The Mumbai Income Tax Appellate Tribunal (ITAT) has held that while computing capital gains on the transfer of a capital asset received under a will, the indexed cost of acquisition has to be computed with respect to the year in which the first owner held the asset. The ITAT relied on a jurisdictional High Court ruling in CIT v. Manjula J Shah and CBDT Circular No. 636 on the same issue in the context of a gifted asset.
In the case in question, the Assessee, a US resident, filed a return of income for the Assessment year 2016-17, declaring a total income of Rs. 15.02 crores, including long-term capital gains from the sale of shares in an immovable property located at Colaba in Mumbai. The property was received by the Assessee under his mother’s will in AY 2008-09, amounting to Rs. 14.89 crores. The Assessee computed the capital gains after claiming various expenses, including the indexed cost of acquisition of Rs. 33.82 lakhs, brokerage of Rs. 42.36 lakhs, solicitors’ and CA’s fees of Rs. 51 lakh, valuation fees of Rs. 57,500, and cost of vacating the occupied place of Rs. 17.15 lakhs.
The Revenue held that the Assessee could only claim indexation benefit from the financial year 2007-08, as he received the property only in March 2008, upon his mother’s death. However, the CIT(A) granted the indexation benefit from the financial year 1981-82, relying on the jurisdictional High Court ruling in Manjula J Shah. The ITAT noted that the leasehold right of the impugned property was first acquired by two individuals in 1907, and through various modes of transfer such as mortgage, settlement of trust, will, etc., the Assessee inherited 15% of the property. The ITAT opined that the issue was squarely covered by the jurisdictional High Court ruling in Manjula J Shah, where it was held that the indexed cost of acquisition has to be computed with respect to the year in which the initial owner first held the asset and not in the year in which the Assessee became the owner of the asset by virtue of his mother’s death. Thus, the Assessee was entitled to the indexed cost of acquisition benefit from the financial year 1981-82.
Regarding the deduction for brokerage charges, the Revenue held that the Assessee’s claim and brokerage expenses and solicitor’s fees were not wholly and exclusively related to the transfer of property. However, the ITAT observed that the brokerage was paid only in connection with the sale of the subject mentioned property, and the broker had arranged and coordinated the meetings with the respective Attorneys of buyers and contributed effectively for negotiating the final sale consideration. Since the Assessee was a resident of the USA, he had employed a broker to negotiate on his behalf with the purchaser and to represent him in all the meetings. Thus, the brokerage paid was allowable in full.
Regarding the Rs. 51 lakhs paid to the solicitor and CA, the ITAT opined that the total expense paid by the Assessee to the solicitor is to be bifurcated towards items allowable and items not connected with the transfer of the property. Since Rs. 18 lakhs were already allowed, the same was held to be reasonable.
With respect to the cost of vacating the premises, the compensation paid on the leave and license agreement to the tenant was allowable as a deduction, and the Revenue was directed to allow the same as a deduction.
[ITO v. [ITO v. Sohrab Fali Mehta [TS-117-ITAT-2023(Mum)] – Date of Judgement : 15.03.2023 (ITAT Mumbai)] [TS-117-ITAT-2023(Mum)] – Date of Judgement : 15.03.2023 (ITAT Mumbai)]
