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Facts
The assessee, a private limited company, sold a property and claimed an indexed cost of improvement of Rs. 3,38,94,347/-, representing compensation paid to previous agreement holders to clear title disputes. The AO disallowed this cost of improvement, and the CIT(A) upheld the disallowance, stating it was not an addition or alteration to the asset. The CIT(A) however allowed the disallowance under Section 14A.
Held
The Tribunal held that the compensation paid to clear title disputes constituted a valid cost of improvement, citing a jurisdictional High Court judgment which recognized such payments as expenditure necessary to obtain a clear title. However, as the additional evidence was not presented to the AO during assessment, the Tribunal remitted the issue back to the AO to verify the documents and grant the allowances in accordance with law.
Key Issues
Whether compensation paid to prior agreement holders to clear title disputes on a property constitutes 'cost of improvement' for capital gains calculation, and if additional evidence can be admitted at the appellate stage to substantiate such claims.
Sections Cited
2(14), 2(47), 48, 14A, 115JB, 142(1), 234B, 234C
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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI LAXMI PRASAD SAHU & SHRI SOUNDARARAJAN K.
ORDER PER SOUNDARARAJAN K., JUDICIAL MEMBER
This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 18/07/2024 in respect of the A.Y. 2017-18 and raised the following grounds: “
1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The learned CIT[A] is not justified in upholding the disallowance of Rs. 3,38,94,347/- being the indexed cost of improvement claimed while computing capital gains on the sale of property under the facts and in the circumstances of the appellant's case.
3. The learned CIT[A] erred in holding that the costs incurred by the appellant with regard to payment of compensation to certain persons in the earlier years has no connection with the sale of property made and therefore, the same could not be considered as cost of improvement of the capital asset sold by the appellant under the facts and in the circumstances of the appellant's case.
4. The learned CIT[A] ought to have appreciated that the appellant had paid compensation to various persons who had previously agreed to purchase the capital asset that was sold by the appellant and therefore, the compensation so paid was capital expenditure incurred by the appellant for the year in which the compensation was paid and therefore, the same was allowable.
5. Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s. 234B and 234C of the Act, which under the facts and in the circumstances of the appellant's case and the same deserves to be cancelled.
6. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.”
The brief facts of the case are that the assessee is a private limited company filed its return of income on 19/10/2017 and declared a total income of Rs. 23,19,33,120/-. The book profit u/s. 115JB was shown at Rs. 4,57,88,996/-. Thereafter, the case was selected for scrutiny through CASS and notices were issued. The AO sought for the details about the sale deed of the property sold by the company, cost of acquisition and the cost of improvement. The assessee had claimed a sum of Rs. 2,36,50,722/- as the cost of improvement and the indexed cost of improvement was arrived at Rs. 3,38,94,347/-. The AO disallowed the cost of improvement on the ground that the assessee could not furnish any evidence. Apart from that the AO also made a disallowance u/s. 14A of the Act. As against the said order of AO, the assessee filed an appeal before the Ld.CIT(A) and contended that the cost of improvement claimed by the assessee is correct for the reason that the assessee had incurred various expenditures in order to clear the title of the property which was owned by the assessee. The assessee also submitted that they were not able to produce the details before the AO since the notice issued u/s. 142(1) was issued through the ITBA portal which was not noticed by the assessee. The assessee further submitted that the assessment year is the first year of compulsory e-proceedings and therefore the assessee had not viewed the portal in order to file the details as requested by the AO. Anyhow the assessee had filed their reply to the show cause notice issued by the AO and also furnished the various documents and submitted that the documents available with the assessee would show that the cost of improvement claimed by the assessee is in order. The Ld.CIT(A) had allowed the appeal insofar as the addition made u/s. 14A of the Act. In respect of the disallowance of indexed cost of improvement, the Ld.CIT(A) had not accepted the case of the assessee and dismissed the same even though the assessee had filed the relevant documents to show that the expenditure incurred were all related to clear the title and therefore the said amounts are to be added to the cost of improvement. As against the said order of the Ld.CIT(A), the assessee is in appeal before this Tribunal.
