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Income Tax Appellate Tribunal, “SMC” BENCH, AHMEDABAD
Before: SHRI P.M. JAGTAP, VICE-
This appeal filed by the assessee is directed against the order of the learned Commissioner of Income-tax (Appeals-5), Vadodara [“CIT(A)” in short] dated 09.07.2019 whereby he not only confirmed the additions made by the Assessing Officer to the total income of the assessee but also enhanced the income of the assessee by Rs.36 lakhs.
The assessee, in the present case, is an individual who filed his return of income for the year under consideration on 29.03.2014 declaring a total income of Rs.9,31,550/-. The case of the assessee was selected for scrutiny under CASS and a notice under Section 143(2) of the Income-tax Act, 1961 (“the Act” in short) was issued by the Assessing Officer to the assessee on 30.09.2014 . In the return of income filed for the year under consideration, a Long Term Capital Gain as worked out at Rs.14,580/- arising from the sale of land at 207, Moje Tandalja was declared by the assessee. The said land was purchased by the assessee on 20.06.2007 and the same was initially agreed to be sold vide an agreement to sale on 19.09.2008. Due to some AY : 2013-14 2
reasons, the said banakhat, however, could not be executed and the agreement to sale was cancelled on 22.02.2010 subject to payment of Rs.36 lakhs by the assessee in the form of compensation to the prospective buyers. Thereafter, the land was sold by the assessee to another buyer during the year under consideration and while computing the capital gain arising from the said sale, the amount of Rs.36 lakhs paid as compensation for cancellation of agreement to sale executed earlier was claimed by the assessee as cost of improvement to the property and deduction for the same was claimed after applying inflation index. According to the Assessing Officer, the amount of Rs.36 lakhs paid by the assessee as compensation for cancellation of the agreement to sale executed earlier did not constitute cost of improvement and the assessee, therefore, was not entitled to claim indexation for the same. He held that the said amount represented expenditure incurred by the assessee wholly and exclusively in connection with the transfer of the property and the assessee, therefore, was entitled for deduction of the same to the extent of Rs.36 lakhs. As regards the other deduction of Rs.1,50,000/- claimed by the assessee on account of commission paid to one Shri Vitthalbhai Ranpura, the Assessing Officer found that the said amount was paid by the assessee only in the year under consideration whereas the agreement to sale was entered into in the year 2010 and even the sale consideration was received by the assessee in FY 2010-11 itself. He held that the commission of Rs.1,50,000/- paid by the assessee thus was not related to the sale of land and deduction for the same as claimed by the assessee was disallowed by the Assessing Officer. Accordingly, the capital gain arising from the sale of land of the assessee was computed by the Assessing Officer at Rs.14,17,745/- as against Rs.14,580/- declared by the assessee. AY : 2013-14 3
The computation of capital gain as made by the Assessing Officer at a higher value was challenged by the assessee in an appeal filed before the learned CIT(A). During the course of appellate proceedings, a detailed submission was filed by the assessee before the learned CIT(A) in support of his case on the issue involved. After going through the said submission, learned CIT(A) noted that the agreement to sale of the property was earlier entered into by the assessee on 19.09.2008 and for cancellation of the same vide subsequent agreement executed on 22.02.2010 a substantial compensation of Rs.36 lakhs was claimed to be paid by the assessee for making the title of the property clear. He noted that there was nothing to show any dispute raised by the prospective buyer or any settlement of such dispute warranting payment of compensation of Rs.36 lakhs. According to him, the amount of Rs.36 lakhs was paid by the assessee as compensation without any dispute raised by the prospective buyer or without any settlement of such dispute and it was a case where the compensation was paid simply to reduce the capital gain chargeable to tax. He, therefore, was of the view that the assessee was not entitled to claim deduction on account of compensation of Rs.36 lakhs paid on cancellation of agreement to sale executed earlier and the deduction allowed by the Assessing Officer in the assessment to that extent was wrong. He accordingly issued a notice proposing to enhance the income of the assessee by Rs.36 lakhs and giving the assessee an opportunity to offer his explanation in the matter. In reply to the said notice, following submission in writing was made by the assessee before the learned CIT(A).
