Income Tax Appellate Tribunal - Madras
Seventh Income-Tax Officer vs L.K.M. Hussain Beevi on 30 September, 1987
Equivalent citations: [1988]26ITD17(MAD)
ORDER
George Cheriyan, Vice President (SZ)
1. This appeal by the Revenue relates to the assessment year 1982-83. The assessee is an individual. The assessee executed a deed of sale on the 16th July, 1981 conveying certain property situated in No. 1/6, New door No. 3, Corporation Division No. 55, Badriah Garden Lane, Park Town, Madras, to one Janab S.A. Abdul Razack. It was stated in the document that the vendor agreed to convey the property to the purchaser for Rs. 1,01,000 on certain terms as detailed in the said document.
2. A perusal of the document shows that one K.S. Raman had entered into an agreement with the vendor for the purchase of the property on 14-3-1975. Raman was the tenant of the vendor. He did not hand over possession of the property nor did he complete the sale within the period of six months as stipulated. He was, therefore, liable to pay Rs. 1,100 for damages for use and if he continued to occupy the property without delivery of possession he should be liable to pay Rs. 550 p.m. as damages for use and occupation. Further, the premises were mortgaged to one Rangachari for Rs. 25,000 under a registered mortgage; deed dated 14-7-1969. The vendor had reason to believe that some amounts were paid by Raman which the vendor was entitled to adjust against the sums payable to the mortgagee and as against K.S. Raman towards the mesne profits payable by him. But, however, as a result of collusion between Raman and the mortgagee Rangachari, the full details could not be had. The purchaser had agreed to discharge the liability of the mortgagee and for this he was permitted to retain Rs. 25,000 for discharging the mortgage and Rs. 35,000 for meeting the cost of any litigation, in all Rs. 60,000. Finally the document recites as under :
NOW THIS DEED OF SALE WITNESSETH that in consideration of a sum of Rs. 1,01,000 (Rupees one lakh and one thousand only) paid as follows :
Rs.
1. Retained in the hands of the purchaser for discharging the mortgage 25,000
2. For meeting the expenses of any litig-
ation in regard to this property. This amount need not be accounted for 35,000
3. Assignment of the right (1) to collect Rs. 1,100 (2) to collect damages for use and occupation Of the premises paid in cash to the VENDOR at the time of the execution of these presents 20,000
4. Balance of consideration paid to the VENDOR at the time of the execution of these presents 21,000 making in all Rs. 1,01,000 (Rupees one lakh and one thousand, only) the receipt of which the VENDOR doth hereby admits and acknowledges, receipt of the same and in consideration thereof, the VENDOR hereby convey, transfer and assign unto the PURCHASER the property described in the Schedule hereunder, and the right to recover damages for use and occupation of the premises from K.S. Raman, written together with all fixtures, yards, waterways, water courses, all trees, all electrical, sanitary and other fittings and fixtures and all the easements, advantages and appurtenances whatever to the said property or any part thereof now or heretobefore enjoyed and appurtenant thereto and all the estate, right, title, interest, claim and demand whatsoever of the VENDOR, if any, into or upon the said property TO HAVE AND TO HOLD the said property unto the PURCHASER absolutely and for ever free from all encumbrances. The PURCHASER shall be entitled to take all necessary proceedings for the recovery of possession and damages for use and occupation from K.S. Raman at his own cost and risk in his own name.' THE VENDOR doth hereby covenant with the PURCHASER that she has full power to convey and assign all and singular the said property hereinbefore expressed to be conveyed and assigned unto the PURCHASER and she has not done or omitted or knowingly suffered or been party or privy to any act, deed or thing, whereby the said property or any part thereof is or may be affected in estate or otherwise and that the said property may be quietly entered into and held and enjoyed by the PURCHASER without any let, hindrance (or interruption) by the VENDOR or any person or persons claiming through or in trust for her and that freed a,nd discharged from all encumbrances, claims and demands whatsoever made, occasioned, or happened by the VENDOR or her predecessors-in-title and further that the VENDOR and every person having or claiming any estate, right, title or interest in or to the said property through or in trust for the VENDOR will at all times at the request and cost of the PURCHASER, execute and register every such lawful assurance and thing for further or more perfectly assuring the said property to the use of the said PURCHASER as on all be reasonably required.
THE VENDOR further conversant with the PURCHASER that there is no suit, attachment or other proceedings relating to the property conveyed and the property is free from all encumbrances. THE VENDOR further covenants and assures the PURCHASER that there is no lispendens and that there is no will or other document affecting the VENDOR'S title to the property.
