2020 (9) TMI 759 - AT - Income Tax

Tribunal allows appeals, directs AO to delete disallowances for indexed cost of improvement and brokerage expenses.

The Tribunal allowed both appeals, directing the AO to delete the disallowances of Rs. 5,17,339/- as indexed cost of improvement and Rs. 10.50 lacs as ... Interest on borrowed funds as part of cost of acquisition / cost of improvement for capital gains - capitalisation of interest in land ledger accounts as admissible proof of cost - allowability of brokerage/commission as transfer expense in computation of long term capital gains - duty of assessing officer to invoke power to issue summons under section 131 of the Income tax Act where assessee requests assistance - no adverse inference where assessee furnishes broker confirmations and payment by account payee chequesInterest on borrowed funds as part of cost of acquisition / cost of improvement for capital gains - capitalisation of interest in land ledger accounts as admissible proof of cost - Whether interest paid on borrowed funds for purchase of agricultural land is includible in the cost of acquisition/improvement for computing long term capital gains. - HELD THAT: - The Tribunal found that the assessee sold agricultural lands and had capitalised interest in plot/khasra wise ledger accounts for the relevant period. The loans were taken for purchase of the specific plots sold, making the interest directly relatable to the acquisition of the assets. Having regard to judicial decisions cited by the Tribunal, the interest paid on money borrowed for purchase of open plots properly forms part of the cost of acquisition/improvement and is allowable for computing long term capital gains. The Assessing Officer and the CIT(A) were therefore in error in disallowing the claimed interest, and the addition was deleted. [Paras 7, 8, 9, 13]Deletion of the addition of Rs. 5,17,339/ and allowance of the interest as part of the cost of acquisition/improvement.Allowability of brokerage/commission as transfer expense in computation of long term capital gains - duty of assessing officer to invoke power to issue summons under section 131 of the Income tax Act where assessee requests assistance - no adverse inference where assessee furnishes broker confirmations and payment by account payee cheques - Whether brokerage/commission paid to brokers and supported by confirmations and bank evidence can be disallowed because the brokers did not physically appear before the AO or furnish ITRs. - HELD THAT: - The assessee had produced confirmations from the brokers containing addresses and PANs and documentary evidence of payments by account payee cheques, and repeatedly requested the AO to issue summons under section 131 to secure their attendance. The Tribunal relied on precedent that where an assessee requests issuance of summons and tenders evidence, the AO should not summarily refuse such assistance, and failure to call and examine offered evidence materially prejudices the assessee. Given the confirmations and bank payment records, and the assessee's inability to compel brokers' attendance, the Tribunal held that no adverse inference could be drawn and that the AO's disallowance was unjustified. The AO was directed to delete the disallowance of the brokerage. [Paras 10, 11, 12, 13]Deletion of the disallowance of brokerage (Rs. 10.50/10.51 lacs as claimed) and allowance of the claimed brokerage as transfer expense.Final Conclusion: Both appeals are allowed: the additions/disallowances made by the Assessing Officer and confirmed by the CIT(A) in relation to interest capitalised as part of cost of acquisition and brokerage paid as transfer expenses are set aside; the Assessing Officer is directed to delete the additions and allow the claimed amounts. Issues Involved:1. Disallowance of Rs. 5,17,339/- as indexed cost of improvement.2. Disallowance of brokerage expenses of Rs. 10.50 lacs.Issue-wise Detailed Analysis:1. Disallowance of Rs. 5,17,339/- as Indexed Cost of Improvement:The assessee filed a return of income declaring long-term capital gains on the sale of agricultural land after claiming an indexed cost of improvement of Rs. 5,17,339/-. The Assessing Officer (AO) disallowed this amount, leading to an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], who confirmed the AO's decision.The Tribunal examined the case and found that the assessee had borrowed funds for the purchase of agricultural land and had capitalized the interest on these borrowed funds as part of the cost of the land. The assessee provided ledger accounts showing the capitalization of interest from 1-4-2008 to 31-3-2013. The Tribunal noted that interest paid on money borrowed for the purchase of an asset is part of the cost of improvement, citing judicial precedents from various High Courts, including the A.P High Court in Addl. CIT Vs. K.S. Gupta, Delhi High Court in CIT Vs. Mithilesh Kumari, Madras High Court in CIT Vs. K. Raja Gopala Rao, and Karnataka High Court in CIT Vs. Maithreys Pal.The Tribunal concluded that the assessee correctly claimed the interest paid on borrowings for the purchase of the plot as the cost of improvements. The disallowance by the AO and CIT(A) was deemed contrary to law and was deleted. The AO was directed to delete the addition of Rs. 5,17,339/-.2. Disallowance of Brokerage Expenses of Rs. 10.50 Lacs:The assessee claimed brokerage expenses of Rs. 10,50,000/- paid to four brokers as transfer expenses in the computation of long-term capital gain. The AO disallowed these expenses, leading to an appeal before the CIT(A), who upheld the AO's decision.The Tribunal reviewed the case and found that the assessee had paid brokerage by account payee cheques and had filed confirmation letters from the brokers, including their complete addresses and IT PANs. The AO had asked the assessee to produce the brokers and submit their ITRs and bank statements. The assessee requested the AO to issue notices under Section 131 to enforce the brokers' attendance, as the assessee had no legal power to compel their appearance.The Tribunal referenced judicial precedents, including the Allahabad High Court in EMC (Works) Pvt. Ltd vs. ITO and Munnalal Murlidhar, which emphasized the AO's duty to call for and examine evidence offered by the assessee. The Tribunal held that the AO's failure to issue summons under Section 131 materially prejudiced the assessee and was a denial of the opportunity to produce evidence.Given that the assessee had filed confirmations from the brokers, who were also assessed to tax, the Tribunal found no justification for the disallowance of brokerage expenses. The AO was directed to delete the disallowance of Rs. 10.50 lacs.Conclusion:The Tribunal allowed both appeals, directing the AO to delete the disallowances of Rs. 5,17,339/- as indexed cost of improvement and Rs. 10.50 lacs as brokerage expenses. The order was pronounced in the open court on 14th September 2020.