Assessee can claim expense on removal of encumbrance created by ancestors

This is an appeal of the assessee directed against the order of the learned Commissioner of Income-tax(A) – IV, Hyderabad, dated 22-03-2012 for AY 2007-08.

2. On perusal of record, we find that there was a delay of 5 days in filing this appeal. In this connection, assessee filed a petition for condonation of the said delay wherein it was stated that she is a resident of Singapore due to which delay occurred in filing the appeal. Assessee also filed an affidavit affirming the reasons mentioned in the condonation petition. After hearing the ld. Counsel for the assessee as well as ld. DR and on perusal of the reasons given in the condonation petition, we are of the opinion that the delay in filing the appeal was on account of reasonable cause, therefore, we admit the appeal and proceed to dispose of the appeal on merits.

3. Briefly the facts of the case are that assessee had filed her return of income for the AY 2007-08 on 27/06/2008 declaring the taxable income at Rs. 1 ,70,53,650/-. During the survey conducted on 11/03/2010 in the case of Sri Karim Nawaz Alladin and M/s Alladin Investments and Properties, however, it was noticed that the market value of the property sold by the assessee was more than the actual consideration recorded in the registered sale deeds. Since the assessee had not offered capital gains on the basis of sale consideration as per the registered sale deeds, there was escapement of income in terms of the provisions of section 50C of the Act. Accordingly, the assessment was reopened by way of a notice u/s 148 served on 11/05/2010 and the reassessment order was passed by making certain additions.

3.1 During the reassessment proceedings, the AO asked the assessee vide letter dtd. 23.11.2010, to furnish the details along with necessary documentary evidence for the cost of acquisition claimed by the assessee at Rs. 79,36,350/- while working out the Long Term capital gains on sale of land at Rs. 1,70,63,650/- in the return of income filed on 27.6.2008. The representative of the assessee submitted that the assessee, along with her family members, was the owner of a property admeasuring 16,366 sq. yards at Sanathnagar, by way of succession, which was in possession of M/s. Voltas Ltd. on 199 years lease. The family paid a sum of Rs. 3 crore to M/s Voltas Ltd. for taking back the possession of the entire property through their agent, M/s. Alladin Investments and Properties. (Rs. 2,75,00,000/-, besides Rs. 25,00,000/- towards proportionate registration expenses). The representative submitted that the assessee’s share for the proportionate area sold came to Rs. 61,48,000/-. Besides, the assessee paid a sum of Rs. 1,50,00,000/- to M/s. Alladin Investments and Properties as consenting party at the time of sale of the property. Copies of documents/reciepts were also submitted. A copy of the assignment deed dtd. 31/03/2003, executed between M/s Voltas Ltd. and M/s. Alladin Investments and Properties was also submitted along with the confirmation letter regarding Rs. 1 ,50,00,000/- towards assessee’s share of cost.

3.2 The Assessing Officer noted that except for filing the above mentioned letter, assignment deed and confirmation letter, the assessee did not furnish any bank accounts so as to verify, the genuineness of payments claimed as made. Any cash flow statement or balance sheet was also not filed. On an examination of the assignment deed, however, he noted that there was no mention of the assessee’s name or any reference to her therein. He observed that the assessee had not explained as to under what circumstances the amounts were paid to M/s. Alladin Investments and Properties. The confirmation from M/s. Alladin Investments and Properties only stated that they had received Rs. 1 ,50,00,000/- towards their share as confirming party, as they were instrumental in obtaining assignment deed for the said property from M/s Voltas Ltd.

3.3 On a consideration of the claim, however, the Assessing Officer noticed that the property sold by the assessee was an ancestral property which her ancestors had leased to M/s Voltas Limited on 8.1.1963. Since the assessee wanted to dispose of the property, she had claimed having paid compensation to them for taking possession and sale rights over the impugned property. As such, the expenditure was claimed as incidental to the transfer of property.

