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Facts
The assessee, a non-resident Indian, sold ancestral land and claimed a deduction of Rs. 13,56,87,500/- as transfer expenses for payments made to "Confirming Parties" and an "Occupant" to clear encumbrances and facilitate the sale. The Assessing Officer (AO) disallowed these expenses, adding the amount back to the long-term capital gains, which was upheld by the Dispute Resolution Panel (DRP). The assessee contended these payments were a diversion of income by overriding title or deductible expenditure necessary for the transfer.
Held
The Tribunal held that the payments to "Confirming Parties" and the "Occupant" were for relinquishing their independent rights and interests, which were indispensable to make the property marketable and free of encumbrances. Such payments should be considered deductible 'expenditure' under Section 48(i) of the Act or a diversion of income by overriding title. The Tribunal found that the AO and DRP erred in not appreciating this principle and restored the matter to the AO for a fresh assessment of capital gains, with directions to provide an opportunity of hearing to the assessee.
Key Issues
Whether payments made to confirming parties and an occupant to clear encumbrances and enable the sale of ancestral land qualify as deductible 'expenditure' under Section 48(i) or represent diversion of income by overriding title for capital gains computation.
Sections Cited
143(3), 144C(13), 48, 2(14), 37, 133(6), 131
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCHES : D : NEW DELHI
Before: SHRI G.S. PANNU, HON’BLE & SHRI ANUBHAV SHARMA
ORDER
PER ANUBHAV SHARMA, JM:
This appeal is preferred by the Assessee against the final assessment order dated 23.06.2023 passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’), by the DCIT, Circle International Taxation 2(2)(2), New Delhi (hereinafter referred to as the Ld. AO), for assessment year 2020-21.
The Applicant is non-resident Indian settled in USA and is US tax resident. During the previous year relevant to the assessment year under reference, the Applicant sold ancestral land bearing S no14 Hissa, No 7 Pt, Village Goregaon, Tal Borivli, Mumbai Suburban Dist on December 11, 2019 and disclosed long term capital gains computed as under:- Amt in Rs Sale Consideration - 18,56,87,500 Less: Deduction u/s 48 - 13,56,87,500 Net Sale Consideration (I) 5,00,00,000 Acquisition Cost Fair Market Value on 01-04-2001 Rs 10,400/- x 3647.80 sq m 3,79,37,120 Less: 60% reduction in FMV due to encroachment 2,27,62,272 1,51,74,848 Indexed Cost 1,51,74,848 x [289/100] 4,38,55,311 Cost of Acquisition (II) 4,38,55,311 Long Term Capital Gains: (I) - (II) 61,44,689
Agreement value 13,31,87,500+ TDR The assessee had provided the break up of consideration as follows; Receipt by Vendor - Yogesh Patel (the assessee) 5,00,00,000 Receipt by Confirming Parties to agreement 5,25,00,000 Receipt value by way of Occupant TDR of 2750 sq m 8,31,87,500 18,56,87,500
3. The rationale behind sale consideration and its components, as per assessee is that on the principles of taxation of real income, the amount not received by assessee but paid to the third party cannot form part of the full value of consideration for computing the capital gains. It was submitted that this amount paid to third parties is disclosed in computation of long-term capital gains so that 2 apparent mismatch or undervaluation is not flagged in a mechanical fashion. divided between Applicant, the Confirming Parties and the Occupant which, for computing capital gains, is comprising of monetary consideration of Rs.10,04,00,000/- and non-monetary consideration as per Stamp Duty authority's adjudication order no 1070 dated December 09, 2019; 4. The Applicant has neither received nor was entitled to any consideration other than the amount of Rs.5,00,00,000/-. At the most, the consideration to Confirming parties and Occupant is by way of diversion of income at source by virtue of their inherent rights as explained in the registered sale agreement. 5. As described in the agreement, the expenses are payments to the Confirming Parties and the occupant in order to enable the Applicant to sell the property. Unless the Applicant/the buyer settled with these parties, the sale transaction could not have materialized and hence deduction is claimed as per the agreement terms and conditions. The expenses are claimed in accordance with the duly registered agreement which is admissible evidence in courts of law as per Registration Act and Evidence Act with necessary facts also considered in government adjudication order for stamp duty valuation. 