2014 (10) TMI 736 - AT - Income Tax

Appeal partially granted, verification directed for construction costs, disallowance upheld for lack of evidence

The Tribunal partially allowed the appeal, directing the AO to verify details on construction costs and improvement payments. Disallowance of dues payment ... Capital Gains - Cost of construction and indexation disallowed – Cost of improvement – Payment to clear the dues – Held that:- Section 48 provides the mode of computation of capital gain - the income chargeable under the head “capital gain” shall be computed by deducting from the full value of the consideration received or accruing as a result to the transfer of capital asset - The tenants have been manufacturing the goods which were subject to excise clearance - The occupancy certificate issued by the Department of Town & Planning is placed on the record and he further drew our attention towards the lease agreement between her and the tenants - On the strength of these documents he pointed out that building was in existence - Her inability to quantify the cost of construction should not be considered as a sole criteria to exclude that cost of construction while computing the capital gain - The assessee has already taken a report from the Registered Valuer and calculated the cost of construction on that basis - As far as the objection of the AO is concerned that building has not been mentioned in the sale deed, according to the assessee the terms and conditions mentioned in the sale deed are negotiated terms and conditions between the vendor and vendee and does not carry the value equivalent to any statute - There may be a different object of the vendee for not mentioning the building and one of the relevant factors can be a lower payment of stamp duties - Thus non mention of building in the sale deed would not authorize the AO to deny the claim of assessee - During the course of hearing we had confronted to the assessee that the rental income can be an income from the land only - if it was an income simply from leasing out of the land then it would have been assessed as income from other sources and not income from house property. Relevant balance sheet for arriving at the conclusion that these companies constructed the buildings can only be examined from the balance sheet of 31.3.1997 - If the examination of these balance sheets as of this year reveals that there was no building appearing in the fixed assets, then the obvious conclusion is that initially building was constructed by assessee and further these tenant companies had made further additions, the value of which is represented in the balance sheets of these companies as on 31.3.2005 - for this verification the matter is to be remitted back to the AO for verification of balance sheets of these companies for the years 31.3.1997 and if there is no amount appearing with respect to buildings, then he should allow the benefit to the assessee as all other evidences are in favour of assessee - the AO can get verified the valuation report for the purpose of rates taken by valuer as the constructed area matches with the occupancy certificate – Decided in favour of assessee. Payment not made by assessee but in the name of husband of assessee – Held that:- Disallowance only on this account is not a valid disallowance as the AO has not otherwise doubted the payments - CIT(A) himself had held that a considerable portion in the nature of permanent structure was also constructed by tenants - CIT(A) also makes a finding that in the case of M/s Excalibur in the balance sheet as on 31.3.2008, a deduction of an amount was made from the value of building - CIT(A) inferred it to be against the assessee as assessee was not able to reconcile the figure with the amount of compensation received by Excalibur - cost of building as appearing as on 1.4.2006 as per paper book page 140 is ₹ 1,17,77,207/- and on receipt of compensation of Rs..1,30,00,000/- the assessee reduced the total amount from building account in subsequent year - there is nothing wrong in it as when an asset is sold for an amount which exceeds the cost price, the only amount which can be reduced from the cost price is maximum up to cost price appearing in the balance sheet – Decided in favour of assessee. Issues Involved:1. Disallowance of cost of construction and indexation.2. Disallowance of cost of improvement paid to M/s Excalibur India P. Ltd. and M/s Texcon India Pvt. Ltd.3. Disallowance of deduction of payment spent to clear the dues of M/s Concept India Pvt. Ltd.Issue-wise Detailed Analysis:1. Disallowance of Cost of Construction and Indexation:The primary contention was the disallowance of Rs. 2,16,00,000/- claimed by the assessee as the cost of construction of a factory on the property sold. The Assessing Officer (AO) disallowed this amount, arguing that the sale deed did not mention any building and the construction within the claimed period was improbable. The AO's decision was based on the absence of supporting bank accounts or expenditure details and the sale deed's omission of the building. The CIT(A) upheld this disallowance, noting the lack of evidence and the improbability of the assessee raising the construction funds in the relevant financial year. However, the Tribunal found merit in the assessee's argument, supported by rental income declarations, lease agreements, an occupancy certificate, and a valuation report. The Tribunal directed the AO to verify the balance sheets of the tenant companies for the year 1997 to ascertain the existence of the building and allow the cost accordingly. The issue was remanded to the AO for further verification.2. Disallowance of Cost of Improvement:The assessee claimed Rs. 1,10,00,000/- as payments made to M/s Excalibur India P. Ltd. and M/s Texcon India Pvt. Ltd. for improvements. The AO disallowed this, noting payments were made from the bank account of the assessee's husband. The CIT(A) upheld the disallowance, citing lack of evidence linking the payments to the sale transaction. The Tribunal, however, found that the disallowance solely on the basis of payment source was invalid. The Tribunal noted that the CIT(A) acknowledged the construction by tenants and found that the balance sheets of the tenant companies reflected the compensation received. The Tribunal allowed this ground, recognizing the payments were necessary for the property's sale.3. Disallowance of Deduction for Clearing Dues:The assessee claimed a deduction of Rs. 1,94,80,000/- for clearing the dues of M/s Concept India Pvt. Ltd. The AO disallowed this due to lack of evidence. The CIT(A) upheld the disallowance, noting inconsistencies and lack of supporting documentation for the claimed liability payment. The Tribunal agreed with the CIT(A), finding no infirmity in the disallowance due to the absence of substantial evidence. This ground of appeal was dismissed.Conclusion:The Tribunal partly allowed the appeal for statistical purposes, directing the AO to verify specific details regarding the cost of construction and improvement payments. The disallowance related to clearing the dues of M/s Concept India Pvt. Ltd. was upheld due to lack of evidence. The judgment emphasizes the importance of substantial evidence in claiming deductions under the Income Tax Act.