2018 (10) TMI 1581 - AT - Income Tax

Capital Gains - Nature of payment to execute an order of eviction - Addition for payment to vacant of unauthorized possession out of capital gain - to be treated as cost of improvement or not - Held that - From the available records it is noted that there was a dispute and Shri Babu Lal Meena and Shri Phool Chand Jhan were having the illegal possessin on the premises of the assessee. It is further noted that the assessee vide letter dated 17-03-2016 addressed to ACIT Circle 6, Jaipur had requested the AO to make enquiry if he has any doubt about the illegal possession of the premises by these two persons. AO had not given any adverse findings thereon. It is noted from the sale agreement made between the assessee wherein the assessee had received the amount of Rs. 45.00 lacs through cheque the details of which are available at PBP 36 of sale agreement. The assessee had taken only Rs. 45.00 lacs through banking channel and Rs. 10.00 lacs was received by cash which was due to the reason that these illegal possession holder wanted the amount in cash. Hon ble Karnataka High Court in the case of Mrs.June Perrett vs ITO 2007 (11) TMI 86 - KARNATAKA HIGH COURT held that Payment to evict an unauthorized occupant can be treated as cost of improvement. CIT(A) is not justified in confirming the addition of Rs. 5.00 lacs which we direct to delete. - Decided in favour of assessee. Expenses claimed against the interest income shown under the head Income from other sources - Held that - The assessee during the course of assessment proceeding submitted all these details filed before the AO who has made the addition of Rs. 8, 02, 854/-. CIT(A) has confirmed the action of the AO. From the available records before us it is noted that the assessee has utilized the borrowed funds to purchase the agricultural land. As regards interest payment to Raj Kumari Agarwal and Aparjita Saini it is noted that there were opening balances of the amounts in their accounts. Further the assessee has earned interest on the advances made to M/s. Feathertouch Polychem (P) Ltd. of Rs. 6, 17, 757/-. It is important to note that during the year the assessee has earned interest income of Rs. 13, 95, 012/- and paid the interest of Rs. 8, 02, 854/-. In view of these facts and circumstances of the case we find no merit in the order of the ld. CIT(A) in sustaining the disallowance of interest - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition of Rs. 5,00,000/- for payment to vacate unauthorized possession out of capital gain.
2. Disallowance of interest expenses of Rs. 8,02,854/-.

Issue-Wise Analysis:

1. Addition of Rs. 5,00,000/- for Payment to Vacate Unauthorized Possession:
The assessee, along with a co-owner, sold a plot for Rs. 1,00,00,000/-. While computing capital gains, the assessee declared consideration of Rs. 45,00,000/- for his 50% share instead of Rs. 50,00,000/-. The assessee argued that the plot was encroached upon by two individuals, and he had to pay them Rs. 10,00,000/- (10% of the sale consideration) to vacate the possession. The assessee relied on cases such as CIT vs Miss Piroja C Patel, Mrs. June Perrett vs ITO, and Naozar Chenoy vs CIT to support his claim. However, the AO added Rs. 5,00,000/- to the income, stating there was no material to suggest that the buyer insisted on vacant possession and the sale deed mentioned the plot as vacant. The CIT(A) confirmed the addition, noting the assessee could not demonstrate that the land was actually occupied by the two parties. The tribunal, however, found that the payment to vacate unauthorized occupants should be considered as cost of improvement, citing similar judgments from various High Courts. Thus, the tribunal directed the deletion of the Rs. 5,00,000/- addition, allowing Ground No. 1 of the assessee.

2. Disallowance of Interest Expenses of Rs. 8,02,854/-:
The AO disallowed interest expenses claimed by the assessee under section 57, noting that the interest-bearing loans were not utilized for giving advances on which interest income was earned. The CIT(A) upheld the AO's decision, observing that the interest-bearing loans were used for personal assets and not for earning interest income. The tribunal, after reviewing the records, noted that the assessee had earned interest income of Rs. 13,95,012/- and paid interest of Rs. 8,02,854/-. The tribunal found that the borrowed funds were utilized for purchasing agricultural land and that the interest income was earned on advances made to a company. Considering these facts, the tribunal found no merit in the CIT(A)'s order and allowed the assessee's claim for interest expenses. Thus, Ground No. 3 of the assessee was allowed.

Conclusion:
The appeal of the assessee was partly allowed, with the tribunal directing the deletion of the Rs. 5,00,000/- addition and allowing the claim for interest expenses of Rs. 8,02,854/-. The order was pronounced in the open court on 02-07-2018.