Case Law Details
Saroj Makan Vs ITO (ITAT Delhi)
Payments made by assessee to occupants/tenants for vacating is allowable while calculating Capital Gain: ITAT Delhi
Summary: he ITAT Delhi allowed the assessee’s appeal and held that payments made to occupants for vacating a property before its sale were deductible while computing capital gains. The assessee, a co-owner of a property in Karol Bagh, Delhi, sold her one-third share for ₹84 lakh and claimed deduction of ₹53 lakh paid to two occupants for handing over vacant possession. The Assessing Officer disallowed the claim, citing insufficient evidence, and the first appellate authority affirmed the disallowance on the ground that there were no municipal records, tenancy surrender deeds, or corroborative documents proving the payments. The Tribunal observed that the assessee had produced contemporaneous evidence, including cheques, bank records, affidavits, agreements, and utility bills showing occupation of the property. It further noted that the sale deed recorded delivery of vacant possession and contemplated rights concerning tenants. Holding that the payments were made to remove encumbrances and enable transfer of unencumbered title, the Tribunal ruled that such expenditure was allowable in computing capital gains and directed recomputation of the capital gain accordingly.
Core Issue: Whether payments made by the assessee to occupants/tenants for vacating a property before its sale were allowable while computing capital gains as expenditure incurred wholly and exclusively in connection with the transfer or as part of the cost incurred to remove encumbrances and secure an alienable title.
Facts: The assessee, a housewife, had not originally filed a return of income as her income was below the taxable limit. Based on NMS information, the Department found that an immovable property had been sold during the relevant year for ₹2.52 crore. Reassessment proceedings were initiated and notice under section 148 was issued on 28.03.2018.
The assessee explained that she was a one-third co-owner of property bearing No. XVI/2559/81, Gali No. 6/7, Beadon Pura, Karol Bagh, New Delhi, which had been purchased in 2002 along with two other co-owners and was sold on 23.03.2011 for ₹2.52 crore. Her share of sale consideration was ₹84 lakh.
The property was occupied by tenants/occupants and vacant possession had to be delivered to the purchaser. The assessee claimed that out of her share of ₹84 lakh, she paid ₹31 lakh to Shri Suraj Prakash Bhola and ₹22 lakh to Shri Gurcharan Kumar Ghai through account payee cheques for vacating the premises and handing over possession. The payments were supported by bank entries, receipts, affidavits, agreements, electricity bills and water bills. The assessee contended that without settling the occupants and obtaining vacant possession, the property could not have been sold. Therefore, the payments were directly connected with the transfer and deductible while computing capital gains.
AO’s Findings: The AO rejected the claim of deduction of ₹53 lakh paid to the occupants. According to the AO, the assessee failed to establish the existence of tenancy rights through municipal records, rent records or other independent evidence. The AO was of the view that the payments lacked sufficient documentary support and were not proved to have been incurred wholly and exclusively for transfer of the property.
Consequently, the AO ignored the payments made to the occupants and computed taxable long-term capital gains by disallowing the entire claim. An addition of ₹52,08,910 was made under the head “Capital Gains” and the assessment was completed under sections 143(3)/147 at a total income of ₹53,63,910.
CIT(A)’s Findings: The CIT(A) affirmed the disallowance. It was observed that although the assessee had produced copies of cheques, bank passbooks, affidavits and agreements, there was no registered surrender deed of tenancy, no municipal or rent records and no court proceedings evidencing eviction. The CIT(A) further observed that the registered sale deed did not specifically mention any payment made to tenants for vacating the property. The appellate authority also questioned the tax treatment adopted by one of the recipients and concluded that the claim appeared doubtful. Accordingly, the disallowance of ₹52,08,910 was confirmed.
ITAT Findings: The Tribunal carefully examined the registered sale deed dated 23.03.2011 and found that what was transferred was not merely vacant land but an old constructed property. The sale deed specifically recorded that peaceful vacant possession was being handed over to the purchaser. More importantly, Clause 7 of the sale deed expressly recognised the existence of tenants/occupants and recorded the purchaser’s right to recover rent, negotiate with tenants and obtain possession through legal process or negotiation. This clause clearly indicated that occupation by tenants was an existing reality connected with the property.
