BACKGROUND
- The Assessee1 filed his return of income ('ROI') for AY 2018-19 declaring total income of INR 17.59 crores. Thereafter, the Assessee filed the revised ROI with total income of INR 13.89 crores.
- Due to this reduction of income in revised ROI, the case of the Assessee was selected for scrutiny.
- On perusal of revised ROI, the Assessing Officer ('AO') noticed that the Assessee had claimed indexed cost of improvement, which was not claimed in original ROI filed.
- During the course of assessment proceedings, the Assessee submitted that in the year under consideration, he transferred a land for a total consideration of INR 19.425 crores and claimed INR 1.66 crores and INR 3.87 crores as indexed cost of acquisition and indexed cost of improvement respectively.
- The Assessee could not furnish any documentary evidence in respect of cost of acquisition amounting to INR 1.62 lakhs and hence AO added it back to the returned income.
- For cost of improvement, the Assessee provided documentary evidence of indexed cost of improvement to the extent of INR 19.27 lakhs only on account of land conversion charges.
- In respect of the remaining amount of INR 3.68 crores, the Assessee submitted that this amount was paid to Shri H.D. Ramesh ('First Buyer') towards compensation on account of cancellation of an 'agreement to sale' dated 18.12.2012 for sale of this land.
- The Assessee further explained that the First Buyer intended to use the land for SEZ purposes but since the land was not available for SEZ unit, the said agreement was required to be cancelled.
- Therefore, both parties mutually agreed to cancel the said agreement by entering into a deed of cancellation dated 21.06.2017 wherein a sum of INR 3.70 crores was paid as compensation to First Buyer and claimed by Assessee as cost of improvement in subsequent transfer of such land in revised ROI.
- AO, while opining that section 48(i) of the Income-tax Act, 1961 ('the Act') does not include compensation paid on account of cancellation of agreement, disallowed and added back such cost of improvement to the returned income.
- Aggrieved by order of AO, the Assessee preferred an appeal before Ld. CIT(A).
- CIT(A) deleted the addition of INR 1.62 lakhs in respect of cost of acquisition as the Assessee produced the necessary documentary evidence. However, it rejected the grounds relating to disallowance of cost of improvement, thereby partly allowing the Assessee's appeal. Aggrieved, the Assessee preferred appeal before the Tribunal.
TRIBUNAL OBSERVATIONS ON CIT(A)'S CONTENTIONS
- CIT(A) Contention 1- No clause in agreement under which
the Assessee was required to pay compensation to First Buyer on its
cancellation
Tribunal's Observations- Clause 7(c) of the agreement to sale dated 18.12.2012 clearly specifies that in case of default by seller to perform the obligations and other terms of the agreement or failure to prove his right, title or interest over the property or to deliver its possession, he would be liable to pay back the advance along with liquidated damages to the tune of double the advance amount received by him. - CIT(A) Contention 2- No documentary evidence filed by
the Assessee to establish that INR 14.64 crores was actually paid
to First Buyer as per deed of cancellation
Tribunal's Observations- The Assessee had duly furnished copies of bank statements (Pg 55-60 of the Paperbook) which substantiate that INR 14.64 crores was actually paid to the First Buyer on various dates (INR 10.12 crores towards total advance received, INR 82.06 lakhs towards conversion charges paid by First Buyer and INR 3.70 crores to clear the liens, charges and other encumbrances created in favor of First Buyer.) - CIT(A) Contention 3- Compensation paid to First Buyer
is in nature of penalty/interest on the advances received and
utilized by Assessee
Tribunal's Observations- Nature and character of agreement, timing of earlier agreement and payment claimed as expenditure and date of transfer resulting into capital gains, are relevant aspects which should be considered and not the nature of payment. As long as the amount paid is in connection with the property, which was transferred to subsequent buyer with clear title, free from all liens, charges and encumbrances, the nomenclature of payment is irrelevant. - CIT(A) Contention 4- Compensation paid by the Assessee
will not fall under the definition of cost of improvement as it did
not enhance or improve the value of asset
Tribunal's Observations- Relied on Hon'ble Madras High Court ruling2 to observe that the word 'improve' has various shades of meaning and includes everything by which there is an enhancement in value of asset or rise in its price or the asset is made to grow better or even followed up by something better.
Had the Assessee not paid such compensation, he would be able to transfer only the litigated property which would not have fetched the price of a property with clear title. Therefore, settlement of a claim and respective payment made enhanced the value of land in this case. - CIT(A) Contention 5- Expenditure was not incurred
wholly and exclusively in connection with the transfer of the
property giving rise to capital gains but in connection with
earlier transaction, which is separate and distinct
Tribunal's Observations-Took support and guidance from Hon'ble Delhi High Court ruling3 to hold that the expression 'expenditure' used in section 48(i) should be given the same meaning as used in section 37 of the Act, except that expenditure may also be capital in nature. Further, the words 'wholly and exclusively' require and mandate that 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.
Therefore, the compensation/penalty amounting to INR 3.70 crores paid by the Assessee in respect of cancellation of first agreement is for clearing encumbrances created in favor of the First Buyer and thus can be said to be wholly and exclusively incurred in connection with the subsequent transfer of land in which capital gain arises and accordingly allowed the appeal of the Assessee.
This ruling of Hon'ble Bangalore Tribunal further confirms the principles laid down by various High Courts as well as the intention of legislature that as long as the intimate connection between the expenditure and act of transfer can be established, such an expenditure can be said to be incurred wholly and exclusively in connection with the transfer resulting in income by way of capital gains.
Footnote
1 Shankare Gowda [TS-1009-ITAT-2025(Bang)]
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