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2018 (8) TMI 1049 - AT - Income TaxDeductions while computing the capital gains u/s 48(1) - amount paid to the tenants for obtaining vacant possession of the property belonging to the appellant - expenditure incurred wholly and exclusively in connection with transfer of capital asset - MAT - inclusion of income from capital gains for the purpose of computing book profits u/s 115J (Minimum Alternate Tax) - Held that - compensation paid by the assessee to two tenants for getting vacant possession of the property is deductible as an expenditure incurred wholly and exclusively in connection with transfer of the property while computing capital gains. - Decided in favor of assessee. MAT - Computation of book profit u/s 115JB - inclusion of capital gains - Held that - there is no scope for the AO to make adjustments towards book profit u/s 115JB, except as provided under Explanation 1 to section 115JB of the Income-tax Act, 1961.- AO was incorrect in recomputing book profit to make adjustments towards capital gain derived from transfer of property. Hence, we direct the AO to delete adjustments made towards Long term capital gain derived from sale of property to the book profit computed u/s 115JB of the Income-tax Act, 1961. - Decided in favor of assessee.
Issues Involved:
1. Disallowance of compensation paid to tenants for obtaining vacant possession. 2. Computation of book profit under section 115JB of the Income-tax Act, 1961. Detailed Analysis: 1. Disallowance of Compensation Paid to Tenants: The first issue pertains to the disallowance of compensation amounting to ?1,20,50,000 paid to tenants for obtaining vacant possession of the property. The assessee claimed this compensation as an expenditure incurred wholly and exclusively in connection with the transfer of a capital asset under section 48(1) of the Income-tax Act. The Assessing Officer (AO) disallowed this claim, arguing that the payments were made to illegal occupants and thus were inadmissible as deductions. The AO referenced the case of ITO vs Narendra S Kapadia (1996) to support the disallowance. The assessee contended that the compensation was indeed for obtaining vacant possession and provided various documents, including a Memorandum of Understanding, declaration-cum-indemnity bonds, and a Civil Court order, to substantiate the claim. The assessee further cited several judicial precedents, including CIT vs A Venkataraman & Ors (137 ITR 846), which held that payments made to tenants to obtain vacant possession are deductible as they are incurred wholly and exclusively in connection with the transfer of property. The Tribunal, after reviewing the evidence and legal precedents, concluded that the compensation paid was indeed for obtaining vacant possession and thus allowable as a deduction. The Tribunal emphasized that the nature of the payment, whether for vacating illegal occupants or for terminating tenancy agreements, was immaterial as long as it was for obtaining vacant possession. The Tribunal directed the AO to allow the compensation as a deductible expenditure while computing capital gains. 2. Computation of Book Profit under Section 115JB: The second issue involved the computation of book profit under section 115JB of the Income-tax Act. The AO recomputed the book profit by including the capital gain from the sale of property, which the assessee had directly credited to the reserves and surplus account without routing it through the Profit & Loss (P&L) Account. The AO argued that the financial statements were not prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956, citing the case of CIT vs Veekaylal Investments Co Pvt Ltd (2001). The assessee argued that once the financial statements are prepared in accordance with the Companies Act and certified by auditors, the AO has no jurisdiction to make adjustments except as provided under Explanation 1 to section 115JB. The assessee relied on the Supreme Court's decision in Apollo Tyres Ltd vs CIT (255 ITR 273) and the Bombay High Court's decision in CIT vs Akshay Textile Trading & Agencies Pvt Ltd (304 ITR 401). The Tribunal noted that the Supreme Court in Apollo Tyres Ltd had held that the AO cannot go beyond the net profit shown in the P&L Account except as provided in the Explanations to section 115JB. The Tribunal also referred to the Bombay High Court's decision in CIT vs Bhagwan Industries Ltd (255 ITR 273), which supported the assessee's position. The Tribunal concluded that the AO was incorrect in recomputing the book profit and directed the AO to delete the adjustments made towards the capital gain from the book profit. Conclusion: The Tribunal allowed the appeal filed by the assessee, directing the AO to allow the compensation paid to tenants as a deductible expenditure and to delete the adjustments made towards the capital gain in the computation of book profit under section 115JB. The order was pronounced in the open court on 10th August 2018.
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