“I refer to your above mentioned notice. In reply to the same I have to state as under: The facts of the case are rightly stated in Para-2 of the above notice which is reproduced hereunder: AY : 2013-14 4
"A land was purchased at S.NO 207, Moje Tandalja on 20.06.2007. Further agreement of sale was made on 19.19.2008. However, the agreement was cancelled on 22.02.2010 and compensation of Rs. 36,00,000/- had to be paid to prospective buyers with whom the agreement was cancelled. It is contended that the compensation should be treated as cost of improvement and indexation be allowed on the same. In the submission before me it is submitted that this being the cost incurred for making defective, incomplete or imperfect title as complete and perfect is an allowable deduction as cost of improvement u/s 48 of the Income Tax Act."
Further in Para-2 of the notice, it is also rightly observed that "the assessing officer has not accepted your assessee's claim of cost of compensation as cost of improvement of the property but allowed this cost to be reduced from the sale consideration without indexation for the reasons not elaborated by him."
In turn your honor intends to hold that "not only the contention treating compensation paid is cost of Improvement appears untenable even the action of assessing officer in allowing deduction of cost of compensation is also perhaps not correct. " The facts of this case is: The Appellant has purchased a land at S.No. 207, Moje Tandalja on 20.06.2007. The appellant had entered into "Agreement to Sale" on 19.09.2008 for the said land. Due to some unavoidable reason, the Appellant had cancelled the "Agreement to Sale" on 22.02.2010. According to the terms and conditions for cancelling the said Agreement, the Appellant was liable to pay the sum of Rs. 36,00,000/- to the party with whom the initial Agreement to Sale (Banakhat) was executed. The Appellant paid the aforesaid sum of Rs.36,00,000/- on 22.02.2010 (F.Y. 2009-10) so as to get the clear title of Land. The Appellant had also paid the commission of Rs. 1,00,000/- on 30.03.2012 and Rs. 50,000/- on 04.07.2012, which is disallowed by AO.
After cancellation of the above agreement to sale, the sale deed was executed on 04.07.2012 (A.Y-2013-J4) with Shivanand Developers whereby the sale consideration was fixed at Rs.61,01,192/- and the said amount was settled by end of F.Y. 2012-13. The appellant had declared Capital Gain of Rs. 14,580/- as- above. However the AO has arrived at Capital Gain at Rs. 14,17,745/- on account of not allowing the deductions as under. AY : 2013-14 5
Indexed cost for cancellation expenses paid by the assessee for cancelling the original agreement. (AO has allowed the same as expense which is not in dispute)
Brokerage Expenses
Considering the above provisions of the Act it may please be stated that in case of your Appellant the cancellation charges paid by the appellant paramount to the Alteration/Clearance of the title of Capital asset. By removing the defect in title on the Asset which would have existed no cancellation charges were paid. The payment of said charges is not in dispute and has been rightly allowed by the A. O.
Even Hon'ble Supreme Court has ruled that the payment made by person for the purpose of clearing of the mortgage created by the previous owner to be treated as cost of acquisition of the interest of the mortgagee in the property and is so deductible u/s. 48 of the Act.
I request your honour to kindly afford an opportunity for personal hearing by fixing the date of hearing convenient to your honour.”