6. The assessing officer was not satisfied and held in para 13 as follows; 13. The submissions of the assessee have been examined but not found tenable. On perusal of the submission of the assessee, it is seen that the assessee has not provided complete details along with documentary evidence in support of the expenses of Rs. 13,56,87,500/- claimed by the assessee in its ITR while computing the capital gain. Regarding, the quantum of amount received after the sale of the said property, from the submissions given by the assessee, it is difficult to find how much amount has been received by the 3 assessee as there are multiple parties involved. Thus, the assessee has failed to discharge its onus in support of its claim. Thus, the expenses of Rs. 13,56,87,500/- remains unverified and added to the income of the assessee. Accordingly, the computation of capital gain of the assessee is recomputed as below: S. No. Particulars Amount 1 Sale consideration Rs. 18,56,87,500/- 2 Expenses on Transfer (13,56,87,500/- disallowed) 3 Less: Cost of acquisition Rs. 4,38,55,311/- 4 Long term capital gain Rs.14,18,32,189/- 5 Long term capital gain declared in ITR 61,44,689/- 6 Addition 13,56,87,500/- 6.1 The DRP decided the objections with following findings in para 5.3 and 5.4 as follows: 5.3 Regarding the expenses to tune of Rs. 13,56,87,500/-, assessee has only furnished an agreement regarding the above expenses but hasn't furnished any detail as to how the expenditure has been incurred backed up by copy of relevant Bank Statement narration of expenditure and other relevant documents. Assessee has stated that the expense of Rs 13,56,87,500 (which) is directly paid to the parties identified by the buyer as per the registered sale agreement. The issue was also remanded back to the assessing officer. The AO has since furnished the remand report which has also been shared with the assessee. According to the remand report the assessee has still not furnished any cogent document to substantiate its claim. The operative part of the remand report is also placed below: "2. The assessee has filed ROI on 30.12.2020 declaring income of Rs. 66,80,060/- claiming refund of Rs. 1,07,88,660/-. The case was selected for scrutiny and during the assesseemt proceedings, assessee has claimed Transfer Expense of Rs. 13,56,87,500/- in respect of sale of ancestral land. The assessee had failed to substantiate his claim of transfer expense: Accordingly, Draft Assessment Order was passed 28.09.2022 by making addition of Rs. 13,56,87,500/-.
Now the assessee has filed additional evidences before the Hon'ble DRP. In this regard it is submitted that assessee has sold ancestral land in sale consideration of Rs. 18,56,87,500/- and claimed Transfer expense of Rs. 13,56,87,500/The assessee has not submitted 4 any documentary evidences which could substantiate that the expense has been wholly and exclusively incurred for the transfer of the property under consideration by him.
Further, assessee has failed to substantiate the receipt of net sale consideration of Rs. 5,00,00,000/-, As per Agreement to sale dated 11.12.2009, page no. 11 and 12, the sale consideration mentioned is Rs. 10,04,00,000/-.
In view of the above, the additional evidence submitted by the assessee doesn't have any substantial value on merit and the same may not be accepted, as the addition made by the assessing officer is genuine and lawful." 5.4 The Panel is therefore of the view that, the assessee's reliance on the case laws cited below: CIT v Sitaldas Tirathdas (1961) 41 ITR 367 (SC), CIT v Travancore Sugars & Chemicals Ltd 88 ITR 1(SC), Dalmia Cement Ltd v CIT 237 ITR 617 (SC),is misplaced as assessee has not discharged the primary onus of providing all the relevant documents in support of the claim of expenditure to the tune of Rs. 13,56,87,500/-. Therefore, the objection of the assessee on the above is rejected.” 6.2 The assessee is before us raising following grounds ; “1. The learned DCIT Circle Int Tax 2(2)(2), New Delhi erred in passing order dated 23-06-2023 u/s 143(3) r.w.s 144C[13] and adding Rs, 13,56,87,500/-by way of unverifiable long term capital gain in respect of sale of property made during the year even though necessary details were contained in the form of Agreement for Sale of Property.
