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2015 (9) TMI 553 - ITAT BANGALORE

2015 (9) TMI 553 - ITAT BANGALORE - TMI - Income under the head “Long Term Capital Gain” (LTCG) on surrender of tenancy rights - Whether the CIT(Appeals) was right in coming to the conclusion that there was no transfer of leasehold rights by the assessee in favour of the lessors? - Held that:- Admittedly, the compromise decree was registered and a sum of ₹ 8,49,639 was incurred as stamp duty and registration expenses in registering the compromise decree. A further sum of ₹ 5,81,090 h .....

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for registration of compromise decree and expenses of demolition of structures. The sum of ₹ 33 lakhs is therefore rightly assessable to tax u/s. 45 of the Act and not under the head ‘income from other sources. The fact that the compromise decree does not refer to the payment of ₹ 33 lacs cannot be the basis to hold that the said sum is not towards surrender of leasehold rights. There was no necessity for the lessors to pay the aforesaid sum but for the Assessee relinquishing leaseh .....

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ject to the computation provisions of Sec.48 of the Act. We hold accordingly.

Tax the FMV of 42 guntas of land & building obtained by the assessee under compromise decree in the form of perpetual leasehold right under the head ‘income from other sources’ - Held that:- As far as the assessment of FMV of 42 guntas of land & building which was given on a permanent lease to the assessee under the compromise decree as income from other sources, we are of the view that the assessee was alre .....

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immovable property which is transferred without consideration, can be brought to tax in the hands of transferee. Even assuming that there was a transfer of leasehold rights in favour of the assessee by virtue of compromise decree, the provisions of section 56(2)(vii) are not applicable for the assessment year 2006-07 and therefore assessment directed by the CIT(Appeals) cannot be sustained and the same is hereby deleted.

Expenses towards dismantling structures of leasehold property - .....

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unsel for the Assessee that since this expenditure was specifically required to be incurred by the Assessee under the receipt cum acknowledgement dated 27.6.2006, it constitutes a diversion of income at source and cannot be construed as income that accrued to the Assessee.

Deduction being the indexed cost of acquisition of the structure - Held that:- We are of the view that the said claim for deduction is unsustainable for the reason that the subject matter of transfer by assessee in .....

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tled to claim deduction of cost of acquisition of leasehold interest as on 1.4.1981. The assessee will also be entitled to benefit of indexation of this cost upto the date of transfer of the leasehold rights. The assessee has not quantified this sum and therefore, in our view, it would be just and proper to direct the assessee to make a claim before the AO in this regard. The AO is directed to examine such a claim and allow deduction in accordance with law. - Decided partly in favour of assessee .....

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611/-, Income from House property at ₹ 1,51,637/- and Income under the head Long Term Capital Gain of ₹ 49,825. The total income declared in the return of income was ₹ 31,605/-. The dispute in this appeal is with regard to the income declared by the Assessee under the head Long Term Capital Gain . 3. Property being vacant land measuring 1 Acre and 10 Guntas in R.S.No.87 and 1 Acre and 14 Guntas in R.S.No.93 respectively in Mariyan Timmasagar Village, Taluka Hubli, District Dhar .....

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arasuramasa Goankar sold the leasehold rights over the property to one Ramdas S/o. Vittaldas Darbar for a sum of ₹ 8,500/-. It is not in dispute that the Assessee herein succeeded to the property and was the sole owner of the leasehold rights over the property. 4. A ginning factory was constructed by the Assessee over the property and business of ginning was carried on by the Assessee therein. Smt. Madhukanta Laxmidas Darbar was the wife of the Assessee. The Assessee and his wife had diffe .....

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the property under the Karnataka Rent Control Act, 1961. The Hon ble Supreme Court in Civil Appeal No.2031 of 2000 by its judgment dated 27.8.2001 held that the fixed term lease will not stand obliterated because of the provisions of the Karnataka Rent Control Act, 1961 and therefore the petition for eviction was liable to be dismissed. 6. The Assessee and his wife filed a suit bearing O.S.No.45/2004 in the Court of the II Additional Civil Judge, Junior Division, Hubli, seeking direction for re .....

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before 31st March of every year. The Assessee and his wife delivered possession of the remaining extent of the property and gave up their right over the said area of the property. Clause-11 of the compromise memo provided that the building constructed over the area over which the lessees gave up their rights in favour of the lessor shall be removed by the lessee at his cost. Clause-14 of the compromise memo provided that a common wall demarcating the portion of the property allotted to the less .....

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removing the structures standing the area surrendered to the lessors. 8. In the return of income filed by the Assessee for AY 2006-07, the receipt of ₹ 33 lacs was declared by the Assessee as Income under the head Long Term Capital Gain (LTCG) on surrender of tenancy rights. The computation of LTCG as given by the Assessee was as follows:- Amount received as per Receipt-cum-Acknowledgement Dt 27/06/2005 33,00,000 Less: Dismantling expenses of structure on leasehold property 5,81,090 27,18, .....

