Property from ‘Will’ eligible for cost indexation from first owner’s acquisition date

ITO Vs Sohrab Fali Mehta (ITAT Mumbai)

Mumbai ITAT holds that while computing capital gains arising on transfer of a capital asset received by the Assessee under a will, the indexed cost of acquisition has to be computed with respect to the year in which the first owner held the asset; Relies on jurisdictional High Court ruling in CIT v. Manjula J Shah (355 ITR 474 (Guj.) on the same issue in the context of a gifted asset and CBDT Circular No. 636; For Assessment year 2016-17, Assessee, a US resident, filed return of income declaring a total income of Rs.15.02 Cr including long term capital gain from sale of share in the immovable property located at Colaba in Mumbai, received from his mother’s will in AY 2008-09, amounting to Rs.14.89 Cr; Assessee computed the capital gains after claiming: (i) indexed cost of acquisition of Rs.33.82 Lakhs duly supported by valuation report (ii) brokerage of Rs. 42.36 Lakhs, (iii) solicitors’ and CA’s fees of Rs.51 lakh, (iv) valuation fees Rs. 57,500 and (v) cost of vacating occupied place Rs.17.15 Lakh; Revenue held that since the Assessee received the property only in March 2008, upon death of Assessee’s mother, the Assessee can be allowed indexation only from Financial year 2007-08 and not from Financial year 1981-82; However, CIT(A) granted indexation benefit from Financial year 1981-82 relying on jurisdictional High Court ruling in Manjula J Shah; ITAT notes that the leasehold right of impugned property was first acquired two individuals in 1907 and through various modes of transfer such as mortgage, settlement of trust, will, etc., the 15% of the property came to be inherited by the Assessee; Opines that the issue is squarely covered by jurisdictional High Court ruling in Manjula J Shah wherein it was held that while computing capital gains arising of transfer of capital asset acquired by the Assessee under the will, the indexed cost of acquisition has to be computed with respect to the year in which the initial owner first held the asset and not in the year in which Assessee became the owner of the asset by virtue of his mother’s death; Thus, holds that the Assessee is entitled for indexed cost of acquisition benefit from Financial year 1981-82; As regards deduction for brokerage charges, ITAT notes that Revenue held that assessee’s claim and brokerage expenses and solicitor’s fees is not wholly and exclusively related to transfer of property as there is no dispute in property and accordingly allowed only 2% on sale consideration as incidental expenses of transfer; Observes that brokerage was paid only in connection with the sale of this subject mentioned property, who had arranged and coordinated the meetings with respective Attorneys of buyers and had also contributed effectively for negotiating final sale consideration; Also observes that since Assessee was resident of USA, he had employed a broker to negotiate on his behalf with the purchaser and to represent him in all the meetings, accordingly holds that the brokerage paid is allowable in full; As regards Rs. 51 Lakhs paid to the solicitor and CA, ITAT opines that the total expense paid by the Assessee to the said solicitor is to be bifurcated towards items allowable and items not connected with the transfer of the property and since Rs.18 Lakh was already allowed, holds the same to be reasonable; With respect to the cost of vacating the premises, opines that compensation paid on leave and license agreement paid to tenant is allowable as deduction and directs Revenue to allow the same as deduction.[In favour of assessee] (Related Assessment year : 2016-17) – [ITO v. Sohrab Fali Mehta  – Date of Judgement : 15.03.2023 (ITAT Mumbai)]

NOTE:

CIT v. Manjula J Shah (355 ITR 474) Wherein the department had filed SLP in that case which was dismissed without discussing the issue on merit as the tax effect involved in the said case was below Rs. 1 Crore.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal in ITA No.55/Mum/2023 for A.Y.2016-17 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-57, Mumbai in appeal No. CIT(A)-57/Mumbai/10217/2018-19/for A.Y.2016-17 dated 03/10/2022 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 31/12/2018 by the ld. Income Tax Officer, INT Tax Ward 3(2)(1), Mumbai (hereinafter referred to as ld. AO).

2. The Revenue has raised the following grounds of appeal:-

“1. Whether on the facts and circumstances of the case and in law, the LA CIT(A) has erred in allowing the Indexation on the basis of Hon ’ble Bombay High Court decision in the case of CIT us. Manjula J Shah (355 ITR 474) Wherein the department had filed SLP in that case which was dismissed without discussing the issue on merit as the tax effect involved in the said case was below Rs. 1 Crore.

