TaxTMI 
TaxTMI 
2025 (8) TMI 531
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.... refund". The AO served notice u/s 143(2) as well as 142(1) of the Act and accordingly the assessee filed his reply on various dates along with the copy of sale deed in respect of full value of consideration and cost of acquisition claimed. On perusal of original and revised ITR filed by the assessee, the AO noticed that the assessee had claimed the cost of improvement in the Revised ITR, whereas the assessee did not claim the same in original ITR. Further, in the revised return, the assessee has declared full value of consideration amounting to Rs. 19,42,50,000/-,claimed indexed cost of acquisition amounting to Rs. 1,66,26,798/- and indexed cost of improvement amounting to Rs. 3,87,47,848/-.During the course of the assessment proceedings, as the assessee could not provide documentary evidences in respect of cost of acquisition amounting to Rs. 1,61,858/- and accordingly the AO reduced the same from the cost of acquisition and added back to the returned income. Further, in respect of cost of improvement claimed amounting to Rs. 3,87,47,848/-, the assessee had provided documentary evidence of Rs. 17,47,848/- only (Indexed amount Rs. 19,26,680/-) which was on account of land conversi....
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....he parties mutually agreed to cancel the agreement dated 18.12.2012 by entering into cancellation agreement dated 21.6.2017 and accordingly a sum of Rs. 3,70,00,000/- was agreed to paid as compensation to the first purchaser which has been claimed by the assessee as cost of improvement in the revised return of income filed. The ld. CIT(A)/NFAC held that compensation of Rs. 3,70,00,000/- said to have been paid by the assessee as compensation is not falling within the definition of cost of improvement. The assessee had not incurred any expenditure of capital nature in making additions or alterations to the capital asset. Therefore, the compensation paid could not improve or enhance the value of the asset. Further, the expenditure cannot be said to have been incurred wholly and exclusively in connection with the transfer which give rise to capital gain declared in the return of income filed but the same is in connection with the earlier transaction of transfer of property, which is separate and distinct from the transaction giving rise to capital gain declared. Further, the ld. CIT(A) noted that out of Rs. 3,00,00,000/- the assessee has received only an amount of Rs. 1,20,00,000/- on ....
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.... ld. A.R. of the assessee vehemently submitted that the ld. CIT(A)/NFAC admitted the fact that the compensation paid to Shri H.D. Ramesh amounting to Rs. 3,70,00,000/- is towards the cancellation of agreement to sale dated 18.12.2012. Further, the ld. A.R. of the assessee submitted that as per clause 7.c of the agreement to sale dated 18.12.2012, it was agreed between the parties that the seller shall be liable to pay back the advance amount received along with the liquidated damages to the tune of double the advance amount received by him till the date of such notice by the purchaser in case the seller failed to deliver the possession or make default to perform the obligations or failed to prove his right title and interest over the scheduled property. Further, as per the cancellation agreement dated 21.6.2017, it is clearly mentioned that the amount of Rs. 3,70,00,000/- was paid towards the penalty for relinquishing all the rights, claims over the scheduled property and the seller had paid the said amount to clear all the liens, charges and other encumbrances created in favour of the purchaser and accordingly prayed that same may be allowed as cost of improvement as it is incurre....
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.... over the scheduled property or to deliver possession of the same or any kind of litigations, then the seller shall be liable to pay back the advance amount received by him along with the liquidated damages to the tune of double the advance amount received by him till the date of such notice by purchaser. Therefore the contention of the ld. CIT(A)/NFAC that there is no clause in the said "agreement to sale" dated 18/12/2012 that the assessee shall pay to the purchaser compensation of Rs. 3,70,00,000/- on cancellation of said agreement is also not correct & devoid of merit. As mentioned above the clause 7(c) of the agreement to sale dated 18.12.2012, it was agreed between the parties that in the event the seller default to perform the obligations and other terms of the agreement or if the seller fails to prove his right, title and interest over the scheduled property or to deliver possession of the same or any kind of litigations, then the seller shall be liable to pay back the advance amount received by him along with the liquidated damages to the tune of double the advance amount received by him. 10.2 Further, on going through the deed of cancellation of agreement dated 21.6.20....
