INCOME TAX OFFICER (IT)-3(2)(1) , MUMBAI vs. SOHRAB FALI MEHTA, MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M): This appeal in A.Y.2016-17 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-57, Mumbai in appeal No.CIT(A)-57/Mumbai/10217/2018-19/for A.Y.2016-17 dated 03/10/2022 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 31/12/2018 by the ld. Income Tax Officer, INT Tax Ward 3(2)(1), Mumbai (hereinafter referred to as ld. AO).

2. The Revenue has raised the following grounds of appeal:-

2. Whether on the facts and circumstances of the case and in law, the LA CIT(A) has erred in allowing the following expenses incurred by the assessee on transfer of his 15% share in the property on the ground that the assessee had incurred these expenses wholly and exclusively for the transfer of his property whereas no documentary evidences has been provided by the assessee during the course of assessment proceedings i) Brokerage Rs 42,36,500/- (ii) Solicitor's fee Rs. 50,00,000/- (iii) Amounts paid to Occupier Rs. 10,00,000/- 3 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing payment of Rs 20 lakhs made to the tenant, Shri Stefano Funari, for early termination of Leave and Licence, even though the assessee failed to furnish the Leave and Licence agreement and also failed prove that the payment made to Mr. Funari was wholly and exclusively for the purpose of transfer of immovable property during the course of assessment proceedings.”

3. Mr Kaikhoshru Byramji Mehta who was having 2/3rd share in the said property settled his share in the said property subject to the mortgage claim for the benefit of the children and widow of his deceased brother, Mr Cawasha Byramji Mehta.

4. The said Mr. Kaikhoshru Byramji Mehta requested Mrs. Awanbai Cawasha Mehta, Mrs. Jehangir Edulji Spencer, Mr. Rustom Cawasha Mehta and Ms. Piroja Cawasha Mehta, the widow and children of the late Mr Cawasha Byramji Mehta, to act as trustees along with him in respect of the Trust created by him for their benefit by putting his 2/3rd share in the said property into the said Trust.

6. Dr. Fali S. Mehta died on 29th August, 2003 leaving behind his Last Will and Testament dated 19th May, 1997 and Codicil dated 12th April, 1999 where under he bequeathed his 30% undivided right, title and interest in the said property to his wife, Mrs. Joan Fali Mehta absolutely. The said Will and Codicil were probated by the High Court at Bombay under T & I. J. Petition No.96 of 2007, as a consequence of which the said Mrs. Joan Fali Mehta became entitled to the said 30% undivided right, title and interest of the said Dr. Fali S. Mehta in the said property subject to the occupation of interest of the said Dr. Fali S. Mehta in the said property subject to the occupation of the tenants.

3.1. The assessee filed the return of income for A.Y.2016-17 on 25/05/2016 declaring total income of Rs.15,01,97,720/-. The said income included long term capital gain from sale of assessee’s share in the immovable property of Rs.14,89,00,351/-. The working for the said long term capital gain is as under:-

Rupees Sale of 15% share in property, i.e., Seaside 18,50,00,000 Building at Colaba, Mumbai 400 005. Sale value as per stamp duty u/s.50C 19,65,78,500 Less: Brokerage 42,36,500 Solicitors Fees 50,00,000 1,00,000 C.A.'s Fees 57,500 Valuation fees to Architect 17,15,000 1,11,09,000 Amount paid to servant and 18,54,69,500 Occupier for vacating occupied place Market value of 1 5% share in property as 33,82,900 per Valuation Report as on 01/04/1981 Index 100 in 1981 Index 1081 in 2015- 16 Index cost as on 31/12/2015 3,65,69,149 Long Term Capital Gain from Sale of 14,89,00,351 property

Sohrab Fali Mehta 3.2. The cost of acquisition claimed by the assessee in the sum of Rs.33,82,900/- was supported by the valuation report obtained from a registered party as on 01/04/1981 which was placed on record before the ld. AO at the time of assessment proceedings.