3.4 On an examination of this issue, however, the Assessing Officer opined that the expenses incurred for getting the lease rights cancelled were not allowable expenditure, as the encumbrance has been created by the assessee or her ancestors. In this regard he relied on the decision in the case of CIT Vs. Ranga Setty (159 ITR 797) (Ker.), holding that’ “payment made by the landlord to the tenant in regard to surrender of tenancy rights cannot be considered as an expenditure incurred in connection with the transfer of capital asset”. Reliance was also placed on the decision in the case of CIT Vs. Roshan Babu Mohammad Hussein Merchant (275 ITR 231) (Bom) opining that an assessee is not entitled to deduction of expenditure incurred to remove the encumbrance created by himself. The Assessing Officer noticed that in the instant case also the land belonged to the ancestors and the encumbrance has also been created by them. Accordingly, it has to be construed that the encumbrance had been created by the assessee ancestors. Besides, he noticed that the assessee had not produced the bank accounts statement to prove the fact of payment. Accordingly, the claim of expenditure on account of payments made to M/s. Voltas Ltd. was rejected.

4. Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A).

5. During the course of appellate proceedings, the representative of the assessee submitted that the expenditure towards proportionate compensation of Rs. 79,36,350/- is allowable u/s. 48(1) of the Act, as upon succession of the impugned property, the assessee had paid the compensation as per the document submitted. The representative averred that where the assessee’s ancestors create any lien, mortgage or any actionable claim, and the assessee who inherits the property makes payment for the purpose of clearing of such actionable claims for perfecting the title, such payments should be regarded as cost of acquisition u/s. 48. He averred that this is applicable for a property under sale which is ancestral in nature and devolved on the assessee upon inheritance. Reliance in this regard was placed on the decision in the case of V S M R Jagadish Chandra Vs. CIT (227 ITR 240)

5.1 The representative of the assessee submitted that the expenditure incurred for vacation of property and payment made to tenant is in the nature of payment “only and exclusively in connection with the sale” and therefore, deductible u/s 48(i). For this proposition he cited the decisions in the cases of CIT Vs. Shakuntla Rajeswar (160 ITR 840) (Del.) and Nawzar Chenoy Vs. CIT (234 ITR 98) (A.P). The representative contended that the case law relied upon by the Assessing Officer i.e. 159 ITR 797, is out of context in the facts of the present assessee, as the said case refer to compulsory acquisition of property by the Government and contemplated on the basis of “one transfer” alone by the assessee therein.

5.2. The representative of the assessee further contended that M/s Alladin Investments and Properties was the affirming party to .both sale deeds and had received Rs. 1 ,50,00,000/- from the assessee by cheque, as per the receipt issued by them. He submitted that the payment of Rs. 1 ,50,00,000/- made to them ‘has been’ taxed in the hands of Sri Karim Nawaz Alladin in the’ A.Y.2007-08 and therefore, such amount should be reduced from the total consideration for arriving at the capital gains.

6. The CIT(A) after considering the submissions of the assessee, observed as under:

“6. I have gone through the facts of the case and the submissions of the assessee. It is an established position of law that in order to determine the capital gains arising from the sale of any property received on succession, the cost of acquisition thereof has to be taken as the cost in the hands of the previous owner. It is clear that the encumbrance on the properties received by the assessee in the instant case had been created, by his ancestors. In the light of the decision of the Hon’ble Bombay High Court in the case of CIT Vs. R M Merchant Hussein and Fancy Corporation Vs. DCIT (275 ITR 231) wherein the decision in the case of Arunachalam Vs. CIT (227 ITR 222)(S.C) and Jagadishchandran (VSMR) (227 ITR 222)(S.C) also was referred to, the encumbrance created by the earlier owner was clearly not a part of such of cost of acquisition. Since the assessee acquired the property only on account of succession, the cost of acquisition would get restricted only to that in the hands of his ancestors, which indeed excludes the cost of any encumbrance created by them. Accordingly, even if the assessee had to discharge the liability on this account by making any payment to M/s. Voltas Ltd., this cannot be said as constituting a part of the cost of acquisition of the property transferred, Finding no infirmity in the action of the Assessing Officer; therefore, it is held that the assessee is not eligible for deduction of any expenditure contentedly incurred for getting the release of the property.