2. In the facts and the circumstances of the case and in law, the learned AO Int Tax, Delhi erred in making the High Pitched addition of alleged unverifiable long term capital gain of Rs 13,56,87,500/- in respect of property sold during the year by Overlooking the fact that a. The buyer had made payments directly to the Confirming parties and the Occupant and therefore the said payments cannot appear in the bank statement of the Appellant. b. The Fair Market Value as on 01-04-2001 was based on Stamp Duty Valuation available with Ready Reckoner to that effect which was rejected without pointing out any defect in standard rate available to all 5 c. Wrongly referring the matter to DVO by overlooking the observation of the DRP in Para No. 6.1 of the Order of the DRP d. The Registered document containing payment made to confirming party cannot be brushed aside as per section 35 of Evidence Act and ratio of various case laws of Supreme Court cited.
3. In the facts and the circumstances of the case and in law, the learned AO Int. Tax, Delhi erred in making the High Pitched addition of alleged unverifiable long term capital gain of Rs 13,56,87,500/- in respect of property sold during the year by Overlooking the fact that a. The AO did not issue notice u/s. 133(6) or summon u/s. 131 to the confirming parties and the occupant or to the buyer b. The AO wrongly refused to consider additional evidence submitted to the DRP during remand proceedings c. The AO did not afford cross examination of the buyer or confirming party to the Appellant d. The same amounts to double taxation of the same Income, costing in the hands of Confirming Parties and the Occupant and again in the hands of the Appellant which is against the Principle of Real Income e. The same was in the nature of diversion of income by overriding title which never accrued to the Appellant and the Confirming Parties and Occupant themselves was eligible to claim the said portion of sale price.
4. In the facts and the circumstances of the case and in law, the Honorable DRP erred in confirming the variations proposed by the AO and issuing the direction to pass the order accordingly by overlooking the substance of Grounds of Appeal
and Case Laws cited.”
7. Heard and perused the record. Ld. AR has primarily reasserted the arguments as submitted before Ld. Tax Authorities below while Ld. DR has relied the impugned orders.
7.1 Now to determine the controversy it is necessary to determine the nature of payments made under the transactions to Third Parties, and see if these payments can be said to be ‘expenses’ for the purpose of Section 48 of the Act. In this context the sale deed recitals are most vital and as we examine the copy of sale deed made available at Page no. 63 to 90 of the appeal set we find that this sale deed has been executed between four parties. First is assessee along with co- owners, who are referred as ‘vendors’. Then, there is Mr. Dhiren M. Shah along with three other persons, who are referred as ‘confirming parties’. Then, Mr. Rajat Jhunjhunwala, who is referred as ‘occupant’, and M/s Maxmise Buildwell Private Limited, the ‘vendee’ or ‘purchaser’. This sale-deed shows that assessee claimed to have got all the rights in suit property by virtue of three un-registered deeds of release dated 12.04.2019, executed by other co-sharers and in sub-clause (l) of clause 1, it is mentioned as follows: “l By virtue of the above said Release Deed Mr. Yogesh Ramanlal Patel became the absolute owner of the said property more particularly described First Schedule hereunder written. But the said release deed is unregistered and upon the request of the Purchasers all the owners of the said property joining this present.”
7.2 Further, it is narrated in sub-clause (o) to clause 1 as follows: “o) The Vendors are well and sufficiently entitled to the Property free from all the encumbrances and has a clear and marketable title to the Property and no other entity/person has any right, title or interest into and upon the Property or any part thereof.”
7.3 The sale-deed mentions in sub-clauses (q) and (s) to clause 1 as follows:
“q) The Vendors nor anyone on their behalf has otherwise created any adverse rights in respect of the Property or any part thereof.”
