By TIOL News Service

MUMBAI, SEPT 08, 2018: THE Issue is - Whether compensation paid for getting vacant possession of the property from the tenants is allowable as deduction while computing capital gains from transfer of property. YES IS THE VERDICT.

Facts of the case

The assessee company, engaged in the business of manufacture of vacuum pumps, had filed its return of income for relevant AY. During the relevant year, the assessee had transferred land and building and computed LTCG. During assessment, the AO noted that while computation of LTCG, the assessee had claimed certain compensation stated to be paid for removing illegal occupants. The AO disallowed compensation claimed by the assessee as expenses incurred exclusively for transfer of property on the ground that the two occupants had illegally occupied the premises and hence, any compensation paid to remove illegal occupation was inadmissible as deduction.

Tribunal held that,

++ there is no dispute with regard to the fact that the parties are occupying the premises on leave and licence basis. The assessee has terminated leave and licence agreement before completion of the term of agreement for which it has paid compensation. There is a dispute between the tenants and the assessee and such dispute has been pending before the Civil Court of Thane. All these evidences go to prove an undisputed fact that the two tenants have occupied the premises for which the assessee has paid compensation to get vacant possession of the property to be handed over to the purchasers. Whether compensation has been paid for getting vacant possession from illegal occupants from the tenants, who occupy the building does not matter as long as the assessee has paid compensation for getting vacant possession of the premises. Once the assessee has paid compensation for getting vacant possession of the property from the tenants, then the said compensation is allowable as deduction while computing capital gains from transfer of property. This proposition is supported by the decision of Madras High Court in the case of CIT vs A Venkataraman & Ors where it was categorically held that the payment made to the tenants to obtain vacant possession was an expenditure incurred wholly and exclusively in connection with transfer of property and the said amount was deductible as an expenditure. This legal proposition is further supported by the decision of Karnataka High Court in the case of Mrs June Perrett vs ITO wherein it was held that expenditure incurred for vacating illegal tenant is deductible as expenditure incurred wholly and exclusively in connection with transfer of property while computing capital gains. The Delhi High Court in the case of CIT vs Eagle Theaters, has taken a similar view and held that amount paid to the tenants for vacating the premises for facilitating the sale of building is required to be deducted in computing capital gain of the building sold as incurred solely and exclusively in connection with the transfer. Hence it was held that compensation paid by the assessee to two tenants for getting vacant possession of the property is deductible as an expenditure incurred wholly and exclusively in connection with transfer of the property while computing capital gains.

(See 2018-TIOL-1467-ITAT-MUM)