6. 1 Likewise, even if the assessee paid any sum to M/s. Alladin Investment and Properties at the time of sale of the property on the ground that it had acted as the consenting party, the amount so paid is only an application of the consideration. received from the sale of the property. It has not been established that but for incurring such expenditure, the assessee would not have been able to sell the property. The mere fact that the sum of Rs. 1,50,00,000/- was assessed in the hands of Sri Karim Nawas Alladin also does not make the claim of the assessee a valid claim as the purpose and necessity of incurring such expenditure has not been established at any stage. Accordingly, it is held that the assessee is not liable to any deduction even on this account. Upholding the action of the Assessing Officer in disallowing the claim of deductions of’ Rs. 79,36,350/- and Rs. 1,50,00,000/- in computing the Long Term capital gains, ground Nos. 2 and 4 are decided against the assessee.”

7. As regards the application of provisions of section 50C of the Act, vide the questionnaire dtd. 8.11.2010, the assessee had been informed that she had admitted the value of consideration at Rs. 4 crores only in the return of income, whereas in view of the provisions of sec. 50C, the market value of the property i.e. Rs. 6,11,90,100/-, should have been adopted for computing the capital gains. In response to the said query, the assessee vide submissions dtd. 23.11.2010 submitted that the property at Sanathnagar was under long lease with M/s. Voltas .Ltd. and when the same was reverted back to the assessee, certain area was lost by way of road widening and for formation of roads. It was submitted that thought of registration was for the gross area, the net area actually received by the buyer was less.

7.1 On a consideration of facts, the Assessing Officer noticed that the provisions of sec. 5OC of the Act were applicable in the instant case. He noticed that no documentary evidence regarding loss of area could be filed. Besides, it was not known as to how the property which was claimed as not being available with the assessee was transferred to the purchasers through the sale deeds. The Assessing Officer also noticed that while both the market value and the actual consideration had been mentioned at Rs. 3 crores in the document No. 1106/2007, the encumbrance certificate reflected the market value at Rs.4,30,66,600/ -, though actual consideration shown was Rs. 3 crores only. In view of the huge variation, therefore, a reference was made to the SRO, SR Nagar Hyderabad, who informed that the market value was Rs. 4,30,66,600/- only. After providing a copy of the letter received from the SRO, the market value of the property in document No. 1106/2007 was considered at Rs. 4,30,66,600/- and adopting the total market value at Rs. 6,11,90,100/ -, as against Rs. 4 crores admitted by the assessee, Long Term capital gains were computed.

8. During the course of appellate proceedings, the representative of the assessee reiterated that the property actually received back by the assessee from Voltas Ltd. was 2853 sq. yards only, as against the area shown in the document at 3353 sq. yards. He submitted that this had happened due to road widening. Accordingly, it was claimed that the valuation u/s. 50C was incorrect to this extent.

9. After considering the submissions of the assessee, the CIT(A) observed that admittedly, the market value of the properties in terms of the provisions of sec. 50C was Rs. 6,11,90,100/-. Even if there is truth in the contention that the actual area received by the assessee from Voltas Ltd. was less than that shown in the document, it is seen that the assessee had transferred the entire property only by way of the relevant deeds and the market value of such property was Rs. 6,11,90,100/- only. Finding no merit in the contention, of the assessee, therefore the application, of the provisions of section 50C of the Act and the consequent adoption of the sale consideration at Rs. 6,11,90,1001/- was upheld.

10. Aggrieved by the order of the CIT(A), the assessee is in appeal before us raising the following grounds of appeal:

1. The Commissioner ought to have allowed the expenditure incurred by the assessee for perfecting title and taking possession of the property as cost of acquisition.

2. The Commissioner ought to have allowed consideration paid to confirming party as part of cost of acquisition.

3. The Commissioner erred in applying section 5OC by adopting the market value as against the sale consideration received.

4. Any other ground at time of hearing.

10.1 The assessee filed a petition seeking admission of additional ground of appeal, which is as under:

“1. The levy of capital gains in the hands of the assessee is not correct in law for the reason that the registered documents executed by the executants, which included the assessee, were not deeds of sale but only agreements of sale cum irrevocable General Power of Attorney and accordingly the said documents did not result in transfer of the immovable property which is the subject matter of the said agreements.”

