The expense of clearing obstacles or encumbrances is deductible as an improvement expenditure
Fact and issue of the case
The instant appeal filed at the behest of the assessee is directed against the order dated 30.07.2017 passed by the Ld. Commissioner of Income Tax (Appeals)-12, Ahmedabad (in short ‘CIT(A)’) arising out of the order dated 20.12.2018 passed by the CIT(A)-12, Ahmedabad under Section 143(3) of the Income Tax Act, 1961, (hereinafter referred to as ‘the Act’) for Assessment Year 2016-17.
Disallowance of deduction of indexed cost of improvement to the tune of Rs.2,90,00,000/- is the subject matter before us.
We have heard the rival contentions made by the respective parties and we have also perused the relevant materials available on record.
The brief facts leading to the issue is this that the appellant filed return of income for the year under consideration on 17.10.20 16 declaring total income of Rs. 1,49,03,580/-. The appellant earned long term capital gain of 2,36, 15,553/- out of the transfer of non-agricultural land lying and situated at Survey No. 360, Sama, Vadodara, the computation whereof is as follows:
|Less: Indexed Cost of Acquisition||1,58,84,447|
|Less: Cost of Improvement||2,90,00,000|
|Long Term Capital Gain||2,36,15,553|
The history of the said transfer of land is as follows:
i. The appellant purchased a plot of land measuring about 7113 sq. mtr. by and under a deed of conveyance dated 23.03.2008 from one Shri Shantilal Ambalal Patel for a consideration of Rs. 1,72,20,573/-.
ii. Thereafter, on 13.02.2009, the appellant entered into an agreement to transfer the right title interest of the part of the said land admeasuring about 1858 sq. mtr. to Smt. Ashaben Hemangbhai Parikh and Sandeep Chandrakant Modi (HUF) for a total consideration of Rs.90 Lakhs out of which Rs.45 Lakhs were duly paid by those two co-owners to the appellant at the time of execution of the said deed of agreement for sale.
iii. On 20.11.2015, the earlier agreement for sale dated 13.02.2009 stood cancelled as the assessee found a better and higher sale consideration from a third party in respect of the said property. However, for withdrawing the rights in respect of Plot measuring about 1858 sq. mtr. of land, the appellant had to pay Rs.3,80,00,000/- to the earlier parties, namely, Smt. Ashaben Hemangbhai Parikh and Sandeep Chandrakant Modi (HUF) including Rs.45 Lakhs, which was paid to the appellant at the initial stage of entering into the agreement by and between the parties.
iv. Finally, the appellant sold out a plot of land admeasuring about 3188 sq. mtr. to one Shri Ambe Gauri Corporation for a consideration of Rs.6,85,00,000/- by and under the sale deed dated 23.11.2015.
In fact, Clause Nos. 5 & 6 of the agreement for sale of the land entered into by and between the appellant as vendor and Shri Ambe Gauri Corporation as purchaser speak about the confirmation of land to be freed from any encumbrances and in order to get the land free from encumbrances, the appellant had to pay Rs.3,35,00,000/- and returned Rs.45 Lakhs to the erstwhile purchaser of land measuring about 1858 sq. mtr. which is part of the total area of land of 3188 sq. mtr. The contents of Clause 5 & 6 of the said agreement reproduced by the Ld. CIT(A) is as follows: Clase 5 – All the rights related to said land shall he transferred us on date by execution of sale agreement and accordingly, the buyer will be sole and independent owner of the land and land can be utilized as per their wish. (Refer page no 37) Clause 6 – It way assured by the Appellant to the buyer that no other person has any right on the land it is not occupied by any other person it has not been offered as security to any person and any agreement executed in favour of any other person has been withdrawn in order to provide whole and sale ownership and rights of the land to the buyer. It was further confirmed that the land is free from all encumbrances, neither at has been given under will to any person nor there are pending legal disputes in respect of said land. (Refer page no 38)”
The assessee claimed that expenditure incurred by him to the tune of 3,35,00,000/- 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) of the Act, which was disallowed by the Ld. AO and confirmed by the First Appellate Authority. Hence, the instant appeal before us.