2. Whether on the facts and circumstances of the case and in law, the LA CIT(A) has erred in allowing the following expenses incurred by the assessee on transfer of his 15% share in the property on the ground that the assessee had incurred these expenses wholly and exclusively for the transfer of his property whereas no documentary evidences has been provided by the assessee during the course of assessment proceedings

i) Brokerage Rs 42,36,500/-

(ii) Solicitor’s fee 50,00,000/-

(iii) Amounts paid to Occupier 10,00,000/-

3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing payment of Rs 20 lakhs made to the tenant, Shri Stefano Funari, for early termination of Leave and Licence, even though the assessee failed to furnish the Leave and Licence agreement and also failed prove that the payment made to Mr. Funari was wholly and exclusively for the purpose of transfer of immovable property during the course of assessment proceedings.”

3. We have heard rival submissions and perused the materials available on record. With regard to aforesaid grounds raised by the Revenue, the following facts are undisputed and indisputable:-

1. Kaikhoshru Byramji Mehta and his brother, Mr. Ardesir Byramji Mehta had a leasehold right by the Deed of Lease dated 30th July, 1910 for a period of 99 years commencing from 1 December, 1907 admeasuring 2170.58 sq. mtrs with two buildings standing thereon known as ‘Beach House’ and ‘Sea Side’ situate at Colaba Road, Mumbai along with the strip of land which was subject to the provisions and covenants contained in the Deed of Lease dated 27th July, 1940 co-terminus with the Deed of Lease dated 30th July, 1910 wherein Mr Kaikhoshru Byramji Mehta was having 2/3 share whereas Mr. Ardesir Byramji Mehta was having 1/3 share in the property (herein referred to as “the said Property”).

2. The share of the said Mr. Kaikhoshru Byramji Mehta was mortgaged by the Deed of Mortgage dated 30th March, 1922 to Mr Ardesir Byramji Mehta for a sum of Rs 50,000/- Out of the aforesaid amount a sum of Rs 30,000/- was outstanding, due and payable by Mr. Kaikhoshru Byramji Mehta to Mr Ardesir Byramji Mehta as on 22 September, 1931.

3. Mr Kaikhoshru Byramji Mehta who was having 2/3rd share in the said property settled his share in the said property subject to the mortgage claim for the benefit of the children and widow of his deceased brother, Mr Cawasha Byramji Mehta.

4. The said Mr. Kaikhoshru Byramji Mehta requested Mrs. Awanbai Cawasha Mehta, Mrs. Jehangir Edulji Spencer, Mr. Rustom Cawasha Mehta and Ms. Piroja Cawasha Mehta, the widow and children of the late Mr Cawasha Byramji Mehta, to act as trustees along with him in respect of the Trust created by him for their benefit by putting his 2/3rd share in the said property into the said Trust.

5. By a registered Deed of Transfer dated 8th July, 2002, the trustees of the said Trust transferred the leasehold right in the said property to Dr. Fali S. Mehta and Dr Keiki R. Mehta being the only beneficiaries in their respective individual capacity whereby the said Dr. Fali S Mehta received 30% undivided share and the said Dr. Keiki R. Mehta had received 70% undivided share in the said property.

6. Fali S. Mehta died on 29th August, 2003 leaving behind his Last Will and Testament dated 19th May, 1997 and Codicil dated 12th April, 1999 where under he bequeathed his 30% undivided right, title and interest in the said property to his wife, Mrs. Joan Fali Mehta absolutely. The said Will and Codicil were probated by the High Court at Bombay under T & I. J. Petition No.96 of 2007, as a consequence of which the said Mrs. Joan Fali Mehta became entitled to the said 30% undivided right, title and interest of the said Dr. Fali S. Mehta in the said property subject to the occupation of interest of the said Dr. Fali S. Mehta in the said property subject to the occupation of the tenants.

7. The said Mrs. Joan Fali Mehta died on 9th March, 2008 leaving behind her Last Will and Testament dated 31^st August, 2007 where under she bequeathed her entire estate to her two sons, namely, Dr. Sorab (Sohrab) Fali Mehta and Dr. Rustom Fali Mehta. The Will of Mrs. Joan Fali Mehta contained a provision that the executor, namely, Mr. Cyrus Soli Nallaseth should sell the said 30% undivided right, title and interest in the said property and divide the sale proceeds equally between her two sons.

