Assessee wins appeal on capital gains computation as expenses for encumbrance removal allowed despite Revenue's objections

The ITAT Delhi allowed the assessee's appeal regarding capital gains computation. The Revenue questioned expenses for removal of encumbrances, accepting only Rs. 15 lakh paid to one party while disallowing other payments due to lack of corroboration. The ITAT found bank statements showed payments to multiple parties for encumbrance removal, reflecting ground realities where landowners pay compensation to unauthorized occupants for clean possession. Considering the socio-economic context and that expenses were incurred and accounted in the preceding financial year, the ITAT accepted the assessee's claim and reversed the disallowance made by the Assessing Officer.

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Issues involved:
The disallowance of expenses incurred towards removal of encumbrances for the purpose of determining tax liability towards capital gain.

Summary:
The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) concerning the disallowance of Rs. 2,12,29,422 claimed as deduction for indexed cost of improvement. The assessee, engaged in real estate business, declared capital gains from the sale of land parcel and claimed deduction for expenses incurred in removing encumbrances on the land. The Assessing Officer disallowed the deduction, leading to an enhanced capital gain. The CIT(A) granted partial relief based on the evidence provided by the assessee, but the assessee appealed to the Tribunal challenging the partial relief granted.

Detailed Judgment:
The assessee contended that the expenses incurred for removing encumbrances were disallowed by the Assessing Officer and partially accepted by the CIT(A). The assessee had purchased land where certain persons claimed rights of possession, leading to encumbrances. Negotiations were conducted with these claimants, and a total of Rs. 2,02,43,749 was paid by the assessee for removal of encumbrances. The cost was reflected in the balance-sheet of the preceding financial year. The assessee sold a portion of the land in the relevant assessment year and claimed deduction for the cost incurred in removing encumbrances. The Revenue Authorities questioned the legitimacy of these expenses due to lack of direct evidence, except for a payment of Rs. 15 lakh to one claimant, Shri Rajender Kumar.

Upon review of the bank statement, it was observed that withdrawals were made in the names of various parties during the period when the expenses were claimed to have been incurred. The Tribunal noted that the payment of Rs. 15 lakh to Shri Rajender Kumar was accepted as a cost of removing encumbrances. The bank statement indicated payments to multiple parties, suggesting the genuineness of the expenses. Considering the socio-economic context of India, where compensation is often paid for encroachments, the Tribunal found merit in the assessee's claim. Additionally, since the costs were accounted for in the preceding financial year, they could not be revisited. Therefore, the Tribunal accepted the plea of the assessee and reversed the disallowance made by the Assessing Officer.

Conclusion:
The Tribunal allowed the appeal of the assessee, setting aside the orders of the lower authorities and accepting the deduction claimed for the expenses incurred towards removal of encumbrances.

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