3.3. During the assessment proceedings, the ld. AO raised a query as to whether the assessee was right in claiming the cost of his 15% undivided share in the said property as on 01/04/1981 and thereafter to apply for indexed cost of acquisition to ascertain the indexed cost of acquisition in December 2015, while computing capital gain for A.Y.2016-17, because the property was transferred to him vide agreement dated 08/07/2002 for nil consideration? The assessee replied to the said query vide letter dated dated 25/06/2018 alongwith all supporting documents before the ld. AO. The ld. AO agreed with the assessee that the cost of acquisition should be the cost in the hands of the previous owner which in the case of the assessee is cost of acquisition in the hands of Mr. Kaikhoshru Byramji Mehta as on 01/04/1981 i.e. Rs.33,82,900/-.The ld.AO however, did not agree with the plea of the assessee that assessee is entitled for indexation benefit from 01/04/1981. The main plea of the ld. AO is that the mother of the assessee died on 09/03/2008 and therefore, the assessee became entitled to share in the property through the will of the mother and hence, the assessee can be allowed indexation only from F.Y.2007-08 and not from F.Y.1981-82. The ld. AO relied on the Circular No.636 issued by CBDT in this regard. The ld. CIT(A) however, agreed that the plea of the assessee by following the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. Manjula J Shah reported in 355 ITR 474.

3.4. We find that the issue in dispute is squarely covered by the decision of the Hon’ble Jurisdictional High Court referred to supra wherein the Sohrab Fali Mehta Hon’ble Jurisdictional High Court after due consideration of CBDT Circular No.636 had held that while computing capital gains arising of transfer of capital asset acquired by the assessee under the will, the indexed cost of acquisition has to be computed with respect to the year in which the previous owner first held the asset and not in the year in which assessee became the owner of the asset.

3.5. Respectfully following the said decision, we hold that assessee would be entitled for indexed cost of acquisition benefit from F.Y.1981-82 on the cost of Rs.33,82,900/-. Accordingly, the ground No.1 raised by the Revenue is dismissed.

4.2. The ld. AO observed that all the three parties were doing the same work for the assessee i.e. mainly arranging meeting with buyer and seller through Shri Markand Gandhi and negotiation of price. In addition to this, the Chartered Accountant was giving advice regarding tax deduction in respect of tax due to the assessee after the transfer of the property and Mulla & Mulla was attending some other work such as will and probate related work and leave and licence work, which are not exclusively incurred for the purpose of transfer of the property. Similarly, payments made to servants amounting to Rs.7,15,000/- was only for the arrears of salary payable to the said servant of the assessee which is not connected to with the transfer of the property and there was a tenant occupying the said property and that the tenant was merely compensated for vacating the premises and assessee’s share of such compensation was Rs.10,00,000/-. The ld. AO observed that the said sum is not for the purpose of transfer of the property. Further, the payment of Rs.57,500/-

Sohrab Fali Mehta made to Architect Mr. Mandar M Rishud is for valuation of property and hence, not incurred for the purpose of transfer of the property.

4.3. However, the ld. AO observed that the normal prevailing brokerage, legal fees and other incidental expenses on transfer of the property prevailing in the market is 2% and accordingly, allowed expenses on transfer of Rs.37,00,000/- i.e 2% of assessee’s share of sale consideration on adhoc basis (18,50,00,000 * 2%). The ld. AO categorically held that payment of Rs.1,00,000/- paid to Chartered Accountant; payment of Rs.57,500/- paid for valuation report and payment of Rs.7,15,000/- towards arrears of salary to servant could no way be connected as expenditure incurred wholly and exclusively for the purpose of transfer of the property and hence, disallowed these expenses in entirety. As against the total brokerage of Rs.42,36,500/-; Solicitor fees of Rs.50,00,000/- and amount paid to tenant for vacating premises of Rs.10,00,000/- claimed by the assessee as deduction while computing capital gains, the ld. AO restricted the allowability of expenses on transfer against these heads to Rs.37,00,000/- being 2% of assessee’s share of sale consideration. The ld. CIT(A) observed that the ld. AO having accepted the genuineness of expenses could not merely restrict the allowability of the same on the basis of excessiveness and accordingly, held that assessee would be entitled for complete deduction on account of brokerage and solicitor fees. With regard to payment of Rs.10,00,000/- paid to the tenant Shri Stefano Funari for vacating the premises and consequently early termination of leave and licence agreement, the ld. CIT(A) held that unless the tenant is vacated and the property is free for occupation, it could not be sold and hence, the compensation paid to the tenant would be construed as an expenditure incurred wholly and exclusively for the purpose of transfer of property and accordingly, allowable as deduction.

Sohrab Fali Mehta Aggrieved by these three reliefs granted by the ld. CIT(A), the Revenue is in appeal before us.