8. In compliance of the aforesaid direction in the Will of Mrs. Joan Fali Mehta, Mr. Cyrus Soli Nallaseth executed the Deed of Release dated 30th December, 2015 wherein Mr. Cyrus Soli Nallaseth was referred to as the First Releasor and Dr. Sorab Fali Mehta and Dr. Rustom Falı Mehta were referred to as the Confirming Parties / the Second Releasors and Dr. Keiki R. Mehta was referred to as the Release. By the Deed of Release dated 30th December, 2015, the two sons of Mrs. Joan Fali Mehta who had received the bequest from their mother released their 30% undivided right, title and interest in the said property for a consideration of Rs.37 crores in favour of Dr. Keiki R. Mehta.

3.1. The assessee filed the return of income for A.Y.2016-17 on 25/05/2016 declaring total income of Rs.15,01,97,720/-. The said income included long term capital gain from sale of assessee’s share in the immovable property of Rs.14,89,00,351/-. The working for the said long term capital gain is as under:-

3.2. The cost of acquisition claimed by the assessee in the sum of Rs.33,82,900/- was supported by the valuation report obtained from a registered party as on 01/04/1981 which was placed on record before the ld. AO at the time of assessment proceedings.

3.3. During the assessment proceedings, the ld. AO raised a query as to whether the assessee was right in claiming the cost of his 15% undivided share in the said property as on 01/04/1981 and thereafter to apply for indexed cost of acquisition to ascertain the indexed cost of acquisition in December 2015, while computing capital gain for A.Y.2016-17, because the property was transferred to him vide agreement dated 08/07/2002 for nil consideration? The assessee replied to the said query vide letter dated dated 25/06/2018 alongwith all supporting documents before the ld. AO. The ld. AO agreed with the assessee that the cost of acquisition should be the cost in the hands of the previous owner which in the case of the assessee is cost of acquisition in the hands of Mr. Kaikhoshru Byramji Mehta as on 01/04/1981 i.e. Rs.33,82,900/-.The ld.AO however, did not agree with the plea of the assessee that assessee is entitled for indexation benefit from 01/04/1981. The main plea of the ld. AO is that the mother of the assessee died on 09/03/2008 and therefore, the assessee became entitled to share in the property through the will of the mother and hence, the assessee can be allowed indexation only from F.Y.2007-08 and not from F.Y.1981-82. The ld. AO relied on the Circular No.636 issued by CBDT in this regard. The ld. CIT(A) however, agreed that the plea of the assessee by following the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. Manjula J Shah reported in 355 ITR 474.

3.4. We find that the issue in dispute is squarely covered by the decision of the Hon’ble Jurisdictional High Court referred to supra wherein the Hon’ble Jurisdictional High Court after due consideration of CBDT Circular No.636 had held that while computing capital gains arising of transfer of capital asset acquired by the assessee under the will, the indexed cost of acquisition has to be computed with respect to the year in which the previous owner first held the asset and not in the year in which assessee became the owner of the asset.

3.5. Respectfully following the said decision, we hold that assessee would be entitled for indexed cost of acquisition benefit from F.Y.1981-82 on the cost of Rs.33,82,900/-. Accordingly, the ground No.1 raised by the Revenue is dismissed.

4. The next issue to be decided is with regard to eligibility of the assessee to claim deduction of brokerage, solicitor’s fees and amounts paid to occupier while computing capital gains on transfer of above mentioned property. As reflected in the computation of long term capital gains supra, it could be seen that assessee had claimed the following expenses as expenses incurred wholly in connection with the transfer of

4.1. The ld. AO observed in his assessment order that assessee has released his shares in the property to other co-owner of this property and there is no third party involvement in this transaction. Accordingly, the assessee’s claim and brokerage expenses and solicitor’s fees is not wholly and exclusively related to transfer of property. Similarly, there is no dispute in the property. Hence, the payment made to occupier for vacation of place is also not wholly and exclusively incurred for transfer of property. The ld. AO also observed that the claim for valuation fees to Architect and Chartered Accountant’s fees is also not related wholly and exclusively for transfer of the property. Accordingly, the assessee was asked to furnish the justification for the aforesaid claim of expenses. The assessee vide letter dated 25/06/2018 submitted the receipts for brokerage, solicitor’s fees, Chartered Accountant’s fees, Architect’s fees and receipts of the servants and occupier to whom the consideration was paid for vacating the premises. The ld. AO on verification of the same observed that assessee had paid brokerage of Rs.42,36,500/- to Mr. Hirji N Nagarwalla; amount paid to Mulla & Mulla Craigie Blunt and Caroe of Rs.50,00,000/- towards solicitor fees; Rs.1,00,000/- paid to Chartered Accountant S.S.Chokshi & Co.