10.2 Referring to the above additional ground, the assessee submitted in the petition as under:

“The assessee has been assessed on 1/3rd share of long term capital gains computed on the ground that she transferred, by way of sale, immovable property. The assessee claimed before the Assessing Officer[A.O] as well as the Commissioner of Income Tax(Appeals) [C.I.T(A)] that the property was the subject matter of legal dispute in 0.A No.844 before Addl.Judge, RR Dist court, Hyderabad, that she has not received any sale consideration on sale of the immovable properties, that the entire sale consideration was received by her brother Sri Karim Nawaz Alladin and that the sale deeds include her name as vendor at the instance of the buyer to avoid further legal disputes from the family. The A.O. did not accept her contention and brought to tax 1/3 share of Capital Gain. The C.I.T(A) confirmed the assessment. The assessee is in appeal before the Hon’ble Income Tax Appellate Tribunal (ITAT) seeking relief from the levy of tax charged on the aforesaid capital gain.

2. Subsequent to the date of filing of appeal before the Hon’ble ITAT, a decree has been passed on 06-03-20 15 in 0.A NO.844 of 2007 in which the assessee is one of the plaintiffs, along with Sri Karim Nawaz Alladin and Smt.Maniza Jumabhoy, the vendors in the sale deeds which gave rise to the capital gains. In the said suit, the court decreed that the assessee and other plaintiffs have failed to establish their claim for title to the property, in respect of which long term capital gain has been computed by the AO.

3. The assessee submits that the registered documents Nos. 18 14/2007 and 18 15/2007 which were the basis for charging capital gain in the assessee’s case, are only agreements of sale cum irrevocable General Power of Attorney and not deeds of sale. Accordingly, the said documents could not have resulted in conveyance of title to the properties which were subject matter of the said agreements. This legal proposition has been clarified by the Hon’ble Supreme Court in the case of Suraj lamps & Industries (P) Ltd., vs State of Haryana (2011) 14 Taxrnann.com 103. Accordingly, the action of the Assessing Officer in assessing Capital Gain, holding that the aforesaid documents being agreements of sale cum General Power of Attorney gave rise to transfer of immovable property mentioned therein, and the action of the Commissioner of Income Tax (Appeals) in upholding the action of the Assessing Officer are not in accordance with law. The assessee did not raise a ground of appeal on this count in the grounds of appeal filed before the Hon’ble Income Tax Appellate Tribunal for the reason that the assessee’s tax advisor omitted to raise the appropriate ground due to inadvertence. The assessee submits that the additional ground of appeal now sought to be filed has a relevant bearing on the very chargeability of Capital Gain.

4. In the above circumstances, the assessee craves leave of the Hon’ble ITAT to file the aforementioned additional ground of appeal in appeal No.655/Hyd/2014 pending before the Hon’ble ITAT. The assessee submits that the additional ground of appeal may kindly be admitted and decided upon while adjudicating the assessee ‘s appeal.”

11. We admit the said additional ground of appeal as it is relevant on the chargeability of capital gain.

12. As regards ground No. 1 relating to denial of assessee’s claim for allowance of expenditure incurred for perfecting title and taking possession of the property sold, Ld. AR submitted that the assessee worked out the indexed cost of acquisition of the properties sold by her, as under:

a) FMV of 3355 sq.yds as on 01/04/81 at Rs. 60/- per sq.yd.	Rs. 2,01,300
B) proportionate compensation paid to M/s Votals Ltd to take possession and sale rights in 2003-04	Rs. 61,48,000
Indexed cost of (a) above Rs. 2,01 ,300 x 519/100	Rs. 10,44,747
Indexed cost of (b) above Rs. 61,48,000 x 51 9/463.	Rs. 68,91,603
Total indexed cost claimed	79,36,350

The AO allowed only Rs. 10,44,747/- as the cost of acquisition, which was upheld by the CIT(A).