The learned CIT(A) did not find merit in the submission made by the assessee and proceeded to enhance the income of the assessee by Rs.36 lakhs for the following reasons given in paragraph Nos. 10 to 10.6 of his impugned order:-
“10. Ground No. 2 relates to not allowing indexed cost of compensation paid of Rs. 36,00,000/- on account of cancellation of agreement for sale of land. AR vehemently argued that expenses incurred were not in dispute. AR disputed applicability of order of the Hon'ble Bombay High Court in the case of CIT Vs. Roshanbabu Mohammad Hossain Merchant (2005) 144 Taxmann.720 (Bombay). Instead, AR has relied upon rulings of the Andhra Pradesh HC in case of Naozar Chemoy Vs. CIT. I have considered the rulings of the Hon'ble Andhra Pradesh High Court. Facts are different in that case, as such tenants were paid for vacating the premise. In other words, assessee used to get rent from that property which was duly disclosed in ITR. Once property fetches income then expenses incurred while sale for vacating that property was considered favourably by Hon'ble HC. Hence, encumbrance was non-intentional. However, in present case, title of the land was absolutely clear. The appellant himself entered with "agreement for sale" AY : 2013-14 6 Admittedly, appellant/AR did not bring cogent reason or unavoidable circumstances forcing appellant to incur expenses towards making title clear which was in fact already without encumbrance. Moreover, agreement nowhere discloses any such payment to be made in case of cancellation of the "agreement to sale". Agreement is also silent as to who, when, how and in what manner either party would be responsible for cancellation of the "agreement to sale". No third party or an advocate or an arbitrator is seen to be roped in towards settlement of disputes. It is the appellant who himself decides to pay Rs. 36,00,000/- and a secret agreement was reached a finality. "Agreement to sale without possession” was not registered. If such expenses are allowed then in each and every case, one after another assessee would resort to secret agreement and incur expenses as per their wish and will and reduce the capital gain.
1 Legislature has enacted provisions of Sec. 49 of the Act with an intention to safeguard the intent of the genuine expenses to be deducted from capital gain so as to arrive at true and fair income. Appellant in its written submission dated 19.06.2019, received in my office on 19.06.2019 vide Dak Sl. No. 275 at page 3 himself admits that "due to unavoidable reason, appellant had cancelled the agreement to sale on 22.02.2010". Once appellant himself does not know the reason for cancellation then I am afraid how was he aware about non-clearance of title of land. Obviously, land was purchased without encumbrances. Neither physical encumbrance by way of photographs has been produced before me.
2 AR/ appellant was requested to visit the land along with Inspector of my office to prepare a factual report after joint inspection, but again neither AR nor appellant readily agreed. Discreet inquiry conducted by Inspector and also information received from police station at Tandalja did not reveal any police report or any complaint filed in respect of the land at S. No. 207, Moje Tandalja. These facts are bizarre which go to the root of the argument of the appellant/AR. Certainly, expenses incurred were on account of self calculation/ estimation only with an intention to evade legitimate taxes on capital gain. Therefore, I can easily conclude that land was saleable without any encumbrance warranting no expenses to be incurred.
3 Once the appellant was made aware of the fact that expenses incurred was not genuine, as per section 101 of the Indian Evidence Act, 1972, the onus was on the appellant to prove that he had claimed was genuine, I find that in the case of Shri Charan Singh vs. Chandra Bhan Singh (AIR 1988 SC 6370), the Hon'ble Supreme Court have clarified that the burden of proof lies on the party who substantially asserts the affirmative of the issue and not upon the party who denies it. It has been further held that the party cannot, AY : 2013-14 7 on failure to establish a prima facie case, take advantage of the weakness of his adversary's case. The party must succeed by the strength of his own right and the clearness of his own proof. He cannot be heard to say that it was too difficult or virtually impossible to prove the matter in question, hi the case under consideration, since it is the appellant who had made the claim that she had paid compensation to make Lad saleable/marketable, all the facts were especially within his knowledge.
Section 102 of Indian Evidence Act makes it clear that initial onus is on person who substantially asserts a claim. If the onus is discharged by him and a case is made out, the onus shifts on to deponent. It is pertinent to mention here that the phrase "burden of proof” is used in two distinct meanings in the law of evidence viz, 'the burden of establishing a case', and 'the burden of introducing evidence’. The burden of establishing a case remains throughout trial where it was originally placed, it never shifts. The burden of evidence may shift constantly as evidence is introduced by one side or the others. In this case, once the evidence that appellant has claimed expenses on account of payment of compensation to first party that, also admittedly without assigning reason, the burden of evidence shifted to the appellant. During the appellate proceeding, the appellant has failed to produce any evidence to prove that payment of compensation was necessary and genuine. In the present case, it is seen that the appellant has failed to discharge her burden of proof.