The contention of the assessee is this that the disallowance of deduction of Indexed cost of improvement amounting to Rs.3,35,00,000/- and addition of the same to the returned income of the appellant despite the fact that the same was incurred wholly and exclusively in connection with the transfer of the asset is not sustainable in the eye of law. 9. Under these facts and circumstances of the matter, Ld. Counsel appearing for the assessee relied upon the following series of judgments on the identical issue:
i. smt. Sapnaben Dipakbhai Patel vs. ITO, reported in  73 taxmann.com 288 (Ahmedabad-Trib.)
ii. ACIT vs. Pushkar Dutt Sharma, reported in  56 com 292 (Delhi-Trib.)
iii. Kaushalya Devi vs. CIT, reported in  92 com 335 (Delhi)
iv. Nanubhai Keshavlal Chokshi HUF vs. ITO, reported in  74 com 113 (Ahmedabad-Trib.) v. CIT vs. Smt. Shakuntala Kantilal, reported in  58 TAXMAN 106 (BOM) 10. On the other hand, the Ld. DR relied upon the orders passed by the authorities below.
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 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. Further that, on this aspect, we have considered the judgment passed by the ITAT, Delhi Bench in the case of ACIT vs. Pushkar Dutt Sharma (supra), 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. The relevant portion whereof is as follows:
If we strictly go by the provisions, then the sum of Rs. 12.50 lac received by the assessee earlier from Shri Dhingra is in the nature of advance money received. This amount is chargeable to tax in the year in question in terms of section 51, which provides that: Where any capital asset was on any previous occasion the subject of negotiations for its transfer, any advance or other money received and retained by the assessee in respect of such negotiations shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition’. Simultaneous with the chargeability of Rs. 12.50 lac, the amount of Rs.25.00 lac paid by the assesse to Sh. Dingra in the year in question is deductible u/s 48(i). Net result remains the same, that is, either there is an income of Rs. 12.50 lac u/s 51 and also deduction for Rs.25.00 lac u/s 48(1), or there is net deduction of Rs. 12.50 lac u/s 48(1). The assessee is entitled to relief u/s 48(1) for a net sum of Rs.12.50 lac. This ground fails.”
Observation of the court
We have further considered the judgment passed in the case of Nanubhai Keshavlal Chokshi HUF vs. ITO (supra), wherein payment was made by the appellant to the brothers who were living with him, for vacating the house to be sold had been considered as an expenditure incurred for improvement of asset or title. The same was found to be liable to be deducted from long term capital gain on sale of said house. The relevant portion whereof is as follows: “
With the assistance of the ld. representatives, I have gone through the record carefully. There is not much dispute between the parties on the facts. The dispute is with regard to inference drawn from the evidence available on the record. Before embarking upon an inquiry on the nature of evidence produced by the assessees, and the reasons assigned by the AO for rejecting the explanation of the assessees, I would like to take note of section 48 of the Income Tax Act. This section contemplates mode of computation of capital gains. It provide that 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, viz.
(i) the expenditure incurred wholly and exclusively in connection with such transfer, and
(ii) cost of acquisition of the asset and the cost of any improvement thereto, provided…
The question before me is whether the payment made by both the assessees to their bothers is to be considered as expenditure incurred for improvement of asset or the title. According to both the assessees, their brothers were residing in the house owned by them and while selling the house in order to get vacant possession, payment of Rs.21 lakhs was made by Shri Nanubhai Keshavlal Chokshi, HUF in his case, and Rs.31 lakhs in the case of Shri Lallubhai Keshavlal Chokshi, HUF. As far as payment part is concerned, there is no dispute. The payment was made through account payee cheques. Both brothers have confirmed receipt of money. They also filed affidavit to this effect. Their statement has also been recorded. They were residing in the house, but not making payment of any rent. On an analysis of the record, I find that the ld.Revenue authorities’ approach to the controversy in strictly mechanical way. Whereas in the present appeals, situation was required to be appreciated, keeping in mind social circumstances and the relationship of the brothers. What was their settlement while residing together? What was feeling of elder brother towards their younger brother, when they displaced them from a property where they were residing for last more than 24 years ?
