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of <h1>ITAT decision: Revenue appeal dismissed, assessee's appeal partially allowed, penalty deletion justified.</h1> <h3>Asst. Commissioner of Income Tax - 16 (1), Mumbai Versus M/s. Kothari Development Corporation</h3> Asst. Commissioner of Income Tax - 16 (1), Mumbai Versus M/s. Kothari Development Corporation - TMI Issues involved:Cross-appeals on ITA No. 3084/Mum/2011 & 3866/Mum/2011, cross objection CO No. 14/Mum/2012 by the assessee against the order of CIT(A)-27, Mumbai for A.Y 2007-08 regarding the order passed u/s 143(3) of the Income Tax Act, 1961.Detailed Analysis:1. Capital Gains Classification:The case involved the conversion of a property from a capital asset to stock in trade, leading to capital gains and business profits upon sale. The Assessing Officer (AO) treated the asset as a short-term capital asset, disallowing the claim for deduction u/s 54 EC. However, the CIT(A) classified the asset as long-term, allowing indexation from 19.7.1981. The ITAT upheld the CIT(A)'s decision, considering the agreement of sale deed from 7.3.1973 and the injunction obtained by the assessee in 1983 as evidence of ownership since 1973.2. Encumbrance Compensation Deduction:The AO disallowed the deduction of Rs. 54 lakhs paid to remove encumbrances on the property, considering it as short-term capital gains. The ITAT disagreed, stating that the payment was wholly and exclusively for the purpose of selling the capital asset, satisfying the conditions under Sec. 48. The payment was deemed necessary to resolve issues with a partner and clear encumbrances, allowing the property to be sold.3. Penalty Imposition:An appeal was filed against the penalty imposed under Sec. 271(1)(c) of the Act for the disallowed deduction of Rs. 54 lakhs. As the ITAT allowed the deduction in the quantum appeal, the penalty was deemed unjustified, and the AO was directed to delete it.In conclusion, the ITAT dismissed the revenue's appeal, partially allowed the assessee's appeal and cross-objection, and directed the deletion of the penalty imposed. The decision was based on the ownership evidence from the agreement of sale deed and the injunction obtained, along with the justification for the encumbrance compensation deduction as a necessary expense for the sale of the capital asset.
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