4 I further find that the above ratio as laid down by the Hon'ble Supreme Court has been reiterated and applied by the Hon'ble Apex Court in the case of Sumati Dayal vs. CIT (214 ITR 801). It is essential for the revenue to look into the real nature of transaction and what happens in the real word and contextualize the same to such transactions in the real market situation. Further, in the case of McDowell & Co. Ltd. [(1985) 154.ITR 148 (SC)],the Hon'ble Supreme Court have observed as under; "Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Every person is entitled to so arrange his affairs as to avoid taxation but the arrangement- must be real and genuine and not a sham or make believe.
5 Appellant in its own submission before AO and also before me has claimed that compensation of Rs.36,00,000 was paid to prospective buyers. AY : 2013-14 8 has accounted for Rs.36,00,000 in their RoI. In view of the aforesaid discussions, I am of the view that documents submitted as evidences to prove the genuineness of expenses incurred in the form of compensation transaction are themselves found to serve as smoke screen to cover up the true nature of the transactions in the facts and circumstances of the case as it is revealed that “agreement to sale without possession" which was later cancelled are arranged transactions to reduce tax from capital gain by well organised network with the sole motive to enable the beneficiary to account for such easy income for a consideration or commission or even routing back the money into own account.
6 I note that the landmark decision of the Hon'ble Supreme Court in the case of McDowell and Company Limited, 154 ITR 148 is squarely applicable in this case wherein it has been held that tax planning may be legitimate provided it is within the framework of the law and any colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that is honourable to avoid the payment of tax by dubious methods. However, the case laws cited by the Ld. counsel for the assessee are on distinguished facts, hence, not applicable in the instant case. The appellant has not raised any legal ground and argued only on merit for which appellant has failed to substantiate his claim before me. In view of above discussions, I am of considered view that appellant is not entitled for deduction on account of payment of compensation from capital gain within the meaning of Sec. 55 of the Act. Thus, compensation claimed for cancellation of banakhat of Rs. 36,00,000/- is not required to be deducted while computing capital gain u/s 48 of the Act. AO is directed to withdraw the deduction of Rs.36,00,000/- and re-compute capital gain and tax liability. Claim of indexed cost of compensation becomes infructuous and accordingly rejected. Accordingly, appellant fails on this ground. Ground No. 2 is dismissed with income enhanced to extent of Rs. 36,00,000/-.“
The learned CIT(A) also confirmed the addition of Rs.1,50,000/- made by the Assessing Officer by way of disallowance of commission for the following reasons given in paragraph no.11 of his impugned order:-
“11. Ground No. 3 relates to brokerage expenses of Rs. 1,50,000/-. During the appellate proceedings before me, neither the AR nor the appellant could controvert the findings of the AR at para 5.3 & 5. 4. The crucial facts brought on record by AO has been sidelined by AR/appellant by way of filing irrelevant case laws. AO has clearly stated that final sale deed of the land AY : 2013-14 9 was executed on 04.07.2012 to Sreenathji Associates through two confirming parties - M./s. Shivanand Developers and M/s. Shreeji Buildtech. Appellant entered into a banakhat agreement with M/s Shivanand Developers on 01.06.2010. Confirmation of Shri Manan U Trivedi, partner of M/s. Shivanand Developers was also obtained which was confirmed in his statement recorded on oath u/s 131(1) of the Act before AO. AO had verified payment details and found that appellant received entire sale consideration of Rs.61,01,192/- during F.Y.2009-10 and 2010-11. Generally, commission is paid when he/she brings a party for sale and not after the sale or entire sale consideration is received. AR/appellant could not advance any reason as to why and under which circumstances or what necessitated him to pay brokerage of Rs.1,50,000/- in F.Y.2012-13. Appellant's argument that commission was paid almost 2 years after receiving the entire sale consideration is imaginary. When agreement to sale itself is dated June, 2010 and in fact almost entire sale consideration is seen to have received during the F.Y.2009-10 & 2010-11 and also the sale / purchase agreement parties are same then commission payment to third party was not required. This is a tactic to reduce capital gain anyway in the garb of provisions of the Act. I remain unconvinced with AR's imaginary argument. Expense on account of brokerage of Rs.1,50,000/- paid to Vithhalbhai Ranpura deserves to be disallowed. AO's action is hereby upheld. Appellant fails on this ground as well. Ground No. 3 is dismissed.”
