2018 (6) TMI 365 - AT - Income Tax

Addition of long term capital gains on account of cost of acquisition/cost of improvement - determination of total cost of acquisition of new house for the purposes of claim of deduction under s.54F while computing LTCG on sale of plot - Held that - The assessee has included the cost incurred towards vacating the new property from tenant amounting to ₹ 35 Lakhs as well as certain costs incurred towards repairs and renovation of the new house as part of cost of acquisition of new house in addition to original cost incurred for its purchase. The original cost of acquisition of the new house was thus increased by the assessee towards cost of removal of encumbrances and cost of repairs and renovation of new house. The cost of removal of encumbrances, we straightway find ourselves in complete agreement with the observations made by the CIT(A) dealing with issue. CIT(A) has objectively analyzed the facts existing in the case with reference to the abandonment of tenancy right as noted in earlier paras and has come to the rightful conclusion in the given set of facts. The purchase agreement itself specifies the existence of encumbrance. The assessee has also demonstrated that the original cost of acquisition was quite lower vis- -vis fair market value having regard to the embedded encumbrance. CIT(A) has drawn conclusions in favour of the assessee based on tell-tale evidences. No reason to upset such conclusions of CIT(A). The order of the CIT(A) is thus well founded with regard to the cost incurred for removal of the tenancy rights. The objection of the Revenue on this score thus cannot be sustained and hence dismissed. Repairs and renovation expenses, we find some merits in the case made out by the Revenue. As against the total costs claimed to be incurred by the assessee amounting to ₹ 30,05,429/-, the outstanding has been shown at ₹ 14,30,638/- which is nearly 50% of the total claim. Most of the payments are admittedly made in cash and, at times, based on simple vouchers. Such huge outstanding and cash payments enjoin greater onus on the assessee. The assessee has not discharged the onus fully towards incurring of such expenses more particularly the whereabouts of substantial outstanding payments as noted above. The CIT(A) has totally omit ted to address this vital aspect. In these set of facts, the AO has fairly admitted the claim to the extent of 20% on estimated basis which stands at ₹ 6,01,085/- on a property of ₹ 19.08 Lakhs. CIT(A) has cursorily dealt with the issue and has blamed the AO for non verification which he could have done itself if he found the AO wanting on this score. In the absence of proper evidences before us towards identification of the parties involved and actual work carried out, we are unable to comment any further. A closer look at cash book filed before us unfolds quite abnormal features. The assessee has shown huge opening balances in cash book (Rs.16.68 Lakhs as on 01.04.2009) against which meager household expenses of ₹ 15000/- or thereabout claimed. The cash in hand has gone up further and at one point of time it is nearly ₹ 40 Lakhs. The pattern of cash deposits and cash withdrawals as reflected in the cash book placed before us does not inspire much confidence. The profile of the assessee and the cost of purchase of the residential house do not lend credence to the claim of the assessee for such huge repairs and renovation. The assessee could not discharge the onus for such claim as required in the given facts. CIT(A) was not justified in accepting the claim of the assessee summarily. AO, on the other hand, has rightly resorted to estimations at certain percentage which in our view is justified in keeping with the original cost of acquisition. The order of the AO as regards estimation of repairs and renovation costs deserves to be approved in supersession to the order of the CIT(A). The relief granted by the CIT(A) towards cost of repairs, renovation etc. is thus set aside and order of the AO is restored on this score. - Appeal of the Revenue is partly allowed.

Summary

Issues:
Challenge to reversal of additions to long term capital gains on account of cost of acquisition/cost of improvement.

Analysis:
The Revenue appealed against the CIT(A)'s order concerning the assessment year 2010-11, challenging the reversal of additions made to long term capital gains. The assessee sold a plot of land and claimed deduction under s.54F for a new residential house acquired. The Assessing Officer disputed the cost of acquisition/cost of improvement of the new house. Two main expenses were questioned: a payment of &8377; 35 Lakhs to vacate the property and &8377; 30,05,429 towards repairs and renovation. The AO disallowed a significant portion of the claimed expenses. The CIT(A) found merit in the assessee's claims for both expenses.

Regarding the payment to vacate the property, the CIT(A) noted various factors supporting the claim, such as a legal suit for abandonment of tenancy rights, negotiations for a lower price due to encumbrances, and a detailed settlement agreement with the tenant. The CIT(A) concluded that these costs formed part of the acquisition cost. For the repairs and renovation expenses, the CIT(A) found no defects in the supporting bills and accepted the entire claim.

The Revenue contended that the CIT(A) erred in accepting unverified expenses and outstanding liabilities. The Tribunal analyzed both issues. It upheld the CIT(A)'s decision on the payment for vacating the property, citing substantial evidence supporting the claim. However, concerning the repairs and renovation expenses, the Tribunal found the evidence lacking. It noted the high outstanding amount and cash payments, casting doubt on the claim's veracity. The Tribunal agreed with the AO's estimation of costs at 20% of the claim, setting aside the CIT(A)'s decision on this issue.

In conclusion, the appeal of the Revenue was partly allowed. The Tribunal upheld the CIT(A)'s decision on the payment for vacating the property but restored the AO's estimation of repairs and renovation costs, setting aside the CIT(A)'s decision on that matter.