The Ahmedabad Bench of Income Tax Appellate Tribunal (ITAT) has held that the indexed cost of improvement incurred wholly and exclusively for transfer of assets would be allowable as deduction under Section 48 of the Income Tax Act 1961.
The appellant, Nitaben M. Patel filed a return of income for the year under consideration declaring total income. The appellant earned long term capital gain out of the transfer of non-agricultural land. The appellant purchased a plot of land measuring about 7113 sq.mtr by and under a deed of conveyance.
Thereafter, the appellant entered into an agreement to transfer the right title interest of the part of the said land admeasuring about 1858 sq.mtr for a total consideration of Rs.90 Lakhs out of which some were duly paid by those two co-owners to the appellant at the time of execution of the said deed of agreement for sale.
The earlier agreement for sale stood cancelled as the assessee found a better and higher sale consideration from a third party in respect of the said property. However, the appellant had to pay some to the earlier parties. Finally, the appellant sold out a plot of land measuring about 3188 sq. mtr. by and under the sale deed.
In fact, the agreement had clause about the confirmation of land to be freed from any encumbrances and in order to get the land free from encumbrances, the appellant had to pay some amount and returned Rs.45 Lakhs to the erstwhile purchaser of land measuring about 1858 sq.mtr. which was part of the total area of land of 3188 sq.mtr.
The assessee claimed that expenditure incurred being the additional cost to effectuate the sale transaction was a capital expenditure and thus should be allowed in the light of Section 55(1)(2)(ii) of the Income Tax Act, which was disallowed by the AO and confirmed by the First Appellate Authority.
Milin Mehta, on behalf of the assessee submitted that the disallowance of deduction of Indexed cost of improvement and addition of the same to the returned income of the appellant despite the fact that the same was incurred wholly and exclusively in connection with the transfer of the asset was not sustainable in the eye of law.
Saumya Pandey Jain,on behalf of the revenue, relied upon the orders passed by the authorities below.
The two-member Bench of Waseem Ahmed, (Accountant Member) and Madhumita Roy, (Judicial Member) referred the judgement in the case of ACIT vs. Pushkar Dutt Sharma (supra), wherein it had been clearly held that the expenses incurred to remove impediments or encumbrances in way of transfer of capital asset had to be allowed as deduction under the head ‘cost of improvement’ while computing the taxable amount of capital gain.
The Bench allowed the appeal filed by the assessee holding that the expenditure incurred solely and exclusively on the immovable property as an expenditure to be deducted while computing capital gains.
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