Compensation Paid to Beneficiary of Original Will under Settlement is Deductible from Capital Gain: Delhi ITAT [Read Order]

GST - Compensation - Taxscan

In Rama Vohra v. ITO, Delhi, a division bench of the ITAT Delhi held that the amount paid to the beneficiary of a property as per the original will under a compromise agreement can be deducted while computing long term capital gain even if the property was transferred to the assessee with a recital that the it is free from all encumbrances. The bench pointed out that in such a case, merely deciding the issue on the basis of recital in the sale deed that the property in question is free from all encumbrances is incorrect interpretation of legal proposition.

AO, during the course of assessment, found that assessee has sold a property of 4 lakhs and omitted to concede capital gain tax in his return. In the computation, assessee showed sale consideration of Rs. 28,00,000 instead of 4 lakhs. Assessee maintained that 30% of the sale consideration was given to her sister-in-law as per compromise agreement between them subsequent to a civil suit filed by the latter. She further claimed exemption under section 54 stating that she had invested the sale consideration in three properties.

AO, however, observed that the payment to sister-in-law cannot be treated as art of acquisition since there were no dispute regarding the title of the property and it was transferred to the assessee with a recital that it is free from all encumbrances. Accordingly, the income was added to the total income of the assessee. He also disallowed the claim under s. 54 on ground that assessee can invoke the benefit of the said section in respect of any one residential property.

On appeal, the first appellate authority granted partial relief to the assessee. Feeling aggrieved, assessee carried the matter before the Tribunal.

Tribunal found that assessee’s husband inherited the said property from his father as per a will. One of the sisters of the assessee’s husband was a beneficiary of that will. Later, the property was transferred to assessee. The division bench said that though the property was transferred to assessee with a recital that it is free from all encumbrances, this cannot bar the beneficiary of the original will from claiming right over the property.

The bench said that “more so, there is no limitation to file a title suit on the basis of natural inheritance. So merely rejecting the claim of the assessee on the basis of recital in the sale deed dated 06.09.2000 that the property in question was free from all encumbrances, is not sustainable in the eyes of law. This issue is required to be determined on the basis of outcome of litigation between Ajith Vohra, vendor of the sale deed dated 26.09.2006 execiuted in favour of assessee and his sister namely, Sheetal Giridhar, pending in the civil court.”

Considering the above facts, the bench noted that both the lower authorities had erred in disallowing the amount paid to sister-in-law of the assessee while computing assessee’s long term capital gain. The bench further relied on the Tribunal’s decision in the case of CIT v. Taj Service Pvt Ltd, wherein it was held that “where compensation is paid to a party for surrendering its pre-existing rights in property in question was inextricably connected with transfer of property as one of condition for sale of such property , such compensation was deductible from sale consideration.”

On the basis of the judicial decisions, including the above, the bench decided the issue in favour of the assessee.

With regard to the issue of claim under section 54, the bench held that assessee is entitled to the benefit in respect of her two properties.

Read the Full Text of the Order Below

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