4.4. We find that the ld. AO had granted deduction of Rs.37,00,000/- on an adhoc basis @2% towards all expenses incurred on transfer. The dispute before us is only with regard to allowability of brokerage, solicitor fees and amount paid to tenant for vacating the premises. Hence, the deduction allowed by the ld. AO in the sum of Rs.37,00,000/- could be apportioned in the following manner:-

A Total expenses allowed by the ld. AO 37,00,000 Actual expenses incurred by the assessee on account of aforesaid three items (Rs.42,36,500 + Rs.50,00,000 + Rs.10,00,000) B 1,02,36,500 C Actual expenses of brokerage 42,36,500 D Actual expenses of solicitor fee 50,00,000 E Amount paid to tenant for vacating premises 10,00,000

Amounts allowed by the ld. AO:

On Account of Brokerage A ÷B x C 37,00,000 ÷ 1,02,36,500 x 42,36,500 15,31,290

On Account of Solicitor Fees A ÷B x D 37,00,000 ÷ 1,02,36,500 x 50,00,000 18,07,258

On Account of amount paid to tenant for vacating premises A ÷B x E 37,00,000 ÷ 1,02,36,500 x 10,00,000 3,61,452

Total 37,00,000

Sohrab Fali Mehta 4.4. With regard to claim of deduction on account of brokerage expenses of Rs.42,36,500/- we find that the same has been paid by the assessee to Mr. Hirji N Nagarwala. It is not in dispute that the said brokerage has been paid to Mr. Hirji N Nagarwala only in connection with the sale of this subject mentioned property. The assessee had submitted that Mr. Hirji N Nagarwala and other agents involved had arranged and coordinated the meetings with respective Attorneys of buyers and had also contributed effectively for negotiating final sale consideration of Rs.37,00,00,000/- for the subject mentioned property (out of this, assessee’s share is 50% i.e. Rs.18.50 Crores). It is a fact on record that assessee is permanently residing in United States of America (USA) and had employed Mr. Hirji N Nagarwala as broker to negotiate on his behalf with the purchaser and to represent him in all the meetings with the Advocate, Chartered Accountant and all other persons for sale of subject mentioned property. Moreover, the subject mentioned property was released by assessee and his brother in favour of their relative Mr. Keiki R Mehta. It is not in dispute that assessee and his brother were at logger heads with Mr. Keiki R Mehta and certainly the assessee (having residing in USA) requires a representative in India to represent on his behalf before Mr. Keiki R Mehta. Similarly, the other co-owner Mr. Rustom Fali Mehta had also employed M/s. Noshil Estates for protecting his share of 15% of the property and had paid independent brokerage thereon. It is not in dispute that the brokerage amount of Rs.42,36,500/- has been paid by the assessee by cross account payee cheque to Mr. Hirji N Nagarwalla. The assessee has also submitted a confirmation from Mr. Hirji N Nagarwalla dated 21/05/2018 wherein he had confirmed the fact of rendering the following services to the assessee:-

(a) Arranging, coordinating and conducting several meetings with the respective borrowings of the buyer / sellers

Sohrab Fali Mehta (b) Negotiating the final price of Rs.37 Crores with the buyer on behalf of the sellers (c) Arranging peaceful vacation of the licensees occupying the apartments belonging to the sellers (d) Assisting with the removal of the occupant of the servant quarters staying in the premises.

4.5. The said confirmation also states that Mr. Hirji N Nagarwalla have attended over a dozen meetings on behalf of the sellers with the purchasers attorney Mr. Markand Gandhi and Mr. Hormaz Dyar Vakil (Attorney of the sellers) to fine tune the sale deed and other documents required to be executed by the sellers. In view of the above, we have no hesitation to hold that the brokerage amount of Rs.42,36,500/- paid by the assessee to Mr. Hiraj N Nagarwalla would be allowable in full as the deduction while computing capital gains of the assessee as against the sum of Rs.15,31,290/- allowed by the ld. AO towards brokerage on transfer of the subject mentioned property.

4.6. With regard to payment of Rs.50,00,000/- paid to M/s. Mulla and Mulla Craigie Blunt and Caroe, Advocates and Solicitors, the ld.AR stated that the same was paid to look after the legal aspects of the transaction of transfer of the subject mentioned property. In support of this argument, the ld. AR placed reliance on the invoice raised by the said solicitor firm dated 31/12/2015 which are enclosed in pages 10-17 of the paper book filed before us. For the sake of convenience, the entire bill raised by the said solicitor firm is reproduced below:-

Particulars Rs. Rs. (a) To our professional charges. Perusing the copy of the Probate dated 7th

Sohrab Fali Mehta October 2008 of the last Will and Testament of late Mrs. Joan Mehta and advising you on the legal implications thereof.

