2015 (1) TMI 603 - AT - Income Tax

Cost of construction and indexation thereon disallowed - computation of capital gain - Held that - Relevant balance sheet for arriving at the conclusion required that these companies constructed the buildings can only be examined from the balance sheet of 31.3.1997. If the examination of these balance sheets as of this year reveals that there was no building appearing in the fixed assets, then the obvious conclusion is that initially building was constructed by assessee and further these tenant companies had made further additions, the value of which is represented in the balance sheets of these companies as on 31.3.2005. Therefore, for this verification we set aside the issue to the office of Assessing Officer with a direction to verify the balance sheets of these companies for the years 31.3.1997 and if there is no amount appearing with respect to buildings, then he should allow the benefit to the assessee as all other evidences are in favour of assessee. Regarding cost incurred, the Assessing Officer can get verified the valuation report for the purpose of rates taken by valuer as the constructed area matches with the occupancy certificate. Regarding indexation, the same can be given from financial year 1996-97 as the occupancy certificate dated 28.5.1997 establishes the completion of building before 28.5.1997. - Decided in favor of assessee for statistical purposes. Cost of improvement disallowed - Held that - Disallowance on the account that payments were not made by the assessee and these were made by the husband of the assessee is not a valid disallowance as the Assessing Officer has not otherwise doubted the payments. Cost of building as appearing as on 1.4.2006 as per paper book page 140 is ₹ 1,17,77,207/- and on receipt of compensation of ₹ 1,30,00,000/- the assessee reduced the total amount from building account in subsequent year , therefore, there is nothing wrong in it as when an asset is sold for an amount which exceeds the cost price, the only amount which can be reduced from the cost price is maximum up to cost price appearing in the balance sheet. Therefore, upholding of disallowance relying upon these findings is not correct. - Decided in favor of assessee.

Issues Involved:
1. Disallowance of the cost of construction and indexation thereon.
2. Disallowance of the cost of improvement paid to Excalibur India P. Ltd. and Texcon India Pvt. Ltd.
3. Disallowance of the deduction of payment spent by the assessee to clear the dues of Concepts India Pvt. Ltd.

Issue-wise Detailed Analysis:

1. Disallowance of the Cost of Construction and Indexation Thereon:

The case revolves around the assessee's claim of Rs. 2,16,00,000/- spent on constructing a factory on the land sold, which was indexed from the financial year 1994-95. The Assessing Officer (AO) disallowed this claim, noting that the sale deed did not mention any building and stated that the covered area was nil. The AO concluded that the capital asset was only the plot of land, not including any factory building. The CIT(A) upheld this disallowance, citing the lack of evidence proving the construction cost and the appellant's inability to show sources of income for such construction costs in the relevant years. The CIT(A) also noted that the building's value appeared in the balance sheets of the tenants, suggesting they, not the appellant, constructed the building.

However, the Tribunal found the existence of the building was supported by various documents, including lease agreements, occupancy certificates, and rental income declarations. The Tribunal noted that the non-mention of the building in the sale deed was not conclusive if other evidence proved its existence. The Tribunal directed the AO to verify the balance sheets of the tenant companies for the year 31.3.1997 to ascertain if the building was constructed by the appellant. If the balance sheets did not show the building, the AO should allow the cost of construction based on the valuation report. The indexation should be given from the financial year 1996-97, as the occupancy certificate dated 28.5.1997 established the building's completion before that date.

2. Disallowance of the Cost of Improvement Paid to Excalibur India P. Ltd. and Texcon India Pvt. Ltd.:

The AO disallowed the payments of Rs. 70,00,000/- to Excalibur India P. Ltd. and Rs. 40,00,000/- to Texcon India Pvt. Ltd., noting that these payments were made from the bank account of the appellant's husband, not the appellant. The CIT(A) upheld this disallowance, stating that the payments made by the husband could not be connected to the sale transaction of the land and the appellant failed to prove the compensation received by the tenant companies.

The Tribunal found that the disallowance based solely on the payments being made by the appellant's husband was not valid. The Tribunal noted that the CIT(A) himself observed that the tenant companies carried out permanent constructions, and the balance sheet of Excalibur India P. Ltd. showed a deduction of Rs. 1,17,77,207/- from the building value, indicating compensation received. The Tribunal allowed this ground, noting that the compensation was necessary to make the property fit for sale and the disallowance was not justified.

3. Disallowance of the Deduction of Payment Spent by the Assessee to Clear the Dues of Concepts India Pvt. Ltd.:

The AO disallowed the deduction of Rs. 1,94,80,000/- claimed by the appellant for clearing the dues of Concepts India Pvt. Ltd., stating that no evidence was provided for this payment. The CIT(A) upheld this disallowance, noting that the appellant failed to produce any evidence of the payment and the sale deed showed a complete payment of Rs. 10,50,00,000/- by bank draft/cheque.

The Tribunal found no forceful arguments were advanced by the appellant on this issue and upheld the CIT(A)'s decision, finding no infirmity in the disallowance.

Conclusion:

The appeal was partly allowed for statistical purposes. The first issue was remanded to the AO for verification, the second issue was allowed, and the third issue was dismissed. The Tribunal directed the AO to verify the balance sheets of the tenant companies for the year 31.3.1997 and allow the cost of construction if the building did not appear in those balance sheets. The Tribunal also allowed the compensation payments made by the appellant's husband, noting they were necessary for the sale. The disallowance of the payment to clear the dues of Concepts India Pvt. Ltd. was upheld due to a lack of evidence.

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