Had the controversy been appreciated in a mechanical manner, and if both the brothers, who were residing in the house refused to vacate the house, then, what would be the situation before these assessees. They have to file a suit for possession that might be decided against, and young brother ejected from the premises, but that would consume time in our judicial process of at least more than ten to fifteen years. The prospective buyers may not be available in such circumstances. Shri Laxmanbhai K. Chokshi as well as Shri Jagdishbhai K. Chokshi were candid in their statement that they were residing in these houses along with their brothers. Shri Laxmanbhai K. Chokshi, though had not been paying any rent, but he was paying electricity bills. I am of the view that the payments were made for improvement of title of the property and they are entitled to claim deduction of cost of payment. Therefore, I allow solitary ground of appeal raised in the case of Shri Lallubhai Keshavlal Chokshi, HUF and direct the AO to grant him deduction of Rs.31 lakhs for computing the long term capital gain. Similarly, I allow ground nos.1 and 2 in the case of Shri Nanubhai Keshavlal Chokshi, HUF and direct the AO to allow deduction of Rs.21 lakhs while computing the long term capital gain.
In the appeal of Shri Lallubhai Keshavlal Chokshi, HUF no other grounds were pressed by the ld. counsel for the assessee except charging of interest under section 234B which is consequential in nature.
In ITA No.86/Ahd/2012, the assessee has raised two more grounds of appeal. In this next ground of appeal, the assessee pleaded that the assessee had claimed additional expenditure for improvement of this property. This claim has been allowed to the assessee, but the ld.CIT(A) has allowed it at Rs.2,88,370/-, whereas, the correct figure is of Rs. 6,75,000/-.
Brief facts of the case are that the assessee has purchased property at 11, Shaligram Bungalow-1, Thaltej, Ahmedabad for a sum of Rs.46,25,000/-. He further incurred an expenditure of Rs. 6.75 lakhs, and accordingly claimed deduction under section 54 of the Income Tax Act. The ld.AO has disallowed the claim of the assessee with regard to the expenditure of Rs. 6.75 lakhs. A perusal of the paragraph 3.00 and 3.2 of the CIT(A)’s order, it would reveal that the ld. CIT(A) has allowed the claim but wrongly mentioned the amount of Rs.2,88,3 70/-. To my mind, it is an apparent error committed at the end of the ld. CIT(A). Otherwise, in the assessment order as well as in all other details, the expenditure incurred by the assessee at Rs. 6.75 lakhs has been mentioned. Accordingly, I allow this ground of appeal, and direct the AO to grant deduction of Rs. 6.75 lakhs from the sale proceedings while computing long term capital gain as cost of improvement.
In the next ground of appeal, the grievance of the assessee is that the ld. CIT(A) has erred in confirming the action of the ld.AO for taking indexed cost of acquisition at Rs.18,21,000/- as against the value of Rs.19, 79,160/- adopted by the assessee as on 1. 4. 1981.
Brief facts of the case are that the assessee had valued its property as on 1.4.1981 at Rs.19, 79,160/-. This valuation was supported by the report of value, Shri Hasmukh C. Patel dated 22.6.2007. According to the assessee, he has half‑ share in the property and other half was with Shri Ashokbhai Keshavdas Chowkshi. While considering the case of Shri Ashokbhai Keshavdas Chowkshi and Shri Lallubhai Keshavlal Chokshi, HUF, it was considered by the AO that value of the land will be taken at Rs.2,000/- per square meter and built-up is to be valued at Rs.1,000/- per sq. meter. In the case of assessee, valuation for land was made separately, and value for the constructed area was made separately. According to the assessee, the AO has appraised this fact to the registered value , who had written a letter dated 10.11.2010 and apprised the AO that in the case of assessee, composite valuation of Rs.3,000/- per sq. meter be considered, and the building valuation was shown as NIL. In other words, the registered value has observed that he adopted composite rate of Rs.3,000/- per sq. meter. The contentions of the assessee is that the value of the land is to be taken at Rs.18.21 lakhs plus half share of the constructed area comes to Rs.1,58,160/-. This aspect was not considered by the AO. When this aspect was brought to the notice of the ld.CIT(A), then, the ld.CIT(A) has observed that the value of the land was Rs.15.81 lakhs and value of the building was Rs.2,32,150/-. If working of this annexure is believed, then, total value of the property will come at Rs.18,91,50/-. In this way, the ld.CIT(A) has considered various aspects, but did not interfere in the working given by the ld.AO.