At the time of hearing, the Ld.AR submitted a paper book containing pages 1 to 139 in which the assessee had sought for the permission for admitting the additional evidences numbering about 9 which was enclosed as annexures 2 to 10. The Ld.AR also enclosed the copy of the acknowledgment for having filed the documents on 03/07/2024, reply dated 26/06/2024 and the copy of the acknowledgment for having filed the return of income on 26/09/2011. The Ld.AR also filed an application under Rule 10 of ITAT Rules for accepting the additional evidences now produced to show that the compensations paid to the purchasers were duly reflected in the bank statements and contended that the cost of improvement includes the compensation paid to the purchasers. The Ld.AR also filed the judgment of the Hon’ble Jurisdictional High Court reported in (2012) 20
The Ld.DR relied on the order of the lower authorities and submitted that no documents were furnished before the AO and therefore the order of the AO is in order.
We have heard the arguments of both sides and perused the materials available on record.
The only dispute involved in this appeal is against the disallowance of cost of improvement claimed by the assessee for the reason that the compensation paid to the other purchasers would not constitute the cost of improvement. In order to appreciate the issue in detail, we are going through the evidences filed by the assessee by way of anenxures 2 -10 to show that the compensation amount was paid to the other purchasers in order to clear the title of the property otherwise, the title would not be a clear one and in effect, the property would not fetch good value while selling the same. In page 61 of the paper book, the assessee enclosed the copy of the agreement to sale dated 08/10/2005 in which the assessee company had entered into a sale agreement with Shri B.A. Srinath and Shri B.S. Adinarayana Gupta for a sale consideration of Rs. 5 crores and received a sum of Rs. 80 Lakhs as advance by way of cheque. In page 69, the assessee also enclosed the copy of the plaint in O.S. No. 4861/2006 which was instituted by Shri B.A. Srinath and Shri B.S. Adinarayana Gupta against the assessee company for the specific performance of the agreement. As seen from the said suit papers, we came to know that the assessee had informed the said purchasers that the sale could not be completed since the Directors as well as shareholders had cancelled the resolution authorising the company to sell the property and therefore the purchasers had moved the competent Civil Court for the judgment and decree of specific performance and the same was pending.
7. Later on, the assessee company entered into an agreement to sale on 15/05/2008 with one Madhura Developers even though the suit instituted by the earlier purchasers Shri B.A. Srinath and Anr was pending. The said Madhura Developers agreed that they would purchase the property after settling the dues payable to Shri B.A. Srinath and Anr. But unfortunately, the assessee was not able to execute the said agreement also and therefore the deed of cancellation was made on 03/02/2012 in which the appellant as well as Shri B.A. Srinath and Anr. and Madhura Developers were shown as parties in the said deed of cancellation, in which it was mentioned as follows:
As seen from the said deed of cancellation, we understand that the assessee had paid an amount of Rs. 25 Lakhs as compensation to Madhura Developers and the assessee paid a further compensation of Rs. 2,36,50,722/- to Shri B.A. Srinath and Shri B.S. Adinarayana Gupta and therefore the assessee had incurred an expenditure of Rs. 2,36,50,722/ in order to clear the disputes on the property. If the assessee had not cleared the disputes, the suit filed by Shri B.A. Srinath and Shri B.S. Adinarayana Gupta would take some time to see the light of the day and similarly, if the second purchaser Madura Developers had initiated any proceedings, it will also drag on which would definitely affect the title of the property and the assessee would also not be able to dispose the property until the civil litigations are come to an end. We have also considered the fact that even the decree granted by the Civil Courts is not a final one because the affected partly would go on further appeal and further second appeal and even before the Hon’ble High Court, in order to get a favourable order in their favour. To complete this process, we do not know how much time it will take whether it is within a reasonable period or not and in that circumstances, the assessee would not be able to get a good title in order to dispose of the property. In order to get a clear title on the property, we feel that the assessee had wisely entered in to the deed of cancellation by paying compensation to both the purchasers. Otherwise it will be very difficult for the assessee to get a clear title for the property.
From the above said facts, it is clear that the assessee had incurred an expenditure of Rs. 2,36,50,722/- towards the improvement of the title of the property and arrived the indexed cost of improvement at Rs. 3,38,94,347/-. The Ld.CIT(A) had not accepted the said expenditure incurred by the assessee on the ground that the expenditure incurred by way of giving compensation to the agreement holders would not amount to any additions or alternations made to the assets. The Ld.CIT(A) also held that the compensation paid by the assessee has no connection with the transaction of the land during the current year. In support of his finding, the Ld.CIT(A) had relied on the judgment of Hon’ble Madras High Court in the case of CIT vs. Indira reported in 119 ITR 837 (Mad) and the judgment of Hon’ble Kerala High Court in the case of K. Sarala Devi vs. CIT(A) reported in 222 ITR 211.
