2018 (11) TMI 868 - AT - Income Tax

Disallowance of capital loss on sale of property at Gurgaon - Paying extra compensation to trust - forced transfer of property - assessee purchased a flat at Gurgoan for the purpose of usage of the trust activities only and due to heavy pressure applied by the said trust on the assessee to locate a property in Kolkata for pursuing its charitable objects, the assessee was forced to sell the flat at Gurgoan and utilize the proceeds thereon for purchasing a property at Rajarhat, Newtown for higher amount - attached encumbrance in the form of a contractual obligation. Held that - The properties at Rajarhat, New Town were purchased from M/s Sunny Rock Estates and Developer P Ltd in the name of Al Habib Welfare & Charitable Trust by the assessee using his own funds. This was done by him as compensation for using the funds of the trust for his personal purposes in the past. From the various correspondences exchanged between the assessee and the said trust as detailed supra, we find that the assessee at the first instance had purchased a flat at Gurgoan for the purpose of usage of the trust activities only. But since the trust refused to accept any property other than in the fringe locality of Kolkata and due to heavy pressure applied by the said trust on the assessee to locate a property in Kolkata for pursuing its charitable objects, the assessee was forced to sell the flat at Gurgoan and utilize the proceeds thereon for purchasing a property at Rajarhat, Newtown in the name of the trust for a higher amount due to huge rise in real estate market and due to effluxion of time. But it cannot be brushed aside that the assessee was having the said flat at Gurgoan together with an attached encumbrance of amounts drawn by him from the said trust which had to be compensated in future either in cash or in kind for the benefit of the trust. Hence there was an attached encumbrance in the form of a contractual obligation to be fulfilled by the assessee to the trust. As decided in COMMISSIONER OF INCOME TAX, KOL-XI VERSUS SATYABRATA DEY 2014 (5) TMI 781 - CALCUTTA HIGH COURT unless the assessee had settled the dispute, the sale transaction could not have materialised and the sale consideration had to be reduced by the amount of compensation paid the expression used in section 48 of the Act, expenditure incurred wholly and exclusively in connection with such transfer has wider connotation than the expression, for the transfer - the transfer would not have taken place and the payment has necessarily to be made for the transfer of the hotel - the sum was expended by the assessee wholly and exclusively in connection with the transfer of the capital asset and not de hors the transfer Decided against Revenue.

Summary

Issues Involved:
1. Confirmation of disallowance of capital loss of ?78,60,000/-.

Issue-Wise Detailed Analysis:

1. Confirmation of Disallowance of Capital Loss of ?78,60,000/-:

The primary issue in this appeal is whether the Learned Commissioner of Income Tax (Appeals) [CIT(A)] was justified in confirming the disallowance of capital loss amounting to ?78,60,000/-. The assessee filed a return of income for the Assessment Year (AY) 2008-09, declaring a total income of ?34,08,690/-. During the first round of assessment proceedings, a sum of ?78,60,000/- was added back, disallowing the loss which was set off against a capital gain of ?94,48,000/- received on the sale of property at Gurgaon. The CIT(A) had passed an ex-parte order due to non-appearance by the assessee, who claimed that the notices were sent to the wrong address. Consequently, the tribunal remitted the issue back to the Assessing Officer (AO) for fresh consideration.

The assessee, who has regular income from property dealing, rent, and other sources, is also associated with philanthropic activities and is a settler of the 'Al-Habib-Welfare & Charitable Trust'. The assessee had entered into an agreement with the trust to provide a constructed area of approximately 4000 sq. feet around Kolkata at a discounted price of ?25,00,000/-. An advance of ?23,90,000/- was taken from the trust for this purpose. However, the assessee could not find a suitable property as per the trust's expectations and utilized the advance to purchase a flat in Gurgaon, which was later sold for ?2,33,64,000/-.

The AO disallowed the loss of ?78,60,000/- claimed by the assessee, arguing that the loss was unrelated to the sale of the Gurgaon property and was a personal liability. The CIT(A) upheld this finding but gave partial relief of ?9,49,475/- due to an erroneous consideration of figures in the computation of capital gains.

Upon appeal, the tribunal examined the facts and found that the properties at Rajarhat, New Town, were purchased in the name of the trust using the assessee's funds as compensation for using the trust's funds for personal purposes. The tribunal noted that the assessee had initially purchased a flat in Gurgaon for the trust's use, but due to the trust's refusal and subsequent pressure, the assessee was compelled to sell the Gurgaon flat and purchase properties in Kolkata at a higher price due to market conditions.

The tribunal referred to the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs. Satyabrata Dey, where it was held that expenditures incurred wholly and exclusively in connection with the transfer of a capital asset should be deducted from the capital gains. The tribunal found that the assessee's actions were in line with fulfilling a contractual obligation to the trust, thus constituting an encumbrance attached to the capital asset.

Respectfully following the decision of the Hon'ble Jurisdictional High Court, the tribunal allowed the appeal, granting relief to the assessee and allowing the grounds raised by the assessee.

Conclusion:

The appeal of the assessee was allowed, and the disallowance of the capital loss of ?78,60,000/- was overturned, recognizing the expenditure as incurred wholly and exclusively in connection with the transfer of the capital asset. The tribunal's decision was pronounced in court on 16.11.2018.