Commissioner of Income Tax vs Miss Piroja C. Patel

At the instance of the Department, the Tribunal has referred the following question for the opinion of this court for the assessment year 1975-76 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 2,30,000 being compensation paid by the assessee and other co-owners to the hutment dwellers for vacating the land was an allowable expenditure within the meaning of Section 48 read with Section 55 of the Income Tax Act, 1961, in the assessment year 1975-76 ?"

The assessee and other co-owners owned a certain piece of land at Andheri admeasuring 10,577 square metres. The property was notified for a public purpose under the Maharashtra Regional Town Planning Act, 1966, read with the Land Acquisition Act, 1894. The property was subsequently sold to the Bombay Municipal Corporation by negotiation-cum-acquisition. This was under the provisions of the Maharashtra Regional Town Planning Act, 1966, read with the Land Acquisition Act, 1894. The property was taken over by the Bombay Municipal Corporation on June 14, 1973, on payment of total consideration of Rs. 14,33,190. On the property, there were 23 hutment dwellers. They claimed occupancy rights over the land. By an agreement dated March 8, 1973, the hutment dwellers agreed to vacate the land on payment of Rs. 2,30,000. The assessee and other co-owners sought deduction of this amount together with other expenditure incurred by way of legal expenses from the capital gains as expenditure incurred on account of transfer of the property. The Assessing Officer allowed this expenditure. The Commissioner of Income Tax came to the conclusion that the deduction was erroneous and prejudicial to the interests of the Revenue. Accordingly, the matter was taken up in revision u/s 263 of the Income Tax Act. After notice to the assessee, the Commissioner disallowed the expenditure. Being aggrieved by the order of the Commissioner, the assessee preferred an appeal before the Tribunal. Following an earlier ruling of the Tribunal, the appeal preferred by the assessee came to be allowed. The Tribunal came to the conclusion that giving vacant possession of the land to the Municipal Corporation was a condition precedent under the terms of the negotiation-cum-acquisition agreement and that by removing hutment dwellers, the property improved in value. On the above facts, the question stated hereinabove has been referred to this court for opinion.

The short point which arises for consideration in the present matter is whether compensation paid by the assessee and other co-owners to the hutment dwellers for vacating the land was an allowable expenditure within the meaning of Section 48 read with Section 55 of the Income Tax Act, 1961. The answer to this question will depend on whether the expenses incurred by the assessee and other co-owners constitute cost of improvement u/s 48(ii). The said point is covered by the judgment of the Division Bench of this court in the case of Commissioner of Income Tax Vs. Shakuntala Kantilal, and the judgment of the Division Bench of this court in the case of Hardiallia Chemicals Ltd. Vs. Commissioner of Income Tax, . On eviction of the hutment dwellers from the land in question, the value of the land increases and, therefore, the expenditure incurred for having the land vacated would certainly amount to cost of improvement. Accordingly, the above question is answered in the affirmative, i.e., in favour of the assessee and against the Department.

The reference accordingly stands disposed of with no order as to costs.

Issuance of certified copy expedited.