“s) The Vendors confirm and declare that there are no mortgages, collateral security, personal guarantee, easement, trust, gift, lien, charges, rights or any other encumbrances, adverse rights or impediments created on the Property or any part thereof.”
7.4 Further, in sub-clause (u) to clause 1 it is provided as follows: “u The Vendors agree and confirm that in an event any claim is raised by any third party in respect of the said Property and/or any part thereof, in that event the same shall be settled by Vendors at their own costs.”
7.5 It is further provided in sub-clause (z) to clause 1 as follows: “z) The Vendors are absolutely seized and possessed of and otherwise well and sufficiently entitled to all the piece and parcel of land admeasuring 3647.8 square meters, bearing survey No. 14 Hissa No. 7 (part), corresponding CTS Nos. 242/A/1. 253/B, and 253/C at village Goregaon, Taluka Borivali, Mumbai Suburban District, situate, lying and being at Sharma Industrial Estate, Goregaon East, Mumbai and mojani No. 2364(4) dated 22nd October, 1970 carried on by the Office of Additional District Deputy Collector, Mumbai Suburban District.” 7.6 It is further seen that sub-clause (aa) of clause 1 provides as follows: “aa) By a Memorandum of Understanding dated 2019 ("MOU") the Vendors therein had agreed to sell, transfer and assign all their undivided right, title and interest the said Property to the Confirming Parties and Occupant for valuable consideration and on the terms and conditions as mentioned in the said MOU. The parties to the said MOU were aware the part of the said Property being Sq Meters is in the occupation of the Occupant herein ie. Mr. Rajat Jhunjhunwala and as shown and delineated by yellow color boundary line on the plan As per the terms of the said MOU 8 the Confirming Parties has paid an amount of Rs. 21,00,000/- to the Vendors as earnest amount. Now the confirming parties are not interested to purchase & acquire the said property thus they are joining to this present. A veritable stalemate is created amongst the Vendors and Confirming parties to the said MOU as such the Confirming Partner along with Vendors therein and herein decide to sell, transfer and convey all their to the Purchaser herein. MOU ax sell.”
7.7 The relevant sub-clauses (bb) & (cc) of clause 1 are also reproduced below: “bb) That the Vendors are in the exclusive and absolute possession of the said Property with the actual custody and dominion over the possession of the said Property and benefits attached to it and save except whatever recited herein above as per clause no. 2, that neither the Vendors had till date hereof at any time either agreed to induct or inducted any third party in use, occupation, possession, tenancy, sub tenancy and/or enjoyment of the said Property or any portion Thereof, in any way or in any manner whatsoever. Save and except what is stated herein. cc) The Vendors say & declare that save except whatever recited herein above as per clause No. 2, the title of the Vendors in respect of the said Property with benefits attached to it is absolutely clear and marketable, free from all encumbrances and reasonable doubts including arrangements, understanding. Agreement, Agreement for sale, transfer or assignment, conveyance, release, relinquishment, surrender, gift, exchange, lease, monthly tenancy, leave and licence, charge, mortgage or any other encumbrances, any debts or dues of private creditors or notice/order of any public authority or any attachment or forfeiture or recovery proceeding whatsoever on account of any matters including the matters of any public levies (including income-tax, property tax, revenue, rates or cess, assignment, duties, stamp duties, registration, registration charges or other charges/fees/amount and/or other levies (by whatever name called or known) under any law/s heretofore or now or hereafter to be in force retrospectively either with or without penalty or interest and/or debts, dues, loans or finances from any person or persons …. .”
