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Income Tax Appellate Tribunal, BANGALORE BENCH ‘ A ’
Before: SHRI VIJAY PAL RAO & SHRI INTURI RAMA RAO
Per Shri Vijay Pal Rao, J.M. : This appeal by the assessee is directed against the order dt.3.9.2013 of the Commissioner of Income Tax (Appeals)-II, Bangalore for the Assessment Year 2009-10.
The assessee has raised various grounds in the appeal. However, we find that the Ground No.2 is only effective ground which reads as under :
“ That, having regard to the facts and circumstances of the case, the learned CIT (Appeals) has erred in law and on facts in confirming the action of the ld. DCIT in disallowing the claim for deduction of the compensation paid amounting to Rs.1,00,00,000/-.”
The assessee is a private limited company engaged in printing and finishing of silk sarees and fabrics. The assessee filed its return of income on 27.9.2009 declaring total income of Rs.18,94,000. During the scrutiny assessment the Assessing Officer noted that the assessee has acquired industrial land measuring 1,07,810 sq. ft. on 12.2.1988 bearing No.48/1, Kudulu Village, Sarjapur Hobli, Anekal Taluk, Bangalore. During the previous year relevant to the Assessment Year under consideration the assessee sold 29,845 sq. ft. out of the total land for a consideration of Rs.2,50,00,000 vide sale deed dt.13.9.2009. The assessee has claimed that it has paid a compensation of Rs.1 Crore to the tenant M/s. Pathi Prints for vacating land in question. The Assessing Officer disallowed the said deduction of Rs.1 Crore on the ground that the assessee as well as Pathi Prints continue to run the respective business from the same place.
Therefore when the tenant is still in physical possession of the property in question there is no justification for payment of the compensation.
The assessee challenged the action of the Assessing Officer before the CIT (Appeals) but could not succeed.
Before us, the learned Authorised Representative of the assessee has referred to the sale deed dt.13.5.2009 and submitted that the assessee has sold a portion of land in question and M/s. Pathi Prints has signed as confirming witness of the sale deed therefore the compensation of Rs.1 Crore was paid to Pathi Prints for vacating the land which was in occupation of the tenant. The learned Authorised Representative has submitted that pursuant to the said agreement the lease deed was cancelled vide cancellation deed dt.23.3.2009. However Pathi Prints continue to carry on the business form another part of the property. Since it was a condition of the sale and purchase that the property shall be vacated by the tenant and he should be a confirming witness therefore the assessee has paid the compensation in question which is wholly and exclusively for the purpose of transfer of the capital
asset. He has further submitted that the recipient of the amount has offered the same to tax and therefore it cannot be disallowed on the ground of justification. The learned Authorised Representative has referred to the legal notice issued by the Advocate of the assessee to M/s. Pathi Prints and submitted that the payment was made only when the tenant agreed to vacate the land in his possession. Therefore it was essentially an expenditure incurred wholly and exclusively in connection with the sale of the capital asset. The assessee would not have been able to get it vacated without payment of compensation as it was insisted by the purchaser that the lessee be also part of the transaction. The compensation paid is expenditure which was absolutely necessary for getting vacate on the transfer of asset. The compensation was paid to lessee through the banking channel and the fund used for payment of compensation out of the consideration received by the assessee for sale of the asset. Thus the learned Authorised Representative has submitted that the said the said amount of Rs.1 Crore paid for vacating the tenant is an expenditure allowable under Section 48 of the Act.
On the other hand, the learned Departmental Representative has submitted that the assessee claimed the payment of compensation for vacating the property in question whereas it is undisputed fact that the tenant is still in occupation of the property. Further the assessee has not offered the rental income to tax and claimed that the rent is outstanding.
Therefore it is clear case of avoidance of tax by means of diverting the amount without any fruitful purpose or proving the payment is necessary in connection with the transfer of capital asset. Thus the learned Departmental Representative has contended that the claim is not allowable as per the provisions of section 48 of the Act. She has relied upon the orders of the authorities below.
