2022 (10) TMI 658 - AT - Income Tax

Sale consideration for capital gain - Enhancement on account of compensation paid for cancellation of agreement to sale executed earlier - HELD THAT - As rightly contended by assessee, the factum as well as the quantum of compensation paid on cancellation of banakhat as per the mutual understanding between both the sides was duly established and since the same was duly supported by the cancellation agreement executed between both the sides on 22.02.2010, there was no justifiable reason for the CIT(A) to dispute the genuineness of the compensation paid by the assessee and to disallow the deduction claimed by the assessee for the same while computing the capital gain by enhancing the income of the assessee to that extent. Compensation charges on cancellation of banakhat being the cost of improvement of the property - Entitled for deduction on index basis while computing the capital gain, it is observed that this issue is squarely covered by the decision in the case of CIT vs. Shakuntala Kantilal 1991 (3) TMI 123 - BOMBAY HIGH COURT wherein it was held that compensation paid to earlier buyer to cancel the agreement is an expenditure incurred wholly and exclusively in connection with transfer because without removing any encumbrance the sale or transfer of property could not be effected. As held by the Hon ble Bombay High Court, such compensation, therefore, cannot be treated as cost of improvement to the capital asset so as to allow deduction at index value while computing the capital gain. We uphold the order of the Assessing Officer allowing deduction to the assessee on account of compensation paid for cancellation of banakhat to the extent of Rs.36 lakhs. Ground No.2 of the assessee s appeal is thus partly allowed. Disallowance of brokerage expenses - said disallowance was made AO and confirmed by CIT(A) mainly on the ground that brokerage was paid by the assessee to the concerned broker in the year under consideration while the agreement to sale was executed on 01.06.2010 and almost the entire sale consideration was received by the assessee in the FYs 2009-10 and 2010-11. There is, however, nothing brought on record by the authorities below to dispute the services rendered by the concerned broker in connection with the sale of assessee s property for which the brokerage was claimed to be paid. Moreover, the sale deed admittedly was executed in the year under consideration and when the brokerage was paid by the assessee after execution of the sale deed, it cannot be disallowed merely because the agreement for sale was executed and entire consideration was received by the assessee in the earlier years when there was nothing to dispute the services rendered by the concerned broker in connection with sale/transfer of the assessee s property. Accordingly delete the disallowance made by the Assessing Officer and confirmed by CIT(A) on this issue and allow Ground No.4 of the assessee s appeal.

Summary

Issues Involved:
1. Enhancement of income by Rs.36 lakhs due to compensation paid for cancellation of an earlier sale agreement.
2. Disallowance of brokerage expenses of Rs.1,50,000/- claimed by the assessee.

Issue-wise Detailed Analysis:

1. Enhancement of Income by Rs.36 Lakhs:
The assessee declared a Long Term Capital Gain of Rs.14,580/- from the sale of land, which included a deduction of Rs.36 lakhs paid as compensation for the cancellation of an earlier sale agreement. The Assessing Officer (AO) disallowed the indexation of this compensation, treating it as an expenditure incurred wholly and exclusively in connection with the transfer of the property, thereby allowing the deduction to the extent of Rs.36 lakhs without indexation.

The assessee challenged this computation before the CIT(A), who noted that there was no evidence of any dispute or settlement warranting the payment of Rs.36 lakhs as compensation and suspected that it was paid merely to reduce the capital gain chargeable to tax. The CIT(A) enhanced the income by Rs.36 lakhs, disallowing the deduction on the grounds that the payment was not genuine and lacked a legal basis under Section 48 of the Income Tax Act.

Upon appeal to the Tribunal, it was argued that the compensation was paid as per mutual understanding and supported by the cancellation deed executed on 22.02.2010. The Tribunal observed that the compensation paid was indeed an expenditure incurred wholly and exclusively in connection with the transfer of the property, as per the decision of the Hon'ble Bombay High Court in CIT vs. Shakuntala Kantilal (1991) 190 ITR 56 (Bom). Therefore, the Tribunal upheld the AO's decision to allow the deduction of Rs.36 lakhs without indexation, partly allowing the assessee's appeal on this ground.

2. Disallowance of Brokerage Expenses of Rs.1,50,000/-:
The AO disallowed the brokerage expenses of Rs.1,50,000/- on the grounds that the payment was made in the year under consideration while the agreement to sale was executed in 2010, and the entire sale consideration was received in FYs 2009-10 and 2010-11. The CIT(A) confirmed this disallowance, stating that the payment of brokerage two years after receiving the sale consideration was not justified and appeared to be a tactic to reduce capital gain.

The Tribunal, however, found that there was no evidence disputing the services rendered by the broker in connection with the sale of the property. The sale deed was executed in the year under consideration, and the brokerage was paid post-execution of the sale deed. Therefore, the Tribunal held that the brokerage expense could not be disallowed merely because the agreement for sale and receipt of consideration occurred in earlier years. The Tribunal deleted the disallowance of brokerage expenses, allowing this ground of the assessee's appeal.

Conclusion:
The Tribunal partly allowed the appeal of the assessee. The enhancement of income by Rs.36 lakhs was upheld without indexation, while the disallowance of brokerage expenses of Rs.1,50,000/- was deleted. The order was pronounced in the open Court on 14th October 2022 at Ahmedabad.