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 brokerage expenses.

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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.

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