The Tribunal further noted that the assessee had produced contemporaneous evidence demonstrating that payments were actually made through banking channels before execution of the sale deed. Receipts, affidavits, agreements, bank records and utility bills established that the recipients were occupants of the property and that payments were made to secure vacant possession. These documents supported the assessee’s explanation that the amounts were paid to remove impediments to the sale and facilitate transfer of an unencumbered title.
The Tribunal held that the tax authorities had merely doubted the assessee’s claim without undertaking any meaningful inquiry or bringing contrary evidence on record. Mere suspicion could not override documentary evidence. Once contemporaneous evidence supported the payments and there was nothing on record to disprove the existence of occupants or the payments made to them, the claim could not be rejected as an afterthought.
The Tribunal reiterated the settled legal principle that where payments are made to remove encumbrances, settle occupants or secure an alienable and marketable title before sale, such payments either form part of the cost of acquisition or constitute expenditure incurred wholly and exclusively in connection with the transfer. Since the payments were directly linked to securing vacant possession and enabling the transfer, they were allowable while computing capital gains.
Case Laws Relied Upon:
1. CIT vs. Shakuntala Rajeshwar
2. Kaushalya Devi (Deceased) Through LRs vs. CIT.
Relevant Paras: Paras 7, 8, 8.1, 8.2 and 9.
Held: The payments of ₹31 lakh and ₹22 lakh made to occupants/tenants for vacating the property before its sale were held to be allowable while computing capital gains, as they were incurred for removing encumbrances and facilitating transfer of an unencumbered and alienable title. The Tribunal directed the AO to recompute the capital gains after allowing the claim. The assessee’s appeal was allowed.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal is preferred by the assessee against the order dated 01.09.2025 of the Ld. Addl/JCIT(A), Panchkula (hereinafter referred to as the First Appellate Authority or ‘the ld. FAA’ for short) in DIN & Order No : ITBA/APL/S/250/2025-26/1080228869(1) arising out of the order dated 18.12.2018 u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as `the Act’) passed by ITO, Ward-40(1), New Delhi for AY: 2011-12.
2. Brief facts of the case are that as per information available under NMS -non-filers category, the assessee had sold immovable property amounting to Rs. 2,52,00,000/- during the year under consideration which does not commensurate with profile of a non-return filer. Reasons were recorded and after prior approval of the competent authority notice u/s 148 of the Act was issued to assessee on 28.03.2018. In response to notice u/s 148 of the Act, the assessee filed her return of income on 08.05.2018 declaring an income of Rs. 1,55,000/- under the head capital gain and income from other sources. Subsequently, notice u/s 143(2) of the Act was issued on 12.12.2018
3. During assessment proceedings, statutory notices were issued to assessee requesting her to furnish photocopy of sale deed/ purchase deed for AY 2010-11 along with bank account statements in which the sale consideration of the property have been credited/ debited. In response, assessee furnished sale deed/ purchase deeds. The assessee claimed that assessee purchased a property namely XVI/2559/81, Gali No. 6/7, Beedonpura, Karol Bagh, Delhi-110015 in 2002 and she was co-owner in the property for 1/3 share alongwith 2 other co-owners. The same property was sold in 2011 and her 1/3 share was Rs. 84.00,000/- [1/3 of Rs. 2.52,00.000/-] . She further claimed that out of Rs. 84,00,000/- sale consideration, she paid Rs. 31 Lakh to Sh. Suraj Prakash Bhola (tenant in the property sold) vide cheque 831278 on Union Bank of India and Rs. 22 Lakh to Sh. Gurcharan Kumar Ghai (tenant in property sold) vide cheque no. 831279 on Union Bank of India for eviction of the property. Subsequently, paid Rs. 31,00,000/- paid to M/s ERA Landmark for purchase of flat. Hence, there is no capital gain from the sale of aforesaid property. The submission of the assessee was not found in order as assessee had not brought municipal or rent records. The assessment was framed u/s 143(3)/147 vide order dated 18.12.2018 at a total income of Rs.53,63,910/- after making an addition of Rs.52,08,910/- under the head capital gains.
