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 the expenditure incurred to remove encumbrances on the property was deductible as a 'cost of improvement' under Section 55(1)(2)(ii) of the Income Tax Act, directly linked to the transfer of the capital asset. The disallowance made by the lower authorities was deemed unjustified, and the impugned addition was consequently deleted.

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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.

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