Removal of 'encumbrance' is cost of improvement and eligible for indexation

CA V.K. Subramani

Tax on income by way of capital gain is at flat rate in contrast to other heads of income. Perhaps, this makes the taxpayers to think and explore avenues to minimize the tax outgo. Income-tax Act, 1961 has certain provisions meant for reinvestment of capital gain or net sale consideration in order to minimize the tax liability. One of the issues which is not alien to our society is tenant claiming tenancy right by virtue of occupying the property for long period of time and thus seeking some compensation for vacating the premises which could disturb/dislocate his present status/affairs. Also, illegal occupancy of vacant land/premises by persons with no justification is also possible in our society. The owner of asset is left with no choice but has to negotiate for amicable settlement for eviction of such person(s) from the land/premises by sharing some money. The issue is whether such sharing of cake (read as part of sale consideration) is to be treated as cost of improvement for insulating the taxpayer in respect of capital gains tax.