2019 (12) TMI 576 - AT - Income Tax

Income of the assessee u/s 56(2)(vii) - difference between the amount paid to the land owners and the market price estimated by the Registration Department - whether the amount paid to the agreement holder for purchase of property has to be taken into consideration as cost of acquisition or not? - pre-existing right for purchase of the property by Durai and associates by virtue of agreement for sale executed with the land owners - HELD THAT - The right to purchase the property can be specifically enforced through a court of law. Therefore, when there was pre-existing right to sell the property in favour of Durai and associates, the assessee cannot purchase the property unless the agreement to purchase the property in favour of Durai and associates is discharged. In other words, the agreement holder, namely, Durai and associates has to be paid for his pre-existing right to purchase the property. This Tribunal is of the considered opinion that the payment made to pre-existing agreement holder to purchase the property to the extent of ₹ 1,58,00,000/- has to be considered as cost of the property/ purchase price. If this amount of ₹ 1,58,00,000/- paid to the agreement holder, namely, Durai and associates was taken into consideration, admittedly, there was no benefit accrued to the assessee. In fact, the assessee has paid more than the market value fixed by the Registration Department. Therefore, there is no question of computing any income under Section 56(2)(vii). Tribunal is unable to uphold the orders of the lower authorities. Accordingly, orders of both the authorities below are set aside and the addition is deleted. - Decided in favour of assessee.

Summary

Issues: Disallowance of payment to agreement holder while computing capital gain.

Analysis:
1. The appellant claimed the amount paid to the agreement holder as cost of acquisition while computing capital gain. The Assessing Officer, however, considered it as brokerage not eligible under Section 56(2)(vii) of the Income-tax Act, 1961.
2. The appellant argued that the payment to the agreement holder was part of the purchase consideration, necessary to clear the title and enable the purchase of the property. The appellant contended that the agreement holder had a pre-existing right to purchase the property, making the payment integral to the acquisition.
3. The Departmental Representative countered, stating that only the amount paid to the landowners should be considered as the cost of the property, not the payment to the agreement holder. The discrepancy between the guideline value and the consideration paid led the Assessing Officer to treat the difference as income under Section 56(2)(vii).
4. The Tribunal analyzed the situation, noting the pre-existing right of the agreement holder to purchase the property. It concluded that the payment to the agreement holder was indeed part of the cost of acquisition, essential for the purchase to proceed. As the appellant had paid more than the market value determined by the Registration Department, no income addition was warranted under Section 56(2)(vii).
5. Consequently, the Tribunal set aside the orders of the lower authorities, deleting the addition of the disputed amount. The appeal by the assessee was allowed, emphasizing the significance of the payment to the agreement holder in determining the cost of the property and negating the income addition under the Act.