Aggrieved by the order of the learned CIT(A), the assessee has filed this appeal before the Tribunal on the following grounds:-
“1) The order passed by the Hon'ble CIT(A)-1 is bad in law, contrary to legal pronouncement and same be quashed. The addition confirmed by the Hon'ble CIT(A) is unwarranted and unjustified. It be held so now and addition made to be deleted.
The Ld CIT(A) has erred in enhancing the compensation paid in nature of cost of improvement due to right of another person in the impugned land under sale consideration for capital gain. It is submitted that amount paid of Rs.36,00,000/- to the party having right to receive / acquire the land be allowed as cost of improvement and indexation be allowed there on as a consequence thereof.
The Hon'ble CIT(A) has erred in passing the order under consideration without affording proper opportunity of hearing by issuance of notice. The Shri Vipul Mansukhbhai Bhimani Vs. ITO AY : 2013-14 10
notice issued by Hon'ble CIT (A) was for filing the written submission and not for hearing. Your appellant has specifically submitted vide written submission dated 19.06.2019 to afford proper opportunity of hearing by passing revised order in this behalf.
The Hon'ble CIT (A) has erred in not considering the brokerage of Rs.1,50,000/- as part of cost of acquisition on the ground that the expenses are related to A.Y. 2011-12 and not for the year under consideration.”
We have heard the arguments of both the sides and also perused the relevant material available on record. Ground Nos. 1 & 3 raised by the assessee in this appeal are not pressed by the learned Counsel for the assessee at the time of hearing before the Tribunal and the same are accordingly dismissed as not pressed.
As regards the issue raised in Ground No.2 relating to the enhancement of Rs.36 lakhs made by the Assessing Officer on account of compensation paid for cancellation of agreement to sale executed earlier, the learned Counsel for the assessee has invited my attention to the submission made by the assessee vide letter dated 15.02.2016 before the Assessing Officer as reproduced on page Nos. 2 & 3 of the assessment order to point out that both the prospective buyers to whom the compensation was paid by the assessee had been personally examined by the Assessing Officer; and, in their statements recorded by the Assessing Officer they had confirmed of having received the amount of compensation in question on cancellation of banakhat. He has contended that the learned CIT(A), therefore, had no reason to doubt the genuineness of the compensation paid by the assessee on cancellation of banakhat on the ground that the identity of the prospective buyers was not established. He has submitted that the compensation of Rs.36 lakhs on cancellation of banakhat was paid as per the mutual understanding between both the sides and the same was evidenced AY : 2013-14 11
by the cancellation deed executed on 22.02.2010. As rightly contended by the learned Counsel for the 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 learned 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.
As regards the claim of the assessee that the compensation charges of Rs.36 lakhs paid on cancellation of banakhat being the cost of improvement of the property, he is entitled for deduction on index basis while computing the capital gain, it is observed that this issue is squarely covered by the decision of Hon’ble Bombay High Court in the case of CIT vs. Shakuntala Kantilal, (1991) 190 ITR 56 (Bom), 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.
Respectfully following the decision of Hon’ble Bombay High Court in the case of Shakuntala Kantilal (supra), I 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. AY : 2013-14 12
As regards the issue raised in ground No.4 relating to the disallowance of brokerage expenses claimed by the assessee at Rs.1,50,000/-, I find that the said disallowance was made by the Assessing Officer and confirmed by the learned 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. I accordingly delete the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on this issue and allow Ground No.4 of the assessee’s appeal.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open Court on 14th October, 2022 at Ahmedabad. (P.M. JAGTAP) VICE-PRESIDENT Ahmedabad, Dated 14/10/2022 *Bt AY : 2013-14 13
आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant
""यथ" / The Respondent. 3. संबं"धत आयकर आयु"त / Concerned CIT 4. आयकर आयु"त ( अपील ) / The CIT(A)-
"वभागीय ""त"न"ध आयकर अपील"य अ"धकरण/DR,ITAT, Ahmedabad, , 6. गाड" फाईल /Guard file. आदेशानुसार/ BY ORDER,सहायक पंजीकार (Asstt.