TMI Blog2016 (5) TMI 429X X X X Extracts X X X X X X X X Extracts X X X X ..... long term capital gains. Accordingly, we do not find any infirmity in the action of CIT(A) for treating capital gains as long term capital gains. Indexation - deduction paid to partner to remove encumbrance disallowed - Held that:- CIT(A) has allowed indexation from 19.7.1981 in place of date of acquisition of property in the year 1973. Since the property was acquired vide agreement of sale deed executed on 7.3.1973 which was duly registered with the Sub-registrar, we direct the AO to allow indexation by taking fair market value as on 1.4.1981. As per Sec. 2(29A) and 2(42A) holding period will be counted from the date from which assessee held the asset i.e. when right in capital asset was vested to assessee which is from the date of allotment or agreement for sale. It does not require that property should be conveyed. Even if the land was purchased, but not conveyed in the name of the assessee it will not affect the holding period of asset. As per Sec. 48 if the expenditure is incurred wholly and exclusively in connection with transfer of capital asset, in that situation expenditure is allowable. The above condition is satisfied in present case because one can sell the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the date of agreement the impugned property was subject matter of suit No. 376 of 1970 filed by the brother of the vendor before the High court, which fact was acknowledged by both the parties in the preamble to the said agreement. The impugned property was agreed to be purchased for a sale consideration of ₹ 2.5 Iakhs and an amount of ₹ 10000 thereof was paid to the vendor on the date of agreement itself. The title deeds were examined by the purchaser/assessee and apparently due to the suit pending before the High court the property could not be conveyed to the purchaser/assessee. Nevertheless both parties continued to hold the impugned agreement and vide the vendor's letter dated 14-5-1976, the vendor confirmed that the time for completion of the sale was extended until such time the suit was finalized or settled in favour of the vendor. That apart the assessee paid monies to the vendor from time to time, being the sale consideration, as requested by the vendor and the total amount paid in this regard was ₹ 21950 including the amount of ₹ 10000 paid at the time of execution of the agreement. Further the assessee also made an attempt to help the vendo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e holding that there is a valid and subsistent agreement and the vendor was directed to do all acts so as to effectively convey the property to the assessee. Further the assessee was also directed to pay an amount of ₹ 1.6 crores in addition to the amounts already paid to the vendor and the decree was to operate as conveyance of the property on payment of the said amount. Accordingly, the payments were made to the vendor and the conveyance deed was executed on 20-2-2006. In the above background the assessee converted the said impugned property into his stock in trade in February 2006 and sold the same in the following financial year relevant to the A.Y. under consideration. On completion of the sale, the assessee computed capital gains up to February 2006 and business profits for the period thereafter. The capital gains were offered to tax for the A.Y. under consideration following the provisions of Sec. 45(2) of the Act. In computing the capital gains, the assessee adopted the FMV of the impugned property on 1-4-81 as it's cost of acquisition on the ground that the right title in the property was available to them since 1973 owing to the subsistence of the above discusse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to clear such encumbrance but for which the sale could not have taken place and accordingly disallowed the assessee s claim to deduct the same from taxable capital gains. 3. By the impugned order, CIT(A) allowed assessee s claim of long term capital gains, however, he declined payment of ₹ 54 lakhs made to remove the encumbrance. 4. Against the above order of the CIT(A), both assessee and revenue are in appeal before us and assessee has also filed cross-objection. 5. We have considered the rival contentions carefully and gone through the orders of the authorities below and find from the record that assessee sold one property during the year and offered long term capital gain after claiming exemption u/s 54EC and claimed deduction of ₹ 54,00,000/- on account of compensation for encumbrance but the AO held that asset is short term capital asset. Hence, exemption u/s 54EC will not be allowed. The AO also disallowed the claim of compensation for encumbrance. The CIT(A) held that asset is long term capital gains and date of acquisition is 19.7.1981 instead of 9.7.1973 claimed by the assessee. Therefore, fair market value of 1.4.1981 will not be allowed, but confir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the on issue of property. Therefore, vide Deed of Retirement of Partnership dt. 21.12.2005, assessee resolved the problem by paying ₹ 54 lakhs in addition to her capital in the firm for the settlement of her claims in the capital as per clause no. 2 on page no. 3 of Deed of Retirement of Partnership dt. 21.12.2005, profits and assets of partnership firm which comprised the property at Bandra as only property. 9. As per Sec. 48 if the expenditure is incurred wholly and exclusively in connection with transfer of capital asset, in that situation expenditure is allowable. The above condition is satisfied in present case because one can sell the property only when the property is free from encumbrance. In the instant case, in a firm, if any partner disagrees to sell the property, the firm cannot sell the property which it is intending to sell. In other words, if any partner does not agree to sell for any reasons, then, there is an encumbrance for selling the property. To sort out such a problem and to make property, which is intended to be sold, without any encumbrance, it is necessary to settle the difference between the partners by either convincing the partner for sellin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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