(b) Preparing the inter se Agreement between Mr. Sorab Mehta and Dr. Rustom Mehta inter alia to the effect that the 30% undivided share in the leasehold land situate at Plot No.147, Middle Colaba, Mumbai 400 005 which includes two houses known as "Sea Side" and "Beach House" with land appurtenant thereto which originally comprised of the K. B. Mehta Trust properties and also the owner occupied tenancy of the flats on the 2nd and 3rd floors and four garages, servant quarters and a dental clinic on the ground floor and property known as "Sea Side" at Colaba (the said Colaba Property) be excluded from the direction contained in Clause 5 of the last Will and Testament of Mrs. Joan Mehta to sell her entire estate and Instead to transfer the said Colaba property into the joint names of Mr. Sorab F Mehta and Dr. Rustom F Mehta after obtaining Probate (c) Acting on your behalf in respect of the proposed sale of your undivided 30% share of the land and dwelling house of the property situate at 147 Middle Colaba Road, Mumbai 400 005 Perusing copies of the relevant. Trust Deeds and Title Deeds as well as the various agreements and correspondence pertaining to the said property and advising you thereon and in terms of the agreement dated 9th September 1994 between the late Dr. Fali Mehta and Dr. Keiki

Sohrab Fali Mehta Mehta (d) Addressing a friendly communication dated 4th June 2012 on your behalf to Dr. Keiki R. Mehta informing him that you were desirous of selling your 30% undivided share in the Colaba property alongwith the various portions in your occupation of which you were tenant owners and requesting a meeting at a mutually convenient date and time to discuss the same as required under the said Agreement dated 9th September 1994 and reporting to you thereafter (e) Attending the office of Mr. Markand Gandhi, Solicitor for Dr. Keiki Mehta on 26th June 2012 when Dr Keiki Mehta and his wife Mrs. Zenobia Mehta were also present alongwith Mr Cyrus (f) Drafting and finalizing the Leave and License Agreement between Mr. Sorab Fali Mehta and Dr Rustom Fali Mehta as Licensors and Mr. Richard Robert McConkey as Licensee in respect of the flat on the 2nd Floor and for that purpose attending on your brokers from time to time till finalization (g) Drafting and finalizing the Leave and License Agreement between Mr Sorab Fali Mehta and Dr. Rustom Fali Mehta as Licensors and Ms Anne Dubourg as Licensee in connection with the 3 floor premises at Sea Side and for that purpose attending on your brokers from time to time till finalization (h) Our Mr. H.SR. Vakil attending the office of Mr. Markand Gandhi on 15th November 2012 to further negotiate and discuss further with Dr. Keiki Mehta and reporting to you thereafter

Sohrab Fali Mehta (i) Addressing a letter dated 29th November 2012 to M/s Markand Gandhi & Co. informing them that since we had not heard from them, it could now be reasonably presumed that his client was not interested in going ahead and that you would be free to deal with the premises and your share in the market. (j) Perusing the letter dated 30th November 2012 from Mr. Markand Gandhi in reply thereto and reporting to you. (k) Perusing two notices both dated 5th June 2013 from the District Collector of Mumbai wherein it was inter alia stated that the Lease dated 22nd July 1940 had expired on 21 July 2006 and as per the Government's recent Policy dated 12 December 2012, the Lessee had an option to apply for a fresh lease to become owners of the said property as stated therein. (l) Obtaining the Government Resolution dated 12 December 2012 and getting the two notices translated and thereafter considering the legal and financial Implications thereof and reporting to you as well as discussing the same with Mr. Markand Gandhi and carrying on correspondence with M/s. Markand Gandhi & Co in connection with the options available under the said Government Policy dated 12th December 2012 and forwarding copies thereof and reporting to you. (m) Carrying on voluminous correspondence with M/s. Markand Gandhi in connection with the renewal option of the lease and reporting to you from time to time. (n) Drafting and finalizing the Leave and License

