SMT. CHITRA BANSAL,JAIPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1, JAIPUR

The hearing of the appeals was concluded through video conference in view of the prevailing situation of Covid-19 Pandemic.

In both these appeals of the assessee, common issues are involved, therefore, for the sake of convenience and brevity, a common order is being passed.

Firstly, we take ITA No. 1225/JP/2018. In this appeal, the assessee is aggrieved for disallowance of Rs. 5,17,339/- made by the A.O. while working out the capital gains. The assessee is also aggrieved for disallowance of brokerage expenses of Rs. 10.50 lacs.

Rival contentions have been heard and record perused. Facts in brief are that the assessee filed her return of income u/s 139 of the Act on 24-07-2014 declaring total income Rs.3,46,0130/- including Long term capital gain on sale of agricultural land(s) of Rs.3,32,89,906/-. The assessee in the year under consideration sold agricultural land(s) through various sale deed(s) amounting to Rs.3,74,30,500/- and declared long term capital gain of Rs.3,32,89,906/- after claiming indexed cost of improvement of Rs.5,17,339/- and brokerage paid of Rs.10,50,000/-. The case was taken in scrutiny by issue of notice u/s 143 (2) of the Act, which was complied from time to time. The AO completed assessment u/s 143(3) at a total income of Rs.3,61,68,370/- by making disallowance of indexed cost of improvement Rs.5,17,339/- (i.e. interest paid on funds borrowed for purchase of land) and disallowance of brokerage expenses of Rs.10,50,000/- paid and claimed in the return of income. The assessee filed an appeal before the Ld. CIT(A) against the said disallowance made by the AO.

By the impugned order, the ld. CIT(A) has confirmed the disallowances made by the A.O., against which the assessee is in further appeal before the ITAT.

We have considered the rival contentions and carefully gone through the orders of the authorities below and found from the record that the assessee during the year under assessment sold agricultural land(s) situated at village Nemeda for a total consideration of Rs. 3,74,30,500/- and has shown long term capital gains of Rs.3,32,89,906/- after claiming the indexed cost of acquisition of Rs.25,73,255 and indexed cost of improvement of Rs.5,17,339/- i.e. interest paid on borrowed funds for acquisition of the capital assets sold i.e. agricultural land. During the course of assessment proceedings Assessing Officer asked the assessee to submit the details regarding funds borrowed for the purchase of agricultural land. The assessee vide letter dated 24-11-2016 has submitted that the lands were purchased several years back by borrowing funds from various parties and interest in respect to the cost of borrowed funds have been capitalized in the accounts.

We also found that the assessee is maintaining the ledger accounts of the plot/khasra wise different agricultural lands. The assessee before the ld. CIT(A) produced the copy(s) of ledger accounts for the period from 1-4-2008 to 31-3-2013 in which the interest has been capitalized to the cost of land.

The interest paid on money borrowed for purchase of asset is part of cost of improvement. We found that assessee took loan from to purchase plot of land which was sold during the year. Thus loan was directly relatable to purchase of property and so interest paid thereon is required to be included in cost of acquisition of said property. The A.P High Court in case of Addl. CIT Vs. K.S. Gupta (1979) 119 ITR 372 has following judgement of Delhi High Court in CIT Vs. Mithilesh Kumari (1973) 92 ITR 9 held that interest paid on amount borrowed for purchase of open plot of land forms part of cost of acquisition. The High Court of Madras in case of CIT Vs. K. Raja Gopala Rao (2001) 252 ITR 459 and High Court of Karnataka in case of CIT Vs. Maithreys Pal (1985) 152 ITR 247 also held in same view. In view of these judicial pronouncements the assessee has correctly claimed the interest paid on borrowings for purchase of plot as cost of improvements. The action of A.O. and Ld. CIT(A) is contrary to law and thus cannot be sustained. Thus, the addition of Rs. 5,17,339/-is grossly wrong and bad in law and accordingly deleted. Accordingly, the A.O. is directed to delete the addition of Rs. 5,17,339/-.