4.2. The ld. AO observed that all the three parties were doing the same work for the assessee i.e. mainly arranging meeting with buyer and seller through Shri Markand Gandhi and negotiation of price. In addition to this, the Chartered Accountant was giving advice regarding tax deduction in respect of tax due to the assessee after the transfer of the property and Mulla & Mulla was attending some other work such as will and probate related work and leave and licence work, which are not exclusively incurred for the purpose of transfer of the property. Similarly, payments made to servants amounting to Rs.7,15,000/- was only for the arrears of salary payable to the said servant of the assessee which is not connected to with the transfer of the property and there was a tenant occupying the said property and that the tenant was merely compensated for vacating the premises and assessee’s share of such compensation was Rs.10,00,000/-. The ld. AO observed that the said sum is not for the purpose of transfer of the property. Further, the payment of Rs.57,500/- made to Architect Mr. Mandar M Rishud is for valuation of property and hence, not incurred for the purpose of transfer of the property.

4.3. However, the ld. AO observed that the normal prevailing brokerage, legal fees and other incidental expenses on transfer of the property prevailing in the market is 2% and accordingly, allowed expenses on transfer of Rs.37,00,000/- i.e 2% of assessee’s share of sale consideration on adhoc basis (18,50,00,000 * 2%). The ld. AO categorically held that payment of Rs.1,00,000/- paid to Chartered Accountant; payment of Rs.57,500/- paid for valuation report and payment of Rs.7,15,000/-towards arrears of salary to servant could no way be connected as expenditure incurred wholly and exclusively for the purpose of transfer of the property and hence, disallowed these expenses in entirety. As against the total brokerage of Rs.42,36,500/-; Solicitor fees of Rs.50,00,000/- and amount paid to tenant for vacating premises of Rs.10,00,000/- claimed by the assessee as deduction while computing capital gains, the ld. AO restricted the allowability of expenses on transfer against these heads to Rs.37,00,000/- being 2% of assessee’s share of sale consideration. The ld. CIT(A) observed that the ld. AO having accepted the genuineness of expenses could not merely restrict the allowability of the same on the basis of excessiveness and accordingly, held that assessee would be entitled for complete deduction on account of brokerage and solicitor fees. With regard to payment of Rs.10,00,000/- paid to the tenant Shri Stefano Funari for vacating the premises and consequently early termination of leave and licence agreement, the ld. CIT(A) held that unless the tenant is vacated and the property is free for occupation, it could not be sold and hence, the compensation paid to the tenant would be construed as an expenditure incurred wholly and exclusively for the purpose of transfer of property and accordingly, allowable as deduction.

Aggrieved by these three reliefs granted by the ld. CIT(A), the Revenue is in appeal before us.

4.4. We find that the ld. AO had granted deduction of Rs.37,00,000/- on an adhoc basis @2% towards all expenses incurred on transfer. The dispute before us is only with regard to allowability of brokerage, solicitor fees and amount paid to tenant for vacating the premises. Hence, the deduction allowed by the ld. AO in the sum of Rs.37,00,000/- could be apportioned in the following manner:-

4.4. With regard to claim of deduction on account of brokerage expenses of Rs.42,36,500/- we find that the same has been paid by the assessee to Mr. Hirji N Nagarwala. It is not in dispute that the said brokerage has been paid to Mr. Hirji N Nagarwala only in connection with the sale of this subject mentioned property. The assessee had submitted that Mr. Hirji N Nagarwala and other agents involved had arranged and coordinated the meetings with respective Attorneys of buyers and had also contributed effectively for negotiating final sale consideration of Rs.37,00,00,000/- for the subject mentioned property (out of this, assessee’s share is 50% i.e. Rs.18.50 Crores). It is a fact on record that assessee is permanently residing in United States of America (USA) and had employed Mr. Hirji N Nagarwala as broker to negotiate on his behalf with the purchaser and to represent him in all the meetings with the Advocate, Chartered Accountant and all other persons for sale of subject mentioned property. Moreover, the subject mentioned property was released by assessee and his brother in favour of their relative Mr. Keiki R Mehta. It is not in dispute that assessee and his brother were at logger heads with Mr. Keiki R Mehta and certainly the assessee (having residing in USA) requires a representative in India to represent on his behalf before Mr. Keiki R Mehta. Similarly, the other co-owner Mr. Rustom Fali Mehta had also employed M/s. Noshil Estates for protecting his share of 15% of the property and had paid independent brokerage thereon. It is not in dispute that the brokerage amount of Rs.42,36,500/- has been paid by the assessee by cross account payee cheque to Mr. Hirji N Nagarwalla. The assessee has also submitted a confirmation from Mr. Hirji N Nagarwalla dated 21/05/2018 wherein he had confirmed the fact of rendering the following services to the assessee:-

(a) Arranging, coordinating and conducting several meetings with the respective borrowings of the buyer / sellers

(b) Negotiating the final price of Rs.37 Crores with the buyer on behalf of the sellers

(c) Arranging peaceful vacation of the licensees occupying the apartments belonging to the sellers

(d) Assisting with the removal of the occupant of the servant quarters staying in the premises.

