2023 (8) TMI 384 - AT - Income Tax

Tribunal rules in favor of assessee, allowing appeal on indexed cost of improvement disallowance.

The Tribunal allowed the appeal, ruling in favor of the assessee by deleting the disallowance of the indexed cost of improvement. The Tribunal held that ... Capital gain computation - Disallowance of deduction of indexed cost of improvement - assessee claimed that expenditure incurred by him being the additional cost to effectuate the sale transaction is a capital expenditure and thus should be allowed in the light of Section 55(1)(2)(ii) - HELD THAT:- We find that the case made out by the assessee is this that the compensation was paid by the appellant to the parties with whom he initially entered into an agreement to sell the plot of land as the sale did not materialize. Such compensation is deductible while computing the capital gains arising from the sale of such plot to another party. We find substance in such submission made by the Ld. AR. As considered the judgment passed in the case of ACIT vs. Pushkar Dutt Sharma [2015 (6) TMI 844 - ITAT DELHI] wherein it has been clearly held that the expenses incurred to remove impediments or encumbrances in way of transfer of capital asset has to be allowed as deduction under the head ‘cost of improvement’ while computing taxable amount of capital gain. Also in the case of Kaushalya Devi [2018 (4) TMI 1137 - DELHI HIGH COURT] wherein payment of certain liquidated damages in terms of earlier agreement to sell which did not materialize has been ultimately held to be treated as expenditure incurred wholly and exclusively in connection with transfer of immovable property and thus found to be allowable as deduction under Clause (1) of Section 48 of the Act. Thus the expenditure incurred solely and exclusively on the immovable property as an expenditure to be deducted while computing capital gains. Link and connection with the transfer of a capital asset and the expenditure must be inextricable which has been found to be established by the appellant before us. We, thus, do not hesitate to hold that the impugned amount paid by the appellant to the erstwhile owners requires to be allowed under the head “cost of improvement” while computing taxable amount of long term capital gain - Decided in favour of assessee. Issues Involved:1. Disallowance of deduction of indexed cost of improvement of Rs. 2,90,00,000/-.2. Whether the expenditure incurred to remove encumbrances on the property is deductible as a capital expenditure under Section 55(1)(2)(ii) of the Income Tax Act, 1961.Summary:Disallowance of Deduction of Indexed Cost of Improvement:The appellant filed a return of income declaring a total income of Rs. 1,49,03,580/- for the Assessment Year 2016-17, which included long-term capital gains from the transfer of non-agricultural land. The appellant claimed a deduction for the indexed cost of improvement amounting to Rs. 2,90,00,000/-. The Assessing Officer (AO) disallowed this deduction, and the disallowance was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].Expenditure Incurred to Remove Encumbrances:The appellant had entered into an agreement to sell part of the land but later had to cancel the agreement and pay compensation of Rs. 3,35,00,000/- to the initial parties to remove encumbrances and facilitate the sale to a third party. The appellant argued that this expenditure should be considered as a capital expenditure under Section 55(1)(2)(ii) of the Act, as it was incurred wholly and exclusively in connection with the transfer of the asset.Tribunal's Findings:1. Deductibility of Compensation Paid: The Tribunal found substance in the appellant's submission that the compensation paid to remove impediments in the transfer of the property is deductible as a 'cost of improvement' while computing taxable capital gains. This view was supported by judgments from various cases, such as ACIT vs. Pushkar Dutt Sharma, where expenses incurred to remove encumbrances were allowed as deductions.2. Relevant Judgments Considered: The Tribunal referred to several judgments, including: - ACIT vs. Pushkar Dutt Sharma: Expenses to remove impediments are deductible under 'cost of improvement.' - Nanubhai Keshavlal Chokshi HUF vs. ITO: Payments made to vacate the property were considered as expenditure for improvement of the asset. - Kaushalya Devi vs. CIT: Payments made to forego rights under an earlier agreement were treated as expenditure incurred wholly and exclusively in connection with the transfer of the property.3. Conclusion: The Tribunal concluded that the expenditure incurred by the appellant to remove encumbrances was directly linked to the transfer of the capital asset and should be allowed as a deduction under the head 'cost of improvement.' Consequently, the disallowance made by the authorities below was not justified, and the impugned addition was deleted.Result:The appeal preferred by the assessee was allowed, and the disallowance of the indexed cost of improvement was deleted.Order Pronounced:The order was pronounced on 04/08/2023.