the payment of Rs. 15 lakh to Shri Rajender Kumar was accepted as a cost of removing encumbrances. The bank statement indicated payments to multiple parties, suggesting the genuineness of the expenses. Considering the socio-economic context of India, where compensation is often paid for encroachments, the Tribunal found merit in the assessee's claim. Additionally, since the costs were accounted for in the preceding financial year, they could not be revisited. Therefore, the Tribunal accepted the plea of the assessee and reversed the disallowance made by the Assessing Officer.

Conclusion:
The Tribunal allowed the appeal of the assessee, setting aside the orders of the lower authorities and accepting the deduction claimed for the expenses incurred towards removal of encumbrances.