7.8 Based upon aforesaid recitals, the vendors, the confirming parties; and the occupant together agreed to sell, transfer and assign the property to the purchaser by following relevant sub-clauses to Clause 2 a) The Vendors, Confirming Parties and Occupant shall hereby sell, transfer, and assign the Property to the Purchasers and the Purchasers shall hereby purchase and acquire the Property from the Vendors; and b) At the instructions of the Vendors and with the consent of the Vendors, the consideration is being paid to the Confirming Parties and the same shall be paid by the Purchasers directly to the said Confirming Parties in the manner stated herein below: ………….. . III. In the circumstances aforesaid, this present is being executed by the vendors & Confirming Parties in the favour of purchasers the said demised property with the title thereof for the lump sum consideration of Rs. 10,04,00,000/- (Rupees Ten Crores and Four Lakhs Only) as total consideration against peaceful possession of the said property and with benefits attached to the said Property. IV. The Purchaser has agreed to give a constructed of 2750 square meters RERA carpet in the new building to be constructed on the said lieu of the consideration against peaceful possession of the said portion of the said property party occupied by the Occupant along with benefits attached to the said portion of the said Property. The purchaser and Occupant both hereby agree to execute the separate agreement for the constructed premises and with pay stamp duty under article 28(b) of the BSA 1958 on the instrument accordingly with legal right to have and call for all relevant deeds, documents, papers and writings from the Vendors and the concerned parties contemplated by law as hereinafter mentioned in these presents with otherwise clear & marketable title free from all encumbrances and reasonable doubts. “AND THIS DEED FURTHER WITNESSETH THAT the Purchaser has agreed to give a constructed of 2750 square meters RERA carpet in the new building to be constructed on the said lieu of the consideration against peaceful possession of the said portion of the said property occupied by the Occupant along with benefits attached to the said portion of the said Property. The purchaser and Occupant both hereby agree to execute the separate agreement for the constructed premises and with pay stamp duty 10 under article 25(b) of the BSA 1958 on the Instrument accordingly with legal right to have and call for all relevant deeds, documents, papers and writings from the Vendors and the concerned parties contemplated by law as hereinafter mentioned in these presents with otherwise clear & marketable title free from all encumbrances and reasonable doubts.”
7.9 As with regard to the consideration and its mode of payment the deed provides as follows: AND THIS DEED FURTHER WITNESSETH THAT the consideration amount of Rs. 10,04,00,000/- (Rupees Ten Crores and Four Lakhs Only) paid to be paid by the Purchasers to the Vendors and/or its Confirming Party in the manner following. It is agreed between the Parties that Purchasers shall pay the following amounts, subject to deduction of TDS as applicable: A) At the express instructions of Vendor Nos. 1, 2 & 4 Rs. 4,79,00,000/-(Rupees Four Crores Seventy-nine Lakhs Only) [Rupees 5,00,00,000/- less Rs. 21,00,000/- already paid by the confirming parties to the vendors) to be paid to the Vendor No.1 3 by the Purchasers in the manner as stated herein below, i) Upon execution hereof, Purchasers has paid a sum of Rs. 4,79,00,000/- (Rupees Four Crores Seventy-nine Lakhs Only) to Vendor No. 3 (the payment and receipt whereof the Vendors hereby admits and acknowledges and of and from the same and every part thereof do hereby forever acquits, releases and discharges. Purchasers); and B) At the express instructions of the Vendors, the following amount shall be paid by the Purchasers to confirming Parties in the manner as stated hereinbelow: (i) Rs. 2,10,00,000/- (Rupees Two Crores and ten lakhs only) to Confirming Party No. 1 (ii) Rs. 1,05,00,000/-/- (Rupees One Crore and five Lakhs only) to Confirming Party No. 2. (iii) Rs. 1,05,00,000/-/- (Rupees One Crosre and five Lakhs only) to Confirming Party No. 3
(iv) Rs. 1,05,00,000/-/- (Rupees One Crore and Five Laks only) Confirming Party No. 4 The above payments will be made in the manner as stated herein below; Party Details On Execution On or before On or before On or before Total 30 January 28 February 7 April 2020 2020 2020 Confirming 40,00,000 50,00,000 50,00,000 70,00,000 2,10,00,000. Party No. 1 Confirming 20,00,000 25,00,000 25,00,000 35,00,000 1,05,00,000 Party No. 2 Confirming 20,00,000 25,00,000 25,00,000 35,00,000 1,05,00,000 Party No. 3 Confirming 20,00,000 25,00,000 25,00,000 35,00,000 1,05,00,000 Party No. 4 Total 1,00,00,000 1,25,00,000 1,25,00,000 1,75,00,000 5,25,00,000
The Vendors and Confirming Party Nos. 1 to 4 agreed and confirm that the Occupant is entitled to receive to be constructed area to the tune of 2750 square meters RERA carpet in the said Property as consideration for managing the affairs of the said Property, removing/realigning High Tension Wire from the site and safeguard the same from further encroachments. It is agreed by and between the Purchasers and Occupant that the area to be allotted to Occupant i.e. 2,750 square meters RERA carpet shall be provided to the Occupant in proportion to Development under taken by the Purchasers. The separate agreement will be execute for the allotted area and will pay stamp duty accordingly.”