12.1 The Ld. AR of the assessee submitted that the decision of the CIT(Appeals) is patently incorrect in law. In this connection the ld. AR brought to the notice of the Bench, its decision in a related case viz., Smt. Farida Alladin Vs. ACIT in ITA No. 954/Hyd/2012 Dt:12-06-2015 wherein on an identical issue the coordinate bench held that the reliance placed by the C.I.T(A) on the decision of the Bombay High Court in the case of R.M Merchant Hussain and fancy corporation ltd (supra) was misplaced and following the Supreme Court’s decision in the cases of Jagadishchandran VSMR (supra) and Arunachalam vs CIT (supra) allowed the claim of the assessee for similar allowance. A copy of the order of the coordinate bench is submitted (Pages 52 to 59 of the paper book). The ld. AR relied on the said decision of the coordinate bench and prays for allowance of the sum of Rs.68,91,603 as part of cost of acquisition in computing capital gain in assessee’s case.

13. The ld. DR, on the other hand relied on the orders of revenue authorities.

14. Considered the rival submissions and perused the material facts on record. In the case of Smt. Farida Alladin Vs. ACIT (supra), the coordinate bench held as under:

8. We have considered the rival contentions and also perused the relevant material on record. It is observed that the property sold by the assessee during the year under consideration was an ancestral property and the assessee’s ancestors had created an encumbrance over the said property by giving the same property on lease of 99 years to M/s. Voltas Limited. In order to get the lease hold rights released from M/s. Voltas Limited and obtain the possession of the property, the amount in question was paid by the assessee as compensation and the same was claimed as deduction being the cost of acquisition for the purpose of computing capital gain. The A.O. however disallowed the said deduction claimed by the assessee and the Ld. CIT(A) confirmed the said disallowance made by the A. O. by relying on the decision of Hon’ble Bombay High Court in the case of CIT vs. R.M. Merchant Hussein and Fancy Corporation Limited (supra).

9. In support of assessee’s claim on this issue, the Ld. Counsel for the assessee has relied on two decisions of the Hon’ble Supreme Court in the case of VSMR Jagadishchandran (Decd) by L.Rs vs. CIT (supra) and R.M. Arunachalam vs. CIT (supra). In the case of VSMR Jagdishchandran (Decd) by L.Rs. vs. CIT (supra), it was held by the Hon’ble Supreme Court that where mortgage was created by previous owner during his life time and the same was subsisting on the date of his death, the successor obtained only the mortgagor’s interest in the property and by discharging the mortgage debt, he acquired the mortgagee’s interest in the property and therefore, the amount paid to clear off the mortgage was the cost of acquisition of the mortgagee’s interest in the property which was deductible as cost of acquisition under section 48. A similar view has been reiterated by the Hon’ble Supreme Court in the case of R.N. Arunachalam vs. CIT (supra) decided simultaneously.

10. At the time of hearing before us, learned D.R. has made an attempt to distinguish the aforesaid decisions of the Hon’ble Supreme Court cited by the Ld. Counsel for the assessee by contending that the same are rendered in the context of mortgage of property whereas the case of the assessee involves payment made for release of lease hold rights. We are unable to accept this contention of the learned D.R. In our opinion, the proposition propounded by the Hon’ble Supreme Court in the case of VSMR Jagadishchandran (Decd) by L.Rs. vs. CIT (supra) as well as R.N. Arunachalam vs. CIT (supra) would be applicable in the case of any encumbrance created by the predecessor which has been removed by the successor to the property by making payment of compensation.

11. In his impugned order, the Ld. CIT(A) has relied on the decision of Hon’ble Bombay High Court in the case of CIT vs. R.M. Merchant Hussein and Fancy Corporation Ltd., 275 ITR 231 while confirming the disallowance made by the A.O. on this issue. A perusal of the judgment of the Hon’ble Bombay High Court in the said case however shows that the same is distinguishable on facts inasmuch as the property in the said case was acquired by the assessee free from encumbrances and since expenditure was incurred by the assessee to remove the encumbrance which was created by himself, the Hon’ble Bombay High Court held that the same was not deductible under section 48 of the Act. In our opinion, the reliance of the Ld. CIT(A) on the decision of Hon’ble Bombay High Court in the case of R.M. Merchant Hussein and Fancy Corporation Ltd., (supra) to confirm the disallowance made by the A.O. on this issue thus is clearly misplaced. We therefore respectfully follow the decisions of the Hon’ble Supreme Court in the case of VSMR Jagadishchandran (Decd) by L.Rs. vs. CIT (supra) as well as in the case of R.N. Arunachalam vs. CIT (supra) and direct the A.O. to allow the deduction claimed by the assessee under section 48 on account of payment made to M/s. Voltas Limited for release of lease hold rights created by her ancestors/predecessors. Ground No. 1 of assessee’s appeal is accordingly allowed.”