4. In appeal assessee re-asserted the claim and relied certain case laws and ld. CIT(A) has sustained the addition with following findings;
“6.1 On Ground of Appeal No. 1: – The appellant has submitted that she sold her 1/3rd share in an old tenanted property at Beadon Pura, Karol Bagh for Rs 84,00, 000/-. She claimed deduction of Rs.52,08,910/-as payments to tenants for eviction of property. The AO disallowed the claim holding that documentary evidence was insufficient and that the claim appeared to be a tax evasion device. Copies of cheques, passbooks, affidavits and agreements were filed by the assessee. However, the onus is on the assessee to conclusively establish that such payments were actually made for eviction, supported by cogent and verifiable evidences. In the present case, although certain affidavits and cheques have been produced, but there is no registered deed of surrender of tenancy, no corroboration from municipal or rent records or court eviction record. The assessee merely relies on one of the tenant’s return of income. Examination shows that Shri Suraj Prakash Bhola offered Rs.31,00,000/- as consideration but simultaneously claimed cost of acquisition of Rs.36,13,067/- (indexed), resulting in an artificial longterm capital loss. Under section 55(2)(a), tenancy rights acquired without cost have Nil cost of acquisition. Therefore, his computation is incorrect and the receipt ought to have been taxed in full. Since his self-computation resulted in no taxable gain, there is no double taxation as alleged by the appellant. The Judgments such as CIT v. Eagle Theatres (Delhi HC), Naozar Chenoy (AP HC), Miss Piroja C. Patel (Bom HC) etc. recognize that eviction payments to tenants are deductible if proved to be genuine and wholly in connection with transfer. In the present case, genuineness of payment itself is in doubt, and the computation by tenant shows deliberate tax avoidance. Hence, ratio of those judgments is distinguishable on facts.
6.2 The registered purchase/sale deed of 2002, being the primary document of transfer, does not record any such payment to tenants or refer to encumbrances requiring settlement. The absence of any recital of alleged eviction payments in the sale deed itself renders the claim doubtful. In view of the following, I find no infirmity in the disallowance made by the Assessing Officer:
(i) lack of substantive evidence of necessity of payment,
(ii) incorrect tax treatment in the hands of the alleged recipient, and
(iii) absence of double taxation.
Therefore, the disallowance of Rs.52,08,910/- made by the AO is confirmed and this ground of appeal is dismissed.”
5. Ld. AR has reiterated the averments as made before ld. tax authorities. It was submitted that the assessee is a housewife and did not have any income except interest on bank deposits and her income was below taxable limit during the year thus had not filed any Income Tax Return for the referred Assessment Year. It was further submitted during the hearing before us that as per sale agreement in 2011 for the said property, the assessee along with other co-owners was required to hand over vacant procession of captioned property and thus had no choice except to share the sale proceeds with tenants. Necessary receipts/ acknowledgements along with copy of agreement/affidavit towards sharing of sale proceeds between the assessee and concerned tenants were submitted with the assessing officer during assessment proceedings. That during the Assessment proceedings from time to time, the assessee had submitted copy of registered purchase deed of tenanted property, which was purchased in 2002 along with other co-owners, and a Photo copy of sale deed for the captioned property sold in 2011 was submitted to Assessing Officer. The assessee had also submitted copies of receipt of Rs. 31 Lacs paid vide cheque no. 831278 to Shri Suraj Prakash Bhola and receipt of Rs. 22 Lacs paid vide cheque no 831279 to Shri Gurcharan Singh Ghai towards sharing of sale proceeds with tenant. Copy of bank pass book was also submitted depicting encashment of cheques in favour of drawee.
5.1 That in support of these payments, the assessee during proceedings had submitted affidavit dated 14.03.2011 executed by Shri Suraj Prakash Bhola confirming eviction of tenanted property along with receipt of payment of Rs. 31 Lacs by cheque as mentioned above. The assessee had also submitted copy of agreement dated 11.03.2011 executed with Shri Gurcharan Kumar Ghai confirming handing over of physical procession of his share in property along with receipt of payment of Rs. 22 Lacs by cheque. It is unfortunate that Ld.A.O has ignored the facts & documents submitted and passed the order which is against the Natural Justice of Law. Even the A.O. did not bother to call the concerned person/recipients of payment to confirm the transaction taken place.
