1990 (8) TMI 184 - AT - Income Tax

Summary

Issues Involved:
1. Assessee's claim for deduction of Rs. 43,00,000 under section 48(i) of the Act in computing long-term capital gain.

Detailed Analysis:

1. Assessee's Claim for Deduction of Rs. 43,00,000:

The only point involved in this appeal pertains to the assessee's claim for deduction of Rs. 43,00,000 under section 48(i) of the Act, in computing the long-term capital gain chargeable to tax. The assessee, a company dealing in various types of papers on an agency basis, owned the first floor of Majithia Chambers and had agreements with M/s. Chimanlal Paper Co. (CPC) and M/s. Chimanlal Pvt. Ltd. (CPL) for allotting portions of the floor to them. During the relevant previous year, the assessee decided to transfer the first floor to the Trustees of eight trusts for Rs. 55,00,000, who insisted on vacant possession.

The assessee entered into agreements with CPC and CPL to vacate the premises for Rs. 37,00,000 and Rs. 6,00,000 respectively. The assessee claimed these amounts as deductions under section 48(i) while computing the capital gain. The ITO disallowed the claim, stating that CPC and CPL had no enforceable rights and the compensation was a device to reduce tax liability. The capital gain was computed at Rs. 45,22,030 without allowing the deduction.

In appeal, the CIT(A) upheld the ITO's decision, emphasizing that the agreements with CPC and CPL did not transfer any rights to them and the payment of compensation was a tax avoidance device. The assessee argued that the compensation was necessary to give vacant possession to the buyer and relied on judicial precedents supporting such deductions.

The Tribunal considered the submissions and material on record, concluding that the assessee should succeed in the appeal. The Tribunal observed that the close relationship between the parties should not detract from the issue and that the arrangement to obtain vacant possession was reasonable and necessary to avoid litigation. The payments made to CPC and CPL were fair and reasonable, and the compensation was not a device to reduce tax liability. The Tribunal relied on judicial precedents, including the cases of A. Venkataraman and C.V. Soundararajan, which supported the assessee's claim for deduction under section 48(i).

The Tribunal directed the ITO to accept the assessee's claim for deduction of Rs. 43,00,000 and modify the assessment accordingly, allowing the appeal in favor of the assessee.