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 31st 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:-