After taking into consideration the aforesaid clauses of the sale deed, we are of the considered view that the sale-deed as stands executed, is not merely transfer of title by the vendor, who is assessee, to the purchaser, rather it is a composite contract wherein not only title but rights and interest other than title which were held by the ‘confirming parties’ or the ‘occupant’ were also transferred by them respectively under the sale-deed.
The consideration, in terms of money, fixed for sale of property was not merely the one paid to the vendor in lieu of relinquishment of title and to the confirming parties, for their interest arising out of a prior agreement in their favour. But the consideration was also in the form of the area of 2750 sq. meters RERA carpet which was supposed to be allotted to ‘occupant’ out of the construction to be raised by the purchaser.
These clauses show that the ‘vendor’ had ensured a marketable title to the property, free from encumbrance of any sort including easementary rights. The same made the ‘confirming party’ and ‘occupant’ bound by this covenant as they had together agreed to sell, transfer and assign the property to the purchaser. Thus, the vendor, confirming parties and occupant, though had different and distinct rights but collectively they transferred to the purchaser a title clear of all sort of encumbrances. 11. Thus, we are of the considered view that DRP has failed to take into cognizance the proposition of law cited by the assessee, relying judgments of Hon’ble Supreme Court in the cases of CIT v. Sitaldas Tirathdas (1961) 41 ITR 367 (SC); CIT v. Travancore Sugars & Chemicals Ltd. 88 ITR 1 (SC); and Dalmia Cement Ltd. v. CIT 237 ITR 617 (SC), about the concept of diversion of income. Diversion of income is an obligation where income is diverted before it reaches to the assessee where it is not subject to tax in the hands of the assessee. The said predominant question will arise when such particular income is applied under contractual obligation or such predetermined manner. The Hon’ble Apex 13 Court in CIT v. Sitaldas Tirthdas [Supra] observed that 'Obligations are in every case but it is the nature of the obligation is a decisive factor and whereby an obligation, income is diverted before it reaches the assessee is deductible but where the income is required to be applied to discharge an obligation after such income reaches the assessee, same is subject to tax. Thus, there is the difference between the diversion of income by an 'Overriding Title and Application of Income' as the former is deductible while the latter is not’.
The consideration received by ‘confirming party’ or value of property in the hands of ‘occupant’ may be liable to tax, as what they transferred or relinquished was an independent right or interest, held by them, falling in definition of capital asset within meaning of section 2(14) but certainly the same was not taxable in the hands of assessee. The AO, as also the DRP, have both fallen in error to appreciate that there was diversion of income, before it accrued to the assessee.
Further we are of considered view that the expression “expenditure” used in clause (i) in section 48 of the Act should be given the same meaning as used in section 37 of the Act, except that expenditure may be also capital in nature. The words “wholly and exclusively” used in section 48 are also to be found in section 37 of the Act and relate to the nature and character of the expenditure, which in the case of section 48 must have connection i.e., proximate and perceptible nexus and link with the transfer resulting in income by way of capital gain. Reliance for this can be placed on the decisions in Kaushalya Devi v. CIT [2018] 92 taxmann.com