2020 (5) TMI 283 - AT - Income Tax

Computation of long-term capital gain - benefit of deduction of the compensation paid to M/s Shikhar Travels (India) Pvt. Ltd., from the net sale consideration for computing the long-term capital gain - HELD THAT - No merit in the argument of the ld. Counsel that the AO cannot sit in the arm chair of a businessman and decide how much compensation should be given for vacating the property and, thereafter, to sell the same to a third party. Since the transaction in the instant case is not doubted, therefore, merely because the parties are related or that the agreement was not registered or notarized, the same, in our opinion, cannot be a ground to deny the benefit of deduction of the compensation paid to M/s Shikhar Travels (India) Pvt. Ltd., from the net sale consideration for computing the long-term capital gain. In this view of the matter, we are of the considered opinion that the ld.CIT(A) was not justified in restricting the compensation paid to M/s Shikhar Travels (India) Pvt. Ltd. to ₹ 38,50,000/- as against the payment of ₹ 1.90 crores for the purpose of computing the long-term capital gain. The grounds raised by the assessee on this issue are accordingly allowed. Deduction u/s 54 - AO denied the claim of deduction u/s 54 on the ground that the assessee sold a piece of land and not a residential house - existence of any structure/fixtures on land cannot be said to be a residential house however, allowed the benefit of deduction u/s 54F - HELD THAT - We find although the assessee challenged the action of the AO in denying the benefit u/s 54, the CIT(A) has not adjudicated the same. We find from the various details that the assessee had filed various documents before the CIT(A) to substantiate that there was a residential unit on the farm house. However, he has not given any finding on this issue. We, therefore, deem it proper to restore this issue to the file of the CIT(A) with a direction to adjudicate the issue of deduction u/s 54 which was specifically challenged before him by the assessee. CIT(A) shall give due opportunity of being heard to the assessee and decide the issue as per fact and law. The second issue raised in the grounds of appeal is accordingly allowed for statistical purposes.

Summary

Issues Involved:
1. Deduction of compensation paid to M/s Shikhar Travels (India) Pvt. Ltd. from the sale consideration for computing long-term capital gain.
2. Allowability of deduction under section 54 versus section 54F of the Income Tax Act.

Detailed Analysis:

1. Deduction of Compensation Paid to M/s Shikhar Travels (India) Pvt. Ltd.:

The assessee, deriving income from various sources, filed a return declaring a total income inclusive of long-term capital gain from the sale of land. The land, co-owned with her spouse, was sold to M/s Ramprastha Greens Pvt. Ltd. The assessee claimed a deduction for compensation paid to M/s Shikhar Travels (India) Pvt. Ltd. for structures on the land, reducing the net sale consideration. The Assessing Officer (AO) disallowed this deduction, arguing that the payment to M/s Shikhar Travels (India) Pvt. Ltd. was not substantiated by a valuation report and that the agreement was not registered or notarized, suggesting it was a self-serving document due to the close association between the parties. The AO treated the sale consideration at the gross value and allowed the compensation as a cost of improvement under section 48, but required substantiation of the claim's genuineness.

The CIT(A) partially allowed the assessee's claim, estimating the cost of the structure at ?38,50,000 and allowing a proportionate deduction while disallowing the remaining compensation. The CIT(A) reasoned that the compensation was intended to reduce the capital gain in the hands of the directors and tax it in the hands of the loss-making company, M/s Shikhar Travels (India) Pvt. Ltd.

The Tribunal found merit in the assessee's argument that the AO cannot determine the reasonableness of the compensation paid for vacating the property. The Tribunal noted that M/s Shikhar Travels (India) Pvt. Ltd. was running a business on the land and had disclosed the compensation in its profit and loss account. The Tribunal also observed that the husband's return, claiming a similar deduction, was accepted without scrutiny. Consequently, the Tribunal held that the compensation paid should be allowed as a deduction from the sale consideration for computing the long-term capital gain, rejecting the CIT(A)'s restriction to ?38,50,000.

2. Allowability of Deduction Under Section 54 Versus Section 54F:

The AO denied the assessee's claim for deduction under section 54, stating that the sold property was merely land with structures and not a residential house, and instead allowed deduction under section 54F. The CIT(A) did not provide a finding on this issue despite the assessee's challenge.

The Tribunal noted that the assessee had submitted documents indicating the presence of a residential unit on the farm house, which the CIT(A) failed to consider. The Tribunal remanded the issue back to the CIT(A) for adjudication, directing a fresh examination of the claim under section 54. The CIT(A) was instructed to provide the assessee an opportunity to present their case and decide based on the facts and law.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, directing the CIT(A) to re-examine the deduction under section 54 and to allow the full compensation paid to M/s Shikhar Travels (India) Pvt. Ltd. as a deduction for computing the long-term capital gain. The decision emphasized the need for a fair assessment of the compensation's reasonableness and the proper classification of the sold property for tax deduction purposes.