The assessee is also aggrieved for disallowance of brokerage expenses of Rs. 10.50 lacs. Rival contentions have been heard and record perused. From the record we found that the assessee paid and claimed brokerage of Rs.10,50,000/- paid to four persons as transfer expenses in the computation of long term capital gain at the time of filling of return of income. The assessee paid the brokerage/commission of Rs.10,50,000/- to following brokers:

The Hon'ble Allahabad High Court in the case of EMC (Works) Pvt. Ltd vs. ITO reported in 49 ITR 650 wherein it has been held that where application is made by the assessee requesting the AO to issue notice u/s 131 and application was rejected by the AO summarily and assessment completed, action of the AO was held to be without juri iction. Reliance is also placed on the decision of Hon'ble Allahabad High Court in the case of Munnalal Murlidhar 79 ITR 540 wherein it was held that the failure on the part of the AO to call for and examine the evidence which is offered by the assessee materially prejudices the assessee and it is denial to the assessee of opportunity to produce evidence in support of its case.

As per our considered view when the assessee has duly filed confirmations from all the brokers to whom commission has been paid and they are also assessed to tax, adverse inference cannot be drawn against the assessee if the brokers to whom the brokerage amount has already been paid and the assessee even had no moral pressure.

In view of the above facts and circumstances, there is no justification for the disallowance on account of brokerage of Rs. 10.50 lacs paid by the assessee. Accordingly, Accordingly, we direct the A.O. to delete the disallowance of brokerage of Rs. 10.50 lacs. In the result, this appeal of the assessee is allowed.

Now we take ITA No. 1226/JP/2018. Facts and circumstances of this case are same as discussed in ITA No. 1225/JP/2018 in the case of Smt. Chitra Bansal. In this case also, we found that the assessee is maintaining the ledger accounts of the plot/khasra wise different agricultural lands. The assessee before the Id. CIT(A) produced the copy(s) of ledger accounts for the period from 1-4- 2008 to 31-3-2013 in which the interest has been capitalized to the cost of land. However, in the absence of details of loans in the initial year of purchase of lands the assessee is not able to correlate the loans which were taken for purchase of land. As the assessee is having records in the form of copy of land account and has not claimed the interest expense as revenue expenses in her returns of income filed. It is submitted that interest paid was clearly allowable and the AO was not justified in not allowing the benefit of cost of improvement as well as indexed cost.

We observe that the interest paid on money borrowed for purchase of asset is part of cost of improvement. It is submitted that assessee took loan from to purchase plot of land which was sold during the year. Thus, loan was directly relatable to purchase of property and so interest paid thereon is required to be included in cost of acquisition of said property. 152 ITR 247 also held in same view. In view of these judicial pronouncements the assessee has correctly claimed the interest paid on borrowings for purchase of plot as cost of improvements. The action of the A.O. and Ld. CIT(A) is contrary to law and thus cannot be sustained. Thus, the addition of Rs. 5,17,339/-is grossly wrong and bad in law and accordingly deleted.

Similarly, with regard to brokerage payment of Rs. 10.51 lacs, we found that assessee paid and claimed brokerage of Rs.10,51,000/- paid to four persons as transfer expenses in the computation of long term capital gain at the time of filling of return of income. The assessee paid the brokerage/commission of Rs.10,51,000/- to following brokers: -

The Hon'ble Allahabad High Court in the case of EMC (Works) Pvt. Ltd vs. ITO reported in 49 ITR 650 wherein it has been held that where application is made by the assessee requesting the AO to issue notice u/s 131 and application was rejected by the AO summarily and assessment completed, action of the AO was held to be without juri iction. Reliance is also placed on the decision of Hon'ble Allahabad High Court in the case of Munnalal Murlidhar 79 ITR 540 wherein it was held that the failure on the part of the AO to call for and examine the evidence which is offered by the assessee materially prejudices the assessee and it is denial to the assessee of opportunity to produce evidence in support of its case. Reliance is also placed on the decision of Hon'ble MP High Court in the case of CIT vs. Kamadhenu Vyapar Company Limited reported in 263 ITR 692 wherein it was held that where the assessee requests the AO for issue of summons u/s 131 to the subscribers of capital in course of investigation into the source for share capital the AO must issue summons.

Since, the assessee has duly filed confirmations from all the brokers to whom commission has been paid and they are also assessed to tax, adverse inference cannot be drawn against the assessee if the brokers to whom the brokerage amount has already been paid and the assessee even had no moral pressure. Accordingly, we direct the A.O. to delete the disallowance of brokerage of Rs. 10.51 lacs.

In the result, both these appeals of the assesses are allowed.