TaxTMI 
TaxTMI 
2010 (11) TMI 119
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....2002. Thereafter, an order u/s 143(3) r.w.s. 147 of the Act was passed on 30-03-2005, with the disallowance of Rs. 21,80,640 on account of penalty paid to GIDC for non-use of the two industrial plots while computing capital gains on transfer of these plots on the ground that the said expenditure was not incurred wholly and exclusively in connection with transfer envisaged under sec. 48(i) of the Act, resulting in assessment of income of Rs. 1,30,267. On appeal, the learned CIT(A), vide his order dated 22-08-2005 allowed the appeal of the assessee and deleted the disallowance made by the AO. On further appeal by the Revenue, the ITAT vide their order 26-05-2006 in ITA No.2258/Ahd/2005 restored the matter to the file of the AO with certain directions. In terms of these directions of the ITAT, the AO allowed fresh opportunity to the assessee vide notice dated 10.10.2006 u/s 143(2) of the Act. None responded on behalf of the assessee. Even in response to a subsequent notice dated 12.1.2007 issued u/s 142(1) of the Act, seeking, inter alia, the following details/documents: (a) "The details of properties and computation of capital gains with supporting. (b) How the expenditure of R....
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.... been submitted by the company with the Return of Income and also during the assessment and reassessment proceedings. Without prejudice to above, I would like to submit the details available with me as under:- The addition made by the Ld. Assessing Officer in the reassessment proceedings was deleted by the Ld. CIT (Appeals) on merits of the case holding that the transfer of industrial plots can be registered only after getting no objection certificate from the Gujarat Industrial Development Corporation. The Gujarat Industrial Development Corporation could not have given such certificate to the assessee company unless the penalty for non-usage of such industrial plots was paid by the assessee company. The CIT(A) was of the view that the payment for non usage penalty of Rs. 21,80,640 was wholly and exclusively connected with the transfer of two industrial plots sold by the assessee company. (d) Whether there was any encumbrances on property sold The industrial plots had been allotted to the Company by the Gujarat Industrial Development Corporation Ltd. (GIDC) and the company was required to pay the quarterly instalments for 10 years, and till the date this amount and othe....
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....tal gain on the sale of such plots. In the light of these submissions, the ld. CIT(A) upheld the disallowance in the following terms : "4.3 I have carefully considered the submission of the Learned Authorized Representative of the appellant. The Hon'ble ITAT while setting aside the issue to the file of the AO made following observations: "The admitted facts of the case that the assessee has paid penalty of Rs. 21,80,640 to Gujarat industrial Development Corporation for non-usage of industrial plots allotted to the assessee company. The expenses for non-utilization penalty has been incurred by the assessee wholly and exclusively for the purpose of securing the valid transfer. In the name of transferee in the records of Gujarat Industrial Development Corporation Ltd. and in case of non-payment the assessee was not able to self these plots. On the basis of above fact, the controversy to be examined by us whether penalty paid by the assessee on account of non-usage of plot amounts to an expenditure incurred wholly and exclusively in connection with such transfer. While interpreting the expression "wholly and exclusively", it has been held that the first adverb "wholly" refers to ....
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....planning to construct building thereon it was required to get the plan approved within six months and to start the production at the end of two years from the date of allotment failing which, the Corporation was entitled to take back the possession of the plot unless extension was granted by it. It was further laid down that in case plot/shed is not utilized within the stipulated time limit extension may be granted in genuine cases subject to charging non-utilization penalty at the rate of 1% for first year, thereafter 2% for second year, 3% for third year and at the rate of 4% for subsequent years of the prevailing allotment price for the said year. 4.6 The aforesaid would show that the penalty under reference is a cumulative amount which has been charged from the appellant at the rates referred to above for each year of default. The appellant violated the conditions laid down in the order allotting the plot of land to it. The appellant acquired the property free from all encumbrances from GIDC and thereafter due to default committed by him the dues were accumulated against him. These dues can not be held as encumbrances so as to allow him deduction under sec.48 of the Act. The....
