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TMI Blog2017 (5) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... 24.3.1962 for the purpose of construction of factory building. The company has constructed a RCC roof building in the year 1987-88 and 1988-89 admeasuring 40,000 Sq.ft. The company did not commence its activities right from the date of incorporation. As the assessee company did not carry on any business activity, it has leased out the property and was receiving rental income. The assessee has sold the impugned property for a consideration of Rs. 3,25,00,000/- by way of two registered sale deeds in favour of M/s. Sarada Estates as per which one portion of property has been sold on 18.12.2006 for a consideration of Rs. 2,75,00,000/- and the remaining portion of the land has been sold on 19.12.2007 for a consideration of Rs. 50 lakhs. Thus, two sale transactions falls in two financial years relevant to assessment years 2007-08 and 2008-09. 3. The assessee company did not filed return of income for the assessment year 2007-08 and 2008-09. A notice u/s 148 of the Act, was issued to re-open the assessment for the reason that the income chargeable to tax had been escaped assessment within the meaning of section 147 of the Act. In response to the notice, the assessee company filed its ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, in the absence of return of income, the genuineness of amount incurred for construction of building cannot be ascertained. In so far as litigation expenses, the A.O. observed that the assessee failed to furnish necessary evidences of payment of compensation for settlement of disputes, therefore, disallowed expenses in the nature of compensation paid. 5. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee has filed elaborate written submissions. The assessee further contended that the A.O. was erred in re-working indexed cost of land by taking into account the cost of land as appeared in the balance sheet, ignoring the fact that the assessee has purchased the impugned land much prior to 1st April, 1981. The assessee further submitted that as per the provisions of section 48 of the Act, the assessee at his option can adopt cost of the land or fair market value of the land as on 1.4.1981 in the cases where the property was purchased prior to 1.4.1981. Since, the land was purchased in the year 1962, the assessee has adopted fair market value of the land as on 1.4.1981, based on the market value fixed by the SRO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thority, wherein the cost of land was fixed at Rs. 40/- per sq.yd., therefore, directed the A.O. to determine the fair market value as on 1.4.1981 based on the certificate furnished by the assessee and worked out indexed cost of acquisition. In so far as development/improvement, the CIT(A) observed that the assessee has constructed 40,000 sq.ft. building with a cost of Rs. 26,52,000/- which was recorded in the books of accounts. The A.O.'s contention is that the same is not allowable as the assessee did not file the return of income is not correct. The question to be determined whether there is any development of the land and if so what would be such amount. The assessee has proved the improvement with necessary evidences. The amount spent for construction has been recorded in the books of accounts. Therefore, the A.O. was incorrect in disallowing the cost of improvement and accordingly, directed the A.O. to allow deduction claimed towards cost of improvement. 8. The next issue is disallowance made towards brokerage and commission paid. The CIT(A) observed that the A.O. disallowed brokerage and commission under the provisions of section 40(a)(ia) of the Act. The said provision app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the SRO which shows that the cost of land as on 1.4.1981 is at Rs. 40/- per sq.yd. 10. Having heard both the sides and considered material on record, we find that the A.O. has re-worked cost of land mainly on the ground that as per the books of accounts, the cost of land is much below the cost of land claimed by the assessee as on 1.4.1981. We do not find any merits in the findings of the A.O., for the reason that the impugned property was purchased in the year 1962. We further observed that as per provisions of section 48 of the Act, the assessee can adopt either cost of the land or fair market value as on 1.4.1981 when the land was purchased prior to 1.4.1981. In this case, admittedly, the land was purchased prior to 1.4.1981. Therefore, we are of the view that there is no error in adopting the fair market value of the land as on 1.4.1981, as against the cost of land in the books of accounts. 11. Having said, let us examine what is the fair market value of the land as on 1.4.1981. The assessee has claimed cost of acquisition of land as on 1.4.1981 based on a certificate issued by the SRO which shows cost of Rs. 40/- per sq.yd. The assessee claims that its land is located in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to file the return of income by the assessee. Therefore, we are of the view that the A.O. was incorrect in disallowing the cost of building, despite the assessee has proved the cost of building with necessary evidences and also which was further supported by the sale deed wherein the existence of building was recorded in the schedule of the property. The CIT(A) after considering relevant provisions of the Act, has rightly directed the A.O. to allow cost of building. We find no error in the order of the CIT(A). Hence, we uphold CIT(A) order and reject ground raised by the revenue. 13. The next question is cost of development and improvement to the building. The A.O. disallowed cost of development/improvement on the ground that the assessee failed to prove the cost of development with necessary evidences. The A.O. further observed that since the assessee did not file the return for the earlier period, it is difficult to ascertain the genuineness of expenditure claimed towards cost of improvement. It is the claim of the assessee that it has constructed 40,000 sq.ft. RCC roof building, which was leased out on rental basis and the rental income has been assessed to income tax. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40(a)(ia) of the Act only applies when income is computed under the head 'profit & gains' from business or profession, but not under the head 'income from capital gains'. Therefore, we direct the A.O. to allow expenditure claimed under the head 'brokerage and commission'. 15. The next issue that came up for our consideration is disallowance of expenses on transfer being compensation paid for property dispute for the assessment year 2008-09. The A.O. disallowed compensation paid on the ground that the assessee failed to substantiate the expenditure with necessary evidences. It is the contention of the assessee that there was a civil dispute on the property and one Shri M.V. Rao has filed a suit before the 7th Additional District Judge, Guntur claiming that the sale effected by the company is not valied on the ground that the signatories to the sale deed have no right to dispose of the property. The assessee further contended that later on the advice of the elders, the director of the company and Shri M.V. Rao had come to the compromise according to which, it has paid a compensation of Rs. 20 lakhs by way of demand draft drawn on Indian Overseas Bank. The assessee further contended ..... X X X X Extracts X X X X X X X X Extracts X X X X
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