We have considered the rival submissions as well as the relevant material on record. The assessee sold a portion of the land in question vide sale deed dt.13.5.2009 for a consideration of Rs.2.5 Crores. The assessee claimed the payment of Rs.1 Crore as compensation to Pathi Prints, the tenant in the property. The said tenant is also a confirming witness to the sale deed. It is pertinent to note that Pathi Prints is an associated enterprise of the assessee as recorded by the Assessing
Officer and engaged in the same business of printing and furnishing of silk sarees. The Assessing Officer disallowed the claim of compensation of Rs.1 Crore against the capital gain by pointing out that both the assessee and Pathi Prints are associated enterprises and are continuing the same business from in the same plot of land. Therefore the tenant has not vacated the property in question. The CIT (Appeals) has confirmed the disallowance made by the Assessing Officer and discussed the issue in para 3.4 of the impugned order as under : “ 3.4 I have carefully considered the appellant's submissions and perused the assessment order. The AO's findings for disallowing the claim for deduction of the compensation of Rs.l,00,00,000/- paid to the tenant are that, in the land measuring 77,965 sq ft retained by the appellant after alienating a portion of the land measuring 29,845 sq ft out of the total area of the land 1,07,810 sq. ft. the tenant M / s . Pathi Prints stayed at 1: ' the same place where it had been carrying on its business ever since it started it. The AO also found that Structure- II in the retained land was occupied by the appellant and structure-III in the retained land was occupied by the tenant M/s. Pathi Prints, where it continued as on the date of the assessment proceedings to be carrying on its business. In effect, both the appellant and the tenant continued to remain and conduct their respective business in the retained land. Even before me, during the appeal proceedings, the appellant was unable to produce any documentary evidence to show that the tenant M/s Pathi Prints had, after the alienation by the a ppellant of the portion of land measuring 29,845 sq.ft, shifted its business to justify the payment to it of compensation for the alleged shifting of its business activities to a new premises. Shri Sanjay Pathi, partner of the tenant firm, has gone on record in a statement recorded u/s 131 of the Act admitting that the business of the said firm continued to be carried on at the same place where it was being run before the alienation by the appellant of land measuring 29,845 sq ft out of the total area of the land measuring 1,07,810 sq ft. It is also on record that the new rental lease vide deed dated 1/4/2009 terminating the old lease deed with effect from 29/3/2009 between the appellant and the tenant shows that M/s Pathi Prints continued to remain as tenant at the same place in the retained land measuring 77,965 sq. ft. As before the AD during the assessment proceedings, the appellant was unable to produce before me during the appeal proceedings any evidence such as copies of plan sanction, electricity/water connections, etc. to show that a new structure had been constructed to which the tenant had moved from the present location or had shifted to an altogether different building. The foregoing facts show that the theory of tenant having been asked to vacate the premises where it had been carrying on its business thitherto was only a camouflage to justify the payment of compensation of Rs.1,00,00,000-/. I am inclined to agree with the findings of the AO in this regard and with his conclusion that the reason for payment of compensation of Rs.1,00,00,000/- is only a sham. In this view of the matter, I uphold the disallowance of the appellant’s claim for deduction of Rs.1,00,00,000/- as compensation from the computation of income from capital gains. The relevant grounds of appeal are dismissed.” Thus it is clear that despite the said payment, the tenant is still in occupation of the property and doing the business. Further the alleged tenant is associated enterprise of the assessee and therefore the entire basis of payment of compensation to the tenant does not exist. We find that M/s. Pathi Prints though shown the said receipt in the account but has not paid any tax on the said amount due to set off of the business loss against the same. Thus it is apparent that payment is nothing but a device to avoid tax by mutual arrangement between the related parties.
The sole purpose as manifest from the facts is to avoid tax and not for getting property vacated. Accordingly, in the facts and circumstances of the case we find no error or illegality in the order of the authorities below.
In the result, the appeal is dismissed. Order pronounced in the open court on the 8th day of Sept.,2016.