THE VENDOR further covenants with the PURCHASER that she has paid off all the property tax and the other taxes including urban land tax due on the property up-to-date to the Government and the Corporation of Madras. THE VENDOR also hereby undertakes to pay the urban land tax not so far paid by her as and when the same is demanded by the Government.
THE VENDOR doth hereby agree and undertake to indemnify the PURCHASER against all claims, costs, losses and damages that the PURCHASER may be put to on account of any defect in title of the VENDOR to convey the property in the manner herein contained and against claims, costs, losses, damages that the PURCHASER may toe put to on account of the breach of covenants of the VENDOR herein contained.
IT IS hereby agreed that the PURCHASER SHALL PAY and discharge encumbrance, if any, subsisting on the property.
3. In computing the capital gains, the ITO did not allow as a deduction the amounts of Rs. 20,000 and Rs. 35,000. The capital gain was eventually computed at Rs. 49,950 as under :
Rs.
Sale Value 1,01,000
Rs.
Less : Cost 46,050
Brokerage 5,000 51,050
------ -------
49,950
-------
4. The assessee appealed and the AAC was of the view that both the amounts of Rs. 20,000 and Rs. 35,000 were admissible deductions. The Revenue, aggrieved by this decision, is in appeal before us.
5. The learned departmental representative submitted that there was no warrant for giving a deduction of Rs. 20,000 since that was the amount due to the assessee which the purchaser was to collect.
6. The learned counsel for the assessee, on the other hand, submitted that rental income had been assessed from year to year and there was no justification for bringing to tax again the amount of Rs. 20,000.
7. We We have considered the submissions of the parties. The, property income is assessed on a notional basis. The property was let out to Raman and it was not vacant. Therefore, the annual assessment of property income does not preclude the assessment of capital gains separately on the sale of the property. Rents had not been received by the assessee but the assessee, assigned to the purchaser the right to recover the rent which was of Rs. 20,000 and this was treated as part of the consideration of Rs. 1,01,000, according to the document. We are, therefore, unable to agree with the AAC that this amount of Rs. 20,000 was an admissible deduction. We restore the amount deleted.
8. Coming to the amount of Rs. 35,000, the learned departmental representative submitted that the legal expenses were not quantified and that apart, legal expenses were not expended and, therefore, under the provisions of Section 48(1), it was not an expenditure incurred wholly and exclusively in connection with the transfer. He also submitted that in such circumstances, the decision of the Madras High Court in the case of CIT v. A. Venkata-raman [1982] 137 ITR 846, on which the learned counsel had placed reliance, had no application.
9. We have considered the rival submissions. The property, which was sold, was under the occupation of Raman. Raman had entered into an agreement as far back as 14-3-1975 with the assessee for the purchase of the house but had defaulted, the sale not having been completed within six months. He also did not deliver vacant possession for over six years, the present sale deed having been executed on 16-7-1981. The assessee wanted to sell the property free of all encumbrances as is clear from the sale deed. There were two ways through which this could be achieved-one was by the assessee getting Raman vacated from the premises or the other was to state that the purchaser should take all the necessary proceedings for the recovery of possession from Raman. This was to be done by the purchaser at his own cost and risk according to the document. This the purchaser agreed to because the assessee had placed at his disposal Rs. 35,000 for meeting any expenses towards litigation and showed this amount as part of the sale consideration. Therefore, as far as the assessee was considered notionally (sic.) the amount of Rs. 35,000 which even if could be deemed to have received, was paid back to the purchaser to enter into litigation for getting vacant possession of the property, which was part of the contract of sale. No doubt, the fixation of Rs. 35,000 is not with reference to any exact amount of legal expenses incurred ; but in a commercial transaction one has to make an evaluation on a commercial basis of probable expenditure necessary for completion of the transaction if the transaction were not to fall through. The point to be seen is whether Rs. 35,000 could be considered as reasonable expenditure for getting vacant possession of the property. Considering that the tenant had hung on for about six years and had not vacated the premises, a stiff legal fight could be anticipated spreading over at least a period of years. Looked at from this angle, the amount of Rs. 35,000 cannot be considered as excessive. Viewed from either angle that the assessee got the amount notionally and gave it back or that the amount of Rs. 35,000 was an amount to be spent for securing vacant possession, though delegated by the assessee to the purchaser, it has to be considered as expenditure incurred by the assessee wholly and exclusively in connection with the transfer because the property was to be transferred free of all encumbrances and as far as the assessee was concerned the amount of Rs. 35,000 went out of the assessee's coffers and it was not an amount based on excessive estimate for the purpose of securing vacant possession. We, therefore, hold that the AAC was right in directing the exclusion of the amount of Rs. 35,000.
10. In the result, the appeal is partly allowed.