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....(A)/NFAC that the said compensation paid by the assessee is in the nature of penalty and the same cannot be said to be an expenditure incurred wholly and exclusively in connection with the transfer. Further, the ld. CIT(A)/NFAC also contended that the assessee has received total advance of Rs. 10,11,5000/- from the first purchaser & thus the compensation paid of Rs. 3,70,00,000/- is in the nature of interest paid on the amount of advance payment received. We are of the considered opinion that the nature and character of the agreement, timing of the earlier agreement and payment claimed as expenditure and the date of transfer resulting in capital gains, are relevant aspects which should be taken into consideration & not the nature of the payment i.e. whether it is paid by way of penalty or interest for the Advances received or towards the liquidated damages/compensation. The fact remains the same that the compensation/Penalty/Interest/Liquidated damages or whatever name called are paid in connection with the immovable property which are ultimately transferred to the subsequent buyer with clear title resulting in capital gains to the assessee & therefore these are paid in connection ....
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....nd exclusively in connection with the transfer of immovable property with clear title. Further Hon"ble High Court of Delhi had observed that the expression "expenditure" used in clause (i) in Section 48 should be given the same meaning as used in Section 37 of the Act, except that expenditure may be also capital in nature. The words "wholly and exclusively" require and mandate that the expenditure should be genuine and the expression "in connection with the transfer" require and mandate that the expenditure should be connected and for the purpose of transfer. The settlement of a claim and payment made can amount to expenditure. The relevant paras are reproduced below for ease of reference & convenience- "48. Mode of computation and deductions.-The income chargeable under the head "Capital gains" shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely: (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto." ....
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....th. Connection can be direct or remote but it should not be fanciful or marginal. In other words, there should be relevant connection between the dispute and the agreement by specific words or by necessary implication like reference to all other agreements in one (principal) agreement. The expression appearing in Clause 30 has to be given a meaningful interpretation particularly when the principal agreement itself, by specific words or by necessary implication, refers to all other agreements. ..." Word "connection" in Section 48(i) reflects that there should be a causal connect and the expenditure incurred to be allowed as a deduction must be united or in the state of being united with the transfer resulting in income by way of capital gains on which tax has to be paid. The expenditure, therefore, should have direct concern and should not be remote or have indirect result or connect with the transfer. Practical and pragmatic view in the circumstances should be taken to tax the real income i.e. the gain. We have applied the said dictum while interpreting clause (i) of Section 48 of the Act.............. "24. The words "wholly and exclusively" require and mandate that the ex....
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.... Income Tax (Appeals), Income Tax Department (hereinafter referred as "CIT(A)" for brevity) is bad and erroneous in law and against the principles of natural justice. 2. The learned CIT(A) erred in not considering the fact that the learned Additional ( Joint / Deputy / Assistant Commissioner of Income Tax/ Income-tax Officer, National e-Assessment Centre, Delhi (hereinafter referred as "AO" for brevity) has erred in making an addition of Rs.3.68.21.168/- without appreciating the fact that the said amount was incurred to re-claim the rights in the land agreed to be sold to the purchaser. 3. The learned CIT(A) erred in confirming additions of Rs 3.68.21.168 made by the learned AO which is bad and erroneous in law and against the principles of natural justice. 4. The learned CIT(A) has erred confirming the action of the learned AO without appreciating that the additional cost of Rs 3,68.21.168 was incurred towards relinquishment of right in the Land or clear encumbrances created in favour of purchaser vide agreement to sale dated 18.12.2012. 5. The learned CIT(A) along with AO has erred in not appreciating that additional cost of Rs 3,68.21.168 was paid to the purchaser....