14.1 As the issue raised before us is materially similar to the said case, respectfully following the decision of the coordinate bench on this issue, we allow the ground raised by the assessee.

15. As regards ground No. 2 relating to denial of assessee’s claim for allowance of consideration of Rs.1,50,00,000 paid to confirming party as cost of acquisition, the ld. AR submitted that the assessee paid a sum of Rs.1,50,00,000/- to M/s. Alladin Investments & Properties ( a concern belonging to Sri Karim Nawaz Alladin) who were instrumental in obtaining assignment deed for the said property from M/s.Voltas Ltd., This amount was paid by cheque No.425079 dated 05-032007. The recipient confirmed the receipt vide confirmation dated 11 -11 -201 0 filed before the Assessing Officer (please see page 30 of the paper book). He submitted that the A.O denied the claim stating that the assessee did not produce his account and held that the payment was not proved and in appeal the C.I.T(A) confirmed the disallowance holding that the payment was only application of income.

15.1 Ld. AR submitted that the impugned property was given on lease way back in the year 1963 to M/s.Hyderabad Allwyn Metal Works Ltd., by the Smt.Zubeda Dost Mohd Alladin and over a period of decades, the property passed into the hands of M/s. Voltas Ltd., a reputed public limited company. With outstanding lease period of several decades remaining, it was a task of some proportion to get the lessee to agree to let go of its lease hold rights prematurely. The assignment deed resulted in the assessee being able to sell the property and realise Rs.4 crores as sale consideration. Having regard to the facts and circumstances of the case, the payment of the sum of Rs. 1,50,00,000 was a necessary outgo in the hands of the assessee. In this connection the ld. AR relied on the decision of the Karnataka High Court in the case of Asgar Jan vs CIT 298 ITR 60 KAR, In the said case, the amount of commission paid was reflected by the recipient of commission in his I.T return and accepted by the Department. The claim for deduction of such commission in computation of capital gain in the hands of the seller was held acceptable.

15.2 Ld. AR submitted that the said amount of Rs.1,50,00,000/- has been offered to tax by Sri Karim Nawaz Alladin and brought to tax in his I.T assessment for the Asst. Year 2007- 08 as amount received from the assessee. A copy of the assessment order in the case of Sri Karim Nawaz Alladin is submitted at pages 31 to 43 of the paper book. In the light of the facts and the evidence placed on record, ld. AR prayed that the claim of allowance of the sum of Rs. l,50,00,000/- u/s.48 may kindly be directed to be allowed.

16. Ld. DR relied on the orders of revenue authorities.

17. Considered the rival submissions and perused the material facts on record. It is clear from the records that the assessee along with the other family members allowed Mr. Karim Nawaz Alladin as party in the negotiation and be a assigning party. The relevant agreement is placed on record. It is fact that the assessee has shown the sale consideration and declared this payment as application on the sale consideration. The same was also confirmed by Mr. Karim Alladin. The same amount of sale consideration was declared by Mr. Karim in his return of income and sale consideration from Assignment right and declared as capital gains. The same was accepted by revenue. As far as revenue is concerned, the whole sale consideration was declared and charged for capital gains. There cannot be any revenue loss. Moreover, the same income cannot be charged to tax twice. Once the revenue accept the income offered by Mr. Karim as income under the head ‘income from capital gains’, the same has to be allowed as deduction in the hands of assessee. Accordingly, ground raised by the assessee is allowed.

18. As regards ground no. 3 relating to computation of capital gain by applying Sec. 5OC of the Act, the ld. AR submitted that the assessee prefers not to press this ground. Accordingly, this ground raised by the assessee is dismissed as not pressed.

19. In the result, appeal of the assessee is partly allowed.

Pronounced in the open court on 2nd June, 2017.