With the assistance of the ld. representatives, I have gone through the record carefully and perused the valuation report which is available at page no.66 of the paper book. The property in question is situated at F.P.No.80, T.P.S. No.20, 35/North Side, Sardar Patel Nagar Society, Ahmedabad. It comprised an area of 1821.00 sq. meters. There is a distribution deed dated 18.8.2006 between the assessee and Shri Ashokbhai Keshavdas Chowkshi. Thus, the assessee has an area of 910.50 sq. meters. The ld. Registered value has estimated the total value at 3 6.42 lakhs. It represents to the area of 1821.00 sq. meters. Similarly, there was a built-up area of 316.32 sq. meters. He applied the rate of 1000/- and valued at Rs.3,16,320/-. The total value has been shown at Rs.39,58,320/-. The assessee has half share and the value has been shown at Rs.19, 79,160/- . Against this valuation report, all other correspondences, i.e. confirmation etc. from value is totally irrelevant at the end of the AO, because the value was never cross-examined as to how he can change his report unilaterally. The ld. Revenue authority has made reference to all irrelevant details for scaling down the valuation of the property as on 1.4.1981. I direct the AO to take value of the property at Rs.19, 79,160/-, and thereafter, compute the long term capital gain in the hands of the assessee.
In the result, appeals of the assessee are allowed.”
We have further considered the judgment passed by Hon’ble Delhi High Court in the case of Kaushalya Devi vs. CIT (supra) 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. The relevant portion whereof is as follows: “26. Looking at the totality of the aforesaid circumstances and on the basis of findings recorded by the Tribunal, we would hold that there was a close nexus and connect between the payment of Rs.25,00,000/- and the transfer of the property to the purchaser resulting in income by way of capital gains. There was proximate link and the expenditure incurred was in furtherance and to effectuate the transfer/sale of the property and was not remote and unconnected. Expenditure of Rs. 25,00,000/-, therefore, has to be treated as expense incurred wholly and exclusively in connection with the transfer of immovable and, hence, allowable as a deduction under clause (1) of Section 48 of the Act. However, we would like to clarify that Rs. 7,50,000/-which was paid by Anil Kumar Sharma and subsequently refunded, cannot be allowed as a double deduction. In other words, refund of Rs. 7,50,000/- would mean that the earlier payment made by Anil Kumar Sharma was squared off. The assessee had in fact incurred expenditure of Rs 25,00,000/-which was paid to Anil Kumar Sharma to forego and give up his right under the agreement to sell dated 10th April, 1989.”
This fact that though the assessee entered into an agreement to sell a part of the said plot of land admeasuring about 1858 sq. mtr. with Smt. Ashaben Hemangbhai Parikh and Sandeep Chandrakant Modi (HUF) on 13.02.2009, the same could not materialize and in order to get the property unencumbered, the appellant had to pay total amount of Rs.3,35,00,000/- compensating these erstwhile parties. Thus, the assessee became able to sell the property at a better consideration to a third party once the land became unencumbered from the earlier parties. Had such impediments not been removed the appellant would have not been in a position to sell out the property on a subsequent date at a higher price. Needless to mention, 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. Our such view has been strengthened by the ratio laid down in a series of judgments passed on identical issue as already discussed hereinabove. In that view of the matter, we do not find any justification in making disallowance and the addition of the impugned amount by the authorities below. Respectfully relying upon the ratio laid down in the identical facts and circumstances of the case passed by the Co-ordinate Bench as well as Hon’ble High Court, the impugned addition is deleted.
In the result, the appeal preferred by the assessee is allowed.
This Order pronounced on 04/08/2023
In the result, appeal of the assessee is allowed and ruled in favour of the assessee