Sohrab Fali Mehta Agreement in respect of the premises on the ground floor between Dr. Rustom Fali Mehta as the Licensor and IB Hospitality Pvt. Ltd. as the Licensee and for that purpose attending on your brokers from time to time till finalization. (o) Drafting and finalizing the Power of Attorney from Dr. Rustom Mehta to Mr. Subodh Choksi. (p) Addressing letter dated 21st January 2014 to the office of the Collector of Mumbai in connection with the lease renewal/occupancy right option and putting them on notice that the application for exercising the option to convert Markand Gandhi to jointly discuss and negotiate the proposed sale of your share to Dr Keiki Mehta on your behalf and reporting to you thereafter and obtaining further Instructions from time to time. (q) Drafting the Memorandum of Understanding and forwarding the same to you as well as M/s. Markand Gandhi & Co. and holding further discussions with them on your behalf. (r) Perusing the files pertaining to the bills for the arrears of property taxes from 2010 to 2013 and advising you thereon. (s) Drafting the Deed of Transfer from Mr Cyrus S Nallaseth as executor to Mr Sorab Fali Mehta and Dr. Rustom Fali Mehta as beneficiaries. (t) Attending several meetings with Mr. Markand Gandhi of M/s Markand Gandhi & Co., Dr Keiki R Mehta, Mr Cyrus Nallaseth and Mr Hirji Nagarwalla and perusing and finalizing several drafts pertaining to the sale of your share and having the Public Notice, Release Deed, Power of Attorney and all other related

Sohrab Fali Mehta documents for the transfer of your share (u) Attending on your behalf with Mr Hirji Nagarwalla, carrying on correspondence with your Licensee Mr. Stefano Funari and taking the necessary steps for terminating the Leave and License Agreement prematurely and taking possession and charge of the Third Floor premises on your behalf on 8th December 2015. (v) Attending to over 900 emails as well as telephone calls, conference calls on Sundays, holidays and outside office hours and attending on you and conferring with you from time to time. (w) And generally advising you in the matter from 1,00,00,000 time to time to bring the matter to a successful close on 30th December 2015.

4.7. From the perusal of the bill given by the Solicitor as reproduced supra, we find that items mentioned in (d), (e), (h), (i) ,(j), (p), (q), (t), (u) & (w) alone could be construed as expenses incurred in relation to the transfer of the subject mentioned property. Hence, the payment of Rs.50 lakhs paid by the assessee to the said solicitor is to be bifurcated towards items allowable in respect of the aforesaid items and items not connected with the transfer of the property. In this regard, we find that the ld. AO had already allowed a sum of Rs.18,07,258/- on account of Solicitor fees, which in our considered opinion, is very reasonable, considering the fact that invoice raised by the solicitor for professional services rendered from the years 2008 to 30/12/2015. Hence, we direct the ld. AO to allow only a sum of Rs.18,07,258/- on account of solicitor fees as deduction while computing capital gains. We hold that the other works carried out by the solicitor firm for which bill has been raised by them on the assessee ,

Sohrab Fali Mehta cannot be construed as expenditure incurred wholly and exclusively in relation to the transfer of the subject mentioned property.

4.8. With regard to payments made to tenant for vacating the property, we find that assessee and his brother had executed leave and license agreement on 13/04/2013 for premises on the third floor of building “Sea side” for a period of three years with a lock in period of 12 months. Since the subject mentioned property was decided to be sold to Mr. Keiki R Mehta to whom obviously the vacant position was to be given, the assessee and his brother through broker Mr. Hiraj N Nagarwalla negotiated with the licensee Mr. Stefano Funari for cancellation of the leave and license agreement before the lock in period of 12 months. Pursuant to the aforesaid negotiation, Mr. Hiraj N Nagarwalla on behalf of the assessee and his brother, agreed to pay lumpsum compensation of Rs.20,00,000/- (out of which assessee’s share is Rs.10,00,000) to the licensee. The aforesaid compensation was paid so as to get the premises vacated by the licensee before the lock in period of 12 months and thus to comply with one of the conditions of the sale of the property. These facts are further confirmed by the solicitor letter dated 02/12/2015 addressed to Mr. Stefano Funari which is enclosed in pages 95-96 and 99- 100 of the paper book filed before us. The leave and license agreement is enclosed in pages 52-94 of the paper book. In our considered opinion, this payment would certainly be construed as an expenditure incurred in relation to the transfer of the property and therefore, allowable as deduction. Hence, we direct the ld. AO to allow the compensation paid to the tenant for vacating premises in the sum of Rs.10,00,000/- as an allowable deduction while computing capital gains as against Rs.3,61,452/- allowed by the ld. AO.

Sohrab Fali Mehta 4.9. To Sum-up the assessee would be entitled for deduction on account of expenses incurred in relation to transfer of the property as under:-

(i) On account of Brokerage - Rs.42,36,500/- (ii) On account of Solicitor fees - Rs.18,07,258/- (iii) On account of compensation Paid to tenant - Rs.10,00,000/-

5. The ground No.2 & 3 raised by the Revenue are partly allowed.

Order pronounced on 15/03/2023 by way of proper mentioning in the notice board.