TMI Blog2010 (11) TMI 119X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Appellant. R.K. Dhanesta for the Respondent. ORDER A N Pahuja : This appeal by the assessee against an order dated 24-11-2008 of the ld. CIT(Appeals)-VIII, Ahmedabad, raises the following grounds:- 1. "That the learned CIT ( A ) has erred in law and facts in confirming the action of the learned AO of disallowance of the deduction of Rs. 21,80,640, being the amount paid towards non-use charges, while computing the capital gain. 2. Your appellant craves liberty to add, alter and/or to amend the ground before the final hearing of the appeal." 2. Facts, in brief, as per relevant orders are that return declaring loss of Rs. 20,50,373 filed on 21-12-1999 by the assessee, after being processed u/s 143(1) of the Income-tax Act, 1961 [hereinafter referred to as the 'Act'] was taken up for scrutiny. The assessment was initially completed u/s 143(3) of the Act on 27-03-2002. Thereafter, an order u/s 143(3) r.w.s. 147 of the Act was passed on 30-03-2005, with the disallowance of Rs. 21,80,640 on account of penalty paid to GIDC for non-use of the two industrial plots while computing capital gains on transfer of these plots on the ground that the said expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... encumbrance on property sold (2) terms and conditions of Gujarat Industrial Development corporation for transfer of property etc. On account of this, the Hon'ble ITAT was not able to decide whether the expenditure incurred was wholly and exclusively in connection with the transfer or not. Therefore, for this limited review, the matter has been set aside by the Hon'ble ITAT. Further it is very important to reiterate the fact which has been time and again informed to you with necessary proofs that Mardia Wire Rods Limited is a dissolved company and it was dissolved 4 years back on 1.4.2003, and therefore, being the ex-director I am not able to trace out the number of details and records which are being called for by your office vide your letter dated 12.1.2007, which in my humble and respectful submission, are not at all required to carry out the directions given by the Hon'ble ITAT. And most of the details have been submitted by the company with the Return of Income and also during the assessment and reassessment proceedings. Without prejudice to above, I would like to submit the details available with me as under:- The addition made by the Ld. Assessing Officer in the reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2001) 252 ITR 880 (SC) disallowed the claim for deduction of payment of Rs. 21,80,640 for non usage of the two plots to GIDC u/s. 48 of the Act while computing capital gains on transfer of the said plots. 3. On appeal, the learned AR on behalf of the assessee submitted before the learned CIT(A) that the two industrial plots in question were allotted to the company by the GIDC for industrial use within the prescribed period. Since the assessee company did not carry any industrial activity on these two plots within the stipulated time, GIDC imposed a penalty of Rs. 21,80,640 on the company for non-use of the plots. Since the transfer of industrial plots could be registered only after getting "no objection" certificate from the GIDC, the payment of non-use penalty of Rs. 21,80,640 was wholly and exclusively connected with the transfer of the two industrial plots sold by the company, and therefore, the same is deductible in computing the capital gain on the sale of such plots. In the light of these submissions, the ld. CIT(A) upheld the disallowance in the following terms : "4.3 I have carefully considered the submission of the Learned Authorized Representative of the appellant. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether there was any encumbrance on the property sold. The appellant during the assessment proceedings carried out in pursuance of the directions of the Hon'ble ITAT could not bring any material on record to establish that there was an encumbrance on the property under reference. The appellant's claim that due to non-payment of penalty, etc., the GIDC had encumbrance on the property is bereft of reasoning. 4.5 As regards the terms and conditions with Gujarat Industrial Development Corporation, the violation thereof led to levy of penalty was also required to be examined. As per condition No. 9, mentioned in the letter of allotment of plot by GIDC dated 27th June, 1997 the appellant was required to put up the shed for industrial use for manufacturing the products mentioned in application within a period of six months from the date of allotment failing which, the Corporation was entitled to obtain the possession back. In case the appellant was planning to construct building thereon it was required to get the plan approved within six months and to start the production at the end of two years from the date of allotment failing which, the Corporation was entitled to take back the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tensions may be granted in genuine cases, subject to charging of non-utilization penalty at the rate of 1% for first year, thereafter 2% for the second, 3% for third year and at 4% for subsequent years of the prevailing allotment price for the said year. D. Accordingly, there was encumbrance on the property from the date of allotment itself and therefore the expenses for non-utilization has been incurred for wholly and exclusively for the purpose securing valid transfer, in the name of transferee in the records of GIDC and in case of non-payment of the amount under consideration, GIDC would have not given the NOC (No objection Certificate) and the assessee was not able to sell these plots/or possession of the plot would have been taken back. Accordingly, the payment under consideration is for obtaining NOC for the transfer of the plot and to remove encumbrances of GIDC and allowable expenses u/s. 48( i ) of the Act. In this regard reliance is placed on the judgment of the Hon'ble ITAT-Mumbai in the case of Damodar G. Naglia v. ACIT 12 SOT 599 (Mum.).Gist of the judgment enclosed as Annexure-1. E. Alternatively, the said non-use charges is to be treated as cost of improvemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee, and ( ii ) in any other case, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property, and, where the capital asset became the property of the assessee by any of the modes specified in sub-section ( 1 ) of section 49, by the previous owner, but does not include any expenditure which is deductible in computing the income chargeable under the head "Interest on securities", "Income from house property", "Profits and gains of business or profession", or "Income from other sources", and the expression "improvement" shall be construed accordingly. ( 2 ) For the purposes of sections 48 and 49, "cost of acquisition",- . ( b ) in relation to any other capital asset,- ( i ) where the capital asset became the property of the assessee before 1st day of April, 1981 , means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of April, 1981, at the option of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be towards addition or alteration of capital asset viz. land in this case and consequently it does not fall within the definition of cost of improvement in terms of provisions of sec. 55(1)( b )(2) of the Act . Thus, alternative plea on behalf of the assessee is rejected. 5.4 As regards plea on behalf of the assessee that the said amount of penalty is expenditure incurred wholly and exclusively in connection with the transfer of two plots, we are of the opinion that the assessee has miserably failed to establish that the said amount has any connection with transfer of two industrial plots. The amount was paid only to protect title and possession of the plots by the assessee. Any payment towards perfection of title or possession of an asset can not be held be expenditure incurred wholly and exclusively in connection with transfer of asset subsequently. A bare reading of the provision makes it clear that what can be deducted under section 48( i ) is expenses incurred wholly and exclusively in connection with the transfer. The crucial words in the provisions are "in connection with such transfer". The expression means intrinsically linked with the transfer. Such expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its dues towards 'kist' and interest due from the assessee and paid over the balance to him. The capital gain that the assessee made was on the immovable property that belonged to him. Therefore, it is on the full price realised ( less admitted deductions ) that the capital gain and the tax thereon has to be computed." 5.5.2 From the aforesaid decisions of the Apex court, it is clear that there is a distinction between the obligation to discharge the mortgage debt created by the previous owner and the obligation to discharge the mortgage debt created by the assessee himself. Where the property acquired by the assessee is subject to the mortgage created by the previous owner, the assessee acquires absolute interest in that property only after the interest created in the property in favour of the mortgagee is transferred to the assessee, that is after the discharge of the mortgage debt. In such a case, the expenditure incurred by the assessee to discharge the mortgage debt created by the previous owner to acquire absolute interest in the property is treated as "cost of acquisition" and is deductible from the full value of the consideration received by the assessee on transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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