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05/06 497 205120 X 497 100 1019446 10,19,446 8,49,825 Less: Amount deposited in capital gain A/c in Bank of Baroda, Hubli On 14/12/2005 (for construction of Residential house) 8,00,000 LONG TERM CAPITAL GAIN 49,825 9. In a note filed along with the return of income the Assessee explained the litigation in respect of the property and claimed that the receipt in question was on surrender of leasehold rights which was a capital asset and therefore the income from such transfer of capital asset is l .....

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states that it is the Assessee who is required to be assessed to tax on the entire capital gain. We need not in this appeal deal much with the applicability of Sec.64(1) of the Act because even the revenue has proceeded to tax the Assessee in respect of the entire capital gain. 10. The Assessing officer did not allow the claim of the Assessee for deduction a sum of ₹ 5,81,090 which was claimed by the Assessee to be expenditure in demolition of structures over the property surrendered to t .....

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diture does not fall within the permissible deduction u/s. 48 of the Act. According to the AO, only cost of improvement can be allowed as a deduction. The AO was also of the view that the structure in question was not constructed either by the assessee or his wife and that Darbar Ginning Factory, Hubli had incurred the expenses. The AO also referred to the statement of the assessee recorded u/s. 131 on 12.11.2008 wherein the assessee admitted that the dismantling expenses were incurred by his wi .....

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no documentary proof available with the assessee to prove that construction was made by the assessee in his capacity as lessee. There was no asset shown in the balance sheet of the assessee in the earlier years. The AO also referred to the statement of the assessee recorded u/s. 131 of the Act on 12.11.2008, wherein he admitted that investment of ₹ 2,05,120 on construction was made by his wife and that a sum of ₹ 1,63,555 was spent by the assessee s wife since the year 1972 and refle .....

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Gains scheme & withdrawn as stated in para-5 above 8,00,000 Rs.16,49,639 Net capital gains Rs.16,50,361 14. Aggrieved by the action of the AO, assessee preferred appeal before the CIT(Appeals). Before the CIT(A), a contention was taken by the assessee that since the leasehold rights in the property and the ginning factory existing thereon was given by the assessee to his wife under an agreement to live apart dated 4.11.1972, compensation received for surrender of tenancy rights should be ch .....

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uting the total income of any individual, there shall be included all such income as arises directly or indirectly- (i) to (iii)……. (iv) subject to the provisions of clause (i) of section 27, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart ; 15. The assessee also further submitted that since the assessee s wife got the leasehold .....

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8 ITR 294 (SC), wherein it was held that where the cost of acquisition cannot be determined, the computation of capital gain u/s. 48 is not possible and therefore the charge to tax u/s. 45 of the Act should also fail. 16. The assessee thus pleaded that capital gain in question cannot be brought to tax either in the hands of assessee or in the hands of his wife. The assessee also pleaded that mere declaration of income by the assessee, when there was no liability or charge to tax, cannot be the b .....

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ucture. The CIT(A) was also of the view that there was no transfer of any capital asset by the assessee and therefore provisions of section 45 of the Act did not come into play. According to him, the entire receipt of ₹ 33 lakhs had to be assessed as income from other sources in the hands of assessee and no expenses whatsoever can be allowed against the said receipt, because deduction claimed by the assessee did not fall within the category of expenses incurred for the purpose of earning t .....

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, in reply to enhancement notice, submitted that there was relinquishment of leasehold rights in favour of lessors, which resulted in a transfer of capital asset giving rise to charge u/s. 45 of the Act and the conclusions of the CIT(A) to the contrary were erroneous. 21. With regard to the FMV of the area of 42 guntas of land and building received by the assessee, the assessee submitted that what was obtained under the compromise decree was only leasehold right which the assessee already had an .....

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d be allowed because the deductions claimed were not permissible while computing income under the head Income from other sources . (2) FMV of the land allotted to the assessee had to be assessed under the head income from other sources ; and (3) with regard to assessment of income in the hands of assessee s wife, it was held that both the assessee and his wife were living in the same premises and therefore provisions of section 64 of the Act were attracted and hence assessment of income in the h .....

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ch transfer (relinquishment) of leasehold rights in favour of lessors? (iii) Whether the action of the CIT(Appeals) in bringing to tax the FMV of 42 guntas of land & building obtained by the assessee under compromise decree in the form of perpetual leasehold right under the head income from other sources can be sustained? (iv) Whether the claim of assessee for computation of capital gains tax as made in the return of income should be accepted? (v) Whether the assessee is not liable to tax on .....