4.5. The said confirmation also states that Mr. Hirji N Nagarwalla have attended over a dozen meetings on behalf of the sellers with the purchasers attorney Mr. Markand Gandhi and Mr. Hormaz Dyar Vakil (Attorney of the sellers) to fine tune the sale deed and other documents required to be executed by the sellers. In view of the above, we have no hesitation to hold that the brokerage amount of Rs.42,36,500/- paid by the assessee to Mr. Hiraj N Nagarwalla would be allowable in full as the deduction while computing capital gains of the assessee as against the sum of Rs.15,31,290/- allowed by the ld. AO towards brokerage on transfer of the subject mentioned property.

4.6. With regard to payment of Rs.50,00,000/- paid to M/s. Mulla and Mulla Craigie Blunt and Caroe, Advocates and Solicitors, the ld.AR stated that the same was paid to look after the legal aspects of the transaction of transfer of the subject mentioned property. In support of this argument, the ld. AR placed reliance on the invoice raised by the said solicitor firm dated 31/12/2015 which are enclosed in pages 10-17 of the paper book filed before us. For the sake of convenience, the entire bill raised by the said solicitor firm is reproduced below:-

4.7. From the perusal of the bill given by the Solicitor as reproduced supra, we find that items mentioned in (d), (e), (h), (i) ,(j), (p), (q), (t), (u) & (w) alone could be construed as expenses incurred in relation to the transfer of the subject mentioned property. Hence, the payment of Rs.50 lakhs paid by the assessee to the said solicitor is to be bifurcated towards items allowable in respect of the aforesaid items and items not connected with the transfer of the property. In this regard, we find that the ld. AO had already allowed a sum of Rs.18,07,258/- on account of Solicitor fees, which in our considered opinion, is very reasonable, considering the fact that invoice raised by the solicitor for professional services rendered from the years 2008 to 30/12/2015. Hence, we direct the ld. AO to allow only a sum of Rs.18,07,258/- on account of solicitor fees as deduction while computing capital gains. We hold that the other works carried out by the solicitor firm for which bill has been raised by them on the assessee, cannot be construed as expenditure incurred wholly and exclusively in relation to the transfer of the subject mentioned property.

4.8. With regard to payments made to tenant for vacating the property, we find that assessee and his brother had executed leave and license agreement on 13/04/2013 for premises on the third floor of building “Sea side” for a period of three years with a lock in period of 12 months. Since the subject mentioned property was decided to be sold to Mr. Keiki R Mehta to whom obviously the vacant position was to be given, the assessee and his brother through broker Mr. Hiraj N Nagarwalla negotiated with the licensee Mr. Stefano Funari for cancellation of the leave and license agreement before the lock in period of 12 months. Pursuant to the aforesaid negotiation, Mr. Hiraj N Nagarwalla on behalf of the assessee and his brother, agreed to pay lumpsum compensation of Rs.20,00,000/- (out of which assessee’s share is Rs.10,00,000) to the licensee. The aforesaid compensation was paid so as to get the premises vacated by the licensee before the lock in period of 12 months and thus to comply with one of the conditions of the sale of the property. These facts are further confirmed by the solicitor letter dated 02/12/2015 addressed to Mr. Stefano Funari which is enclosed in pages 95-96 and 99­100 of the paper book filed before us. The leave and license agreement is enclosed in pages 52-94 of the paper book. In our considered opinion, this payment would certainly be construed as an expenditure incurred in relation to the transfer of the property and therefore, allowable as deduction. Hence, we direct the ld. AO to allow the compensation paid to the tenant for vacating premises in the sum of Rs.10,00,000/- as an allowable deduction while computing capital gains as against Rs.3,61,452/- allowed by the ld. AO.

4.9. To Sum-up the assessee would be entitled for deduction on account of expenses incurred in relation to transfer of the property as under:-

5. The ground No.2 & 3 raised by the Revenue are partly allowed.

6. In the result, appeal of the Revenue is partly allowed.

Order pronounced on 15/03/2023 by way of proper mentioning in the notice board.