Tribunal allows deduction for unauthorized possession payment as cost of improvement, grants interest expenses claim

The tribunal partly allowed the assessee's appeal by directing the deletion of the addition of Rs. 5,00,000 for payment to vacate unauthorized possession and allowing the claim for interest expenses of Rs. 8,02,854. The tribunal found that the payment to vacate unauthorized occupants should be considered as a cost of improvement, overturning the CIT(A)'s decision. The order was pronounced on 02-07-2018.

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Issues Involved:
1. Addition of Rs. 5,00,000/- for payment to vacate unauthorized possession out of capital gain.
2. Disallowance of interest expenses of Rs. 8,02,854/-.

Issue-Wise Analysis:

1. Addition of Rs. 5,00,000/- for Payment to Vacate Unauthorized Possession:
The assessee, along with a co-owner, sold a plot for Rs. 1,00,00,000/-. While computing capital gains, the assessee declared consideration of Rs. 45,00,000/- for his 50% share instead of Rs. 50,00,000/-. The assessee argued that the plot was encroached upon by two individuals, and he had to pay them Rs. 10,00,000/- (10% of the sale consideration) to vacate the possession. The assessee relied on cases such as CIT vs Miss Piroja C Patel, Mrs. June Perrett vs ITO, and Naozar Chenoy vs CIT to support his claim. However, the AO added Rs. 5,00,000/- to the income, stating there was no material to suggest that the buyer insisted on vacant possession and the sale deed mentioned the plot as vacant. The CIT(A) confirmed the addition, noting the assessee could not demonstrate that the land was actually occupied by the two parties. The tribunal, however, found that the payment to vacate unauthorized occupants should be considered as cost of improvement, citing similar judgments from various High Courts. Thus, the tribunal directed the deletion of the Rs. 5,00,000/- addition, allowing Ground No. 1 of the assessee.

2. Disallowance of Interest Expenses of Rs. 8,02,854/-:
The AO disallowed interest expenses claimed by the assessee under section 57, noting that the interest-bearing loans were not utilized for giving advances on which interest income was earned. The CIT(A) upheld the AO's decision, observing that the interest-bearing loans were used for personal assets and not for earning interest income. The tribunal, after reviewing the records, noted that the assessee had earned interest income of Rs. 13,95,012/- and paid interest of Rs. 8,02,854/-. The tribunal found that the borrowed funds were utilized for purchasing agricultural land and that the interest income was earned on advances made to a company. Considering these facts, the tribunal found no merit in the CIT(A)'s order and allowed the assessee's claim for interest expenses. Thus, Ground No. 3 of the assessee was allowed.

Conclusion:
The appeal of the assessee was partly allowed, with the tribunal directing the deletion of the Rs. 5,00,000/- addition and allowing the claim for interest expenses of Rs. 8,02,854/-. The order was pronounced in the open court on 02-07-2018.

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