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le computing capital gain, especially in the light of provisions of section 48 of the Act? 24. We have heard the ld. counsel for the assessee and the ld. DR on the above issues that arise for consideration. The learned DR relied on the order of the CIT(A). The learned counsel for the Assessee reiterated submissions that were made before CIT(A). 25. With a view to give coitus to the entire litigation, in our view, it would be appropriate to uphold the assessment in the hands of the assessee and a .....

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me from other sources or capital gain ? 26. A suggestion was put to the ld. counsel for the assessee on the examination of the aforesaid questions, to which the ld. counsel for the assessee did not object. We now proceed to examine the above issues. 27. Firstly we take up the question as to whether the sum of ₹ 33 lakhs was received by the assessee was assessable under the head income from other sources or capital gain . 28. Under section 45 of the Act, any profit or gain arising from the .....

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n Sec.2(14) of the Act to mean property of any kind held by an assessee, whether or not connected with his business or profession. In CIT V/s. Tata Services Limited 122 ITR 594 (Bom.) it was held that the word property u/s.2(14) is of widest amplitude and includes any right which can be included in definition of Capital Asset. In Ponds (India) Ltd. V/s. DCIT 64 ITD 33 (Mum) the ITAT had to decide a case in which by an agreement dated 18.04.81, the assessee agreed to purchase immovable property f .....

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1990. The transaction did not materialize. He relinquished his right in favour of new vendee in 1995. The consideration received for relinquishment of interest in property was held to be liable to long term capital gain. In CIT v/s. Vijay Flexible Containers 186 ITR 693(Bom), it was held that giving up of the right to obtain conveyance of immovable property amounts to transfer of a capital asset. Similar ruling was also rendered in the case of CIT V/s. Vimal Lalchand Mutha 187 ITR 613(Bom). In .....

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sfer of her rights under the agreement in April, 1983, constituted long-term capital gain. The Hon ble High Court upheld the order of the Tribunal. 29. In CIT Vs. Sandhu Brothers 273 ITR 1 (SC), the Hon ble Supreme Court observed that the tenancy right is a capital asset, the surrender of the tenancy right is a transfer and the consideration received therefore a capital receipt within the meaning of Section 45 of the Act, has not been questioned before us and must in any event be taken to be con .....

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memo. The receipt in question is therefore clearly attributable to surrender of leasehold rights. The fact that the compromise decree of the Court does not make a reference to the sum of ₹ 33 lacs cannot be the basis to conclude that the said payment was not for surrender of leasehold rights of the Assessee over portion of the property. The compromise memo based on which the Hon ble Court passed the compromise decree and the receipt cum acknowledgment for the Assessee having received a sum .....

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ring the compromise decree. A further sum of ₹ 5,81,090 had also been incurred to demolish the structure on the area surrendered to the lessors by the Assessee. It may be true that the compromise decree does not refer to the payment of the sum of ₹ 33 lacs as a payment for surrender of leasehold rights by the Assessee, but the circumstances of the case clearly show that the said payment was towards surrender of leasehold rights. The only modification is that the said sum of ₹ 3 .....

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ay the aforesaid sum but for the Assessee relinquishing leasehold rights over part of the property in favour of the lessors. We therefore hold that the sum of ₹ 33 lacs was paid in lieu of the Assessee surrendering his leasehold rights in favour of the lessors subject to certain directions for incurring of certain expenses by the Assessee and therefore the said receipt by the Assessee is attributable to release of leasehold rights in favour of the lessors. Consequently the sum of ₹ 3 .....

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has not acquired any right whatsoever over this property by virtue of compromise decree. Therefore, conclusion of the CIT(Appeals) to tax the FMV of this property is without any basis. Even assuming that the Assessee received the portion of the property without any consideration, the FMV of the said property cannot be brought to tax as there is no provision under the Act, under which the sum in question can be brought to tax. U/s. 56(2)(vii) which was inserted by the Finance Act, 2009 w.e.f. 1.1 .....

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towards expenses on dismantling structures of leasehold property is concerned, there is no dispute that these expenses were actually incurred for dismantling of structure, but the vouchers in support of incurring of these expenses showed that Darbar Ginning Factory, Hubli had incurred these expenses. Sec.48 of the Act, lays down the mode of computation of Capital Gains and the relevant portion of the said section reads thus:- Mode of computation. Sec. 48. The income chargeable under the head Cap .....

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only by the assessee. Since the factum of expenditure having been incurred is not disputed and since, admittedly, this was an expenditure incurred wholly and exclusively in connection with such transfer, the deduction claim, in our view, had to be allowed. We hold and direct accordingly. We also find merit in the contention of the learned counsel for the Assessee that since this expenditure was specifically required to be incurred by the Assessee under the receipt cum acknowledgement dated 27.6 .....

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