2010 (6) TMI 779 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Equating leasehold rights with tenancy rights.
3. Computation and acceptance of the cost of acquisition of property.
4. Allowability of expenditure under Section 48 for removing encumbrances.
5. Disallowance of brokerage paid to a broker.

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 263 of the Income Tax Act, 1961:
The assessees questioned the jurisdiction of the Commissioner of Income Tax (CIT) under Section 263, which allows the CIT to revise any order passed by the Assessing Officer (AO) if it is erroneous and prejudicial to the interests of the Revenue. The CIT held that the AO's acceptance of the cost of acquisition of the property as shown in the returns was erroneous and prejudicial to the Revenue. The Tribunal upheld the CIT's jurisdiction under Section 263, noting that the AO's orders were indeed erroneous and prejudicial to the interests of the Revenue.

2. Equating Leasehold Rights with Tenancy Rights:
The assessees argued that leasehold rights and tenancy rights are different and should not be equated. The CIT, however, equated the two, applying Section 55(2)(a) of the Income Tax Act, which states that if the cost of acquisition of tenancy rights cannot be determined, it should be taken as nil. The Tribunal supported the CIT's view, stating that the difference between lease and tenancy is subtle and that for the purpose of the Income Tax Act, leasehold rights can be treated similarly to tenancy rights.

3. Computation and Acceptance of the Cost of Acquisition of Property:
The assessees contended that the cost of acquisition should be based on the fair market value as of 1st April 1981 or the cost to the previous owner. The CIT found the AO's acceptance of this method erroneous, as the cost of acquisition should be nil under the amended Section 55(2)(a). The Tribunal agreed with the CIT, stating that the AO erred in accepting the cost of acquisition shown by the assessees and upheld the CIT's revision of the orders.

4. Allowability of Expenditure under Section 48 for Removing Encumbrances:
The assessees claimed deductions for expenditures incurred to remove encumbrances and clear the marketable title of the property. The CIT found that the AO allowed these expenditures without proper verification. The Tribunal upheld the CIT's view, stating that the AO's failure to verify the claimed expenditures rendered the assessment orders erroneous and prejudicial to the Revenue. The Tribunal supported the CIT's direction to the AO to re-examine the allowability of these expenses.

5. Disallowance of Brokerage Paid to a Broker:
In ITA No. 625/Pn/2008, the assessee challenged the disallowance of brokerage paid to a broker. The AO disallowed the brokerage on the basis that the same broker was involved in earlier transactions with the same party. The Tribunal upheld the AO's disallowance, agreeing that brokerage is typically paid for finding a new buyer, and since there was no change in the buyer, the brokerage claim was not justified.

Conclusion:
The Tribunal dismissed all the appeals, upholding the CIT's revisions under Section 263, the equating of leasehold rights with tenancy rights, the computation of the cost of acquisition at nil, the re-examination of claimed expenditures for removing encumbrances, and the disallowance of brokerage paid to the same broker for transactions with the same party.