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....ed on the judgment of the Hon'ble ITAT-Mumbai in the case of Damodar G. Naglia v. ACIT 12 SOT 599 (Mum.).Gist of the judgment enclosed as Annexure-1. E. Alternatively, the said non-use charges is to be treated as cost of improvement, while computing the capital gain, as the same has not been claimed as revenue expenses and the payment under consideration is directly related to the plot and therefore is allowable u/s. 48(ii) of the Act." 4.1 The learned DR, on the other hand, supported the findings of the learned CIT(A). 5. We have heard both the parties and gone through the facts of the case. As is apparent from the facts of the case, despite sufficient opportunity allowed by the AO in terms of directions of the ITAT vide their order 26-05-2006 in ITA No.2258/Ahd/2005, the assessee did submit details sought by the AO nor established as to how the amount paid towards penalty for non-usage of two industrial plots was encumbrance on the said plots or was an expenditure incurred wholly and exclusively in connection with their transfer. The onus is on the assessee to establish that the said amount was an expenditure incurred wholly and exclusively in connection with transfer of....
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............................................................................................... (b) in relation to any other capital asset,- (i) where the capital asset became the property of the assessee before 1st day of April, 1981 , means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of April, 1981, at the option of the assessee; ....................................................................................." 5.2 As already stated, admittedly, the assessee was allotted two industrial plots Nos. 631 & 632 by the GIDC and their cost of acquisition is Rs. 39,07,440. The assessee received sale consideration of Rs. 43,48,080 in terms of an agreement(copy has not been placed before us). At the time of transfer of these plots, payments of Rs. 4,06,823 have been made to GIDC which include administration charges, NA assessment, water charges and miscellaneous payments. These payments are not in dispute. Only dispute is in respect of an amount of Rs. 21,80,640 towards non-usage penalty. In terms of following clause 9 of the allotment letter issued by the GIDC , the assessee is required to put the shed or get t....
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.... asset can not be held be expenditure incurred wholly and exclusively in connection with transfer of asset subsequently. A bare reading of the provision makes it clear that what can be deducted under section 48(i) is expenses incurred wholly and exclusively in connection with the transfer. The crucial words in the provisions are "in connection with such transfer". The expression means intrinsically linked with the transfer. Such expenditure has to be wholly and exclusively in connection with the transfer. Even if such expenditure has some nexus with the transfer it does not qualify for deduction unless it is wholly and exclusively in connection with the transfer. The amount paid towards non-usage charges can not be held to be wholly and exclusively in connection with the transfer of two industrial plots . 5.5 As regards plea on behalf of the assessee that amount due to GIDC being encumbrance on the property sold, we find that in the case of V.S.M.R. Jagdishchandran [1997] 227 ITR 240. the Hon'ble Apex court while following its decision in the case of Rm. Arunachalam [1997] 227 ITR 222 held that where the mortgage is created by the assessee himself, then the expenditure incurred ....
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....created in the property in favour of the mortgagee is transferred to the assessee, that is after the discharge of the mortgage debt. In such a case, the expenditure incurred by the assessee to discharge the mortgage debt created by the previous owner to acquire absolute interest in the property is treated as "cost of acquisition" and is deductible from the full value of the consideration received by the assessee on transfer of that property. However, where the assessee acquires a property which is unencumbered, then, the assessee gets absolute interest in that property on acquisition. When the assessee transfers that property, the assessee is liable for capital gains tax on the full value (less admitted deductions) realised, even if an encumbrance is created by the assessee himself on that property and the assessee is under an obligation to remove that encumbrance for effectively transferring the property. In other words, the expenditure incurred by the assessee to remove the encumbrance created by the assessee himself on the property which was acquired by the assessee without any encumbrance is not an allowable deduction under section 48 of the Act. Admittedly, when the assessee w....