First we will consider the judgment of the Hon’ble Madras High Court and whether the same would be applicable to the facts and circumstances of the present case. In the said judgment, the third party claimed title over the property which was compromised by the said assessee by paying a compensation and therefore the Hon’ble Madras High Court had held that the said compensation cannot be construed to be an amount paid for the cost of depreciation or cost of improvement. In the present case on hand, the facts are entirely different. In this case, the compensation was not paid to any third parties but only to the genuine agreement holders and therefore the said judgment relied on by the Ld.CIT(A) to deny the cost of improvement is not correct.
Similarly, in the Hon’ble Kerala High Court judgment, the assessee paid the tax to lift the attachment made by the income tax department and therefore the Hon’ble Kerala High Court had denied the payment of tax as the expenditure incurred towards the property which was under attachment. The facts of the present case is also not akin to the facts found in the Hon’ble Kerala High Court and therefore the Ld.CIT(A) is not correct in relying on the said judgment also. We have also perused the order of Hon’ble Chennai Bench of the Tribunal which are also on different facts.
Insofar as the reliance made by the assessee on the judgment of the Hon’ble Jurisdictional High Court cited supra, the finding given by the Hon’ble High Court is as follows: “23. From the aforesaid judgments it is clear that the right to obtain a conveyance of immovable property falls within the expression 'property of any kind' used in s. 2(14) of the Act and consequently it is a capital asset. It is because the expression 'property of any kind' is of wide import. When this expression is read along with the expression defined in s. 2(47)(ii) i.e., 'extinguishment of any rights therein', the giving up of a right of specific performance by the assessee to get conveyance of immovable property in lieu of receiving consideration, results in the extinguishment of the right in property, thereby attracting the rigor of s. 2(14) r/w s. 2(47). Giving up of a right to claim specific performance by conveyance in respect to an immovable property, amounts to relinquishment of the capital asset. Therefore, there was a transfer of capital asset within the meaning of the Act. The payment of consideration under the agreement of sale, for transfer of a capital asset is the cost of acquisition of the capital asset. Therefore, in lieu of giving up the said right, any amount received, constitutes capital gain and it is exigible to tax. However, as is clear from s. 48, before the income chargeable under the head capital gains is computed, the deductions set out in s. 48 has to be given to the assessee. It is only the amount thus arrived at, after such deductions under s. 48, would be the income chargeable under the heading capital gains.
In the instant case both the assessees entered into an agreement to purchase the immovable property and paid Rs. 1,00,000 as advance amount. It is the cost of acquisition. They filed a suit for specific performance of the agreement of sale. It is thereafter under an agreement entered into between them and the purchasers, they gave up their right to sue for specific performance in lieu of a payment of Rs. 7,50,000. Therefore, the amount received by them for giving up the right of specific performance i.e., to give up their right in a capital asset constitutes capital gains. However, they are entitled to deductions as per s. 48, both regarding the investment made as well as the expenditure incurred and only after such deduction the amount arrived at would be exigible to capital gains tax.”
From the reading of the above finding of the Hon’ble Jurisdictional High Court, we came to the conclusion that the compensation paid to the two agreement holders would definitely amount to expenditure incurred for clearing the disputes on the title of the property and therefore the said expenditures are necessarily to be treated as cost of improvement. If the disputes are not cleared the assessee will not get a good title and in turn it will affect the value of the property of the assessee and therefore we are of the view that the compensation paid to the genuine agreement holders would constitute cost of improvement which was rightly claimed by the assessee.
We have gone through the application to admit the additional evidences filed by the assessee and from that we came to know that the same were not placed before the AO while framing the assessment. Even though, in the earlier paragraphs, we had given a clear finding with regard to the eligibility of the compensations paid to the agreement holders as cost of improvement, in order to verify the documents now filed before us, we are remitting the issue to the AO and directed the AO to grant the allowances in accordance with law if the documents are in order. With the above direction, we set aside the orders of the lower authorities.
Order pronounced in the open court on 30th January, 2025.