INCOME TAX ACT, 1961

Section 2(47)

Capital gains - Transfer under section 2(47) - Allegation that assessee had not acquired any right in property -

Assessee had entered into an agreement of sale for purchase of land. AO observed that assessee had paid a sum towards advance. Subsequently, agreement could not be gone ahead due to non-fulfilment of conditions by the vendor and consenting party as well as the vendee and vendor had approached the City Civil Court who directed assessee company to vacate and deliver vacant possession of the suit schedule property to the vendor. Assessee submitted that agreement could not be gone ahead because of violation of conditions by vendors and consenting party and amount of Rs. 60.00 lakhs paid by vendor was not only towards return of Rs. 12.00 lakhs with indexation, but it was towards expenditure incurred by assessee in excavation work and other developmental work and also towards legal expenses and expenses incurred towards watch and ward of the property for a period of ten years. Therefore, assessee had explained that the sum of Rs. 60 lakhs was only reimbursement of expenditure incurred by the assessee towards that property and was not compensation received and that there was no capital gain arose to the assessee. However, AO was not convinced with the assessee's contention that assessee had not acquired any right in the property. Therefore, there was a capital asset and capital gain had arisen therefrom and computed the tax thereon @20%. Held: AO treating the sum of Rs. 60.00 lakhs as received for transfer of right in the capital asset cannot be faulted with. AO had allowed indexation of only cost of acquisition of Rs. 12.00 lakhs and also Rs. 6.00 lakhs which is the sum incurred by assessee for excavation work. However, litigation between the assessee and the vendors before the City Civil Court is not in dispute. Therefore, assessee's claim of legal expenses ought to have been allowed. Further, assessee's claim of expenditure towards watch and ward of the property over a period of 10 years also cannot be brushed aside. Assessee had been protecting the property from encroachers for a period of 10 years and it cannot be ruled that assessee had not incurred any expenditure towards such work. A sum would be reasonable expenditure towards legal expenses and also towards watch and ward expenses which was to be allowed from the amount received by the assessee for computing the taxable capital gain. Thus, AO was directed to recompute the capital gain after allowing a sum towards expenses.

REFERRED :

FAVOUR : Partly in assessee's favour.

A.Y. : 2005-06

SUBSCRIBE FOR FULL CONTENT