5.2 That during assessment proceedings, the assessee had been retreating before assessing officer that expenditure of Rs. 53 Lacs incurred towards payment of compensation to the tenants for vacating the premises has a direct nexus with sale transaction of captioned property and tenants vacating the premises because without this, property could not have been sold.
5.3 That the assessee had performed his duties in submitting all desired documents in support of his claims of expenditure and the onus was on Assessing officer to verify the veracity of the documents filed by the assessee before rejecting the same.
5.4 Apart for above during hearing before us assessee further placed on record before water and electricity charges bills in the name of certain occupants who according to assessee were tenants on a very small amount and were even in occupation before the assessee acquired interest.
6. Ld. DR has countered the same by submitting that ld. CIT(A) has duly countered these factual submissions by holding that there is insufficient evidence to establish genuineness of payments and specially as such there are no relevant recitals in the sale deed or any separate agreements with such occupants.
7. On appreciating the material on record we find that at page No. 41 the copy of sale deed dated 23.03.2011 is available under which assessee along with two other co-sharers has sold the said property to one Shri Pradeep Goel and when we go through the recitals we find that recital No. 3 is recorded that vendor handed over the peaceful vacant possession of the said property to the vendee on the execution of this sale deed. The endorsement on this sale deed mentions that the total plot area is 183.95 sq. mtres. and the land value was Rs.43,600/- per sq. mtrs. and cost of construction was Rs.7,600/- per sq. mtrs. The type of construction has shown as pucca and land use is shown as commercial. Minimum cost of land is shown as Rs. 2,40,60,660/- and cost of construction is Rs.11,21,000/- and the year of construction is mentioned is before 1959. A pertinent recital is recital No. 7 which is reproduced below:
“7. That the Vendors now admit that they have been left with no right, title and interest of any nature whatsoever in the said property and the Vendee has become the absolute owner of the same. He will use and enjoy the same in any manner, he likes, including the right to sell, transfer or alienate the said property to anyone including the right to give the said property on rent to anyone and to recover and realise rent and profit, to get the tenant/s evicted through the process of law or by negotiation, to take possession, etc.”
8. Thus, what this sale deed establishes is that what was sold by the assessee was not merely some piece of land but there was constructed part on it and being constructed in 1959 it may have been quite at dilapidated condition. But in occupancy of some persons who may have been paying some nominal rent or some sort of license fee as for that reason there are electricity bill and water bill in the name of such persons which have been filed before us.
8.1 Assessee has led evidence to establish that payments were made by cheque to these persons before the sale deed generating capital gain. These evidences being contemporaneous to the transaction justify a plea taken by the assessee that certain payments were made to the occupants of the property so as to enable the assessee to sale the property and convey all right title interest without encumbrances to the vendee and for this reason in the sale deed the aforesaid recital No. 7 it was agreed that vendee shall have right to get tenants evicted through process by law or by negotiation to take possession.
8.2 Thus, in the given facts and circumstances the plea raised does not appear to be an afterthought story. Therefore, the facts which were asserted during the assessment proceedings could have been rejected in the absence of any further inquiry or evidence in rebuttal by merely doubting statement contained in the affidavits. The law in this regard is quite settled that if in order to acquire the encumbrances from the property and to acquire alienable title any payment is made to persons in occupation then the same should be considered to be cost of acquisition or an expense incurred wholly and exclusively in connection with the transfer. Reliance in this regard is placed on the decision of Hon’ble Delhi High Court in Kaushalya Devi (deceased) through LRs Versus CIT order dated 20/04/2018 vide ITA 600 where in CIT-VIII, Delhi Vs. Shakuntala Rejeshwar, (1986) 160 ITR 840 (Delhi) has been relied.
9. In the light of aforesaid discussion we are inclined to sustain the grounds. The appeal of the assessee is allowed and assessing officer is directed to re-compute the capital gain in the light of aforesaid discussion.
Order pronounced in the open court on 03.06.2026
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