The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has allowed an appeal concerning the computation of capital gains arising from the sale of four residential flats, holding that legitimate deductions cannot be denied merely because they were raised for the first time during assessment proceedings. 

The bench of Sandeep Gosain (Judicial Member) and Bijayananda Pruseth (Accountant Member)  rejected the department’s objection that brokerage payments could not be allowed because they were made after completion of the property transactions.

The case concerned the sale of four residential flats. The taxpayer had claimed various expenses and deductions while computing capital gains, including brokerage, improvement costs and other charges incurred in connection with acquisition and sale of the properties.

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According to the grounds of appeal, the Assessing Officer had assessed short-term capital gains of Rs.50,400 on the sale of Flat, whereas the taxpayer claimed that after allowing brokerage of Rs.75,000 on purchase and Rs.1 lakh on sale, the transaction resulted in a short-term capital loss of Rs.1,25,200.

In respect of Flat No. 1006/3, the AO assessed long-term capital gains at Rs.17,16,830. The taxpayer, however, claimed that after accounting for indexed other charges, indexed improvement costs and indexed brokerage on purchase along with brokerage paid on sale, the correct long-term capital gain was only Rs.2,11,761.

For Flat No. 1108/1, the AO computed short-term capital gains at Rs.16,99,800, while the taxpayer claimed that the taxable gain should be Rs.3,85,625 after allowing other charges, improvement expenditure and brokerage on sale.

Similarly, in relation to Flat No. 203/3, the AO assessed short-term capital gains at Rs.18,23,000, against the taxpayer’s computation of Rs.11,01,000 after claiming improvement costs and brokerage paid on sale.

The Tribunal noted that the total expenditure claimed by the taxpayer in relation to the four properties amounted to Rs.37,16,244, which had been disallowed by the Assessing Officer.

The Tribunal’s order records that the taxpayer’s case had been reopened and, during the reassessment proceedings, the taxpayer furnished a revised computation raising the disputed deductions. The table reproduced on page 5 of the order sets out the deductions that were not allowed, including brokerage, indexed other charges, indexed improvement costs and other expenditure relating to the flats.

The revised computation showed the difference between the capital gains determined by the AO and those claimed by the taxpayer after accounting for the disputed expenses. The total deduction claim not allowed by the AO was recorded at Rs.37,16,244.

The Assessing Officer rejected the claims primarily on two grounds.

First, the taxpayer had not made the claims in the original return of income and had not subsequently filed a revised return. Second, the AO questioned the brokerage expenditure on the ground that the payments had been made after completion of the purchase and sale transactions.

The Tribunal specifically examined both grounds because they formed the principal basis for denial of the deductions.

On the brokerage issue, the Tribunal found that the entire expenditure had been incurred through banking channels and that no cash payments were involved. Importantly, neither the Assessing Officer nor the CIT(A) had disputed this fact.

The Tribunal observed that brokerage ordinarily becomes payable upon completion of the transaction. Therefore, merely because the brokerage was paid after completion of the purchase or sale could not, by itself, be a valid ground for rejecting the expenditure.

The Bench held that the taxpayer could not reasonably have been expected to make the brokerage payment before completion of the underlying transaction. Since the Revenue had not doubted either the payment itself or the incurring of the expenditure, the Tribunal found the AO’s reasoning insufficient to reject the claim.

The second issue concerned the Revenue’s reliance on the Supreme Court’s decision in Goetze (India) Ltd. v. Commissioner of Income Tax, reported at 284 ITR 343.

The AO had taken the position that a fresh deduction claim could not be entertained because it had not been made in the original return filed under Section 139 or in the return filed in response to the notice under Section 148 of the Income-tax Act.

However, the ITAT noted that the taxpayer had subsequently furnished a revised computation during the assessment proceedings and had supported the claims with documentary evidence. The AO had examined those documents and had even issued notices under Section 133(6) to the respective parties to whom payments had been made.

The Tribunal relied on the jurisdictional Bombay High Court’s ruling in CIT v. Pruthvi Brokers and Shareholders, ITA No. 3908 of 2010.

The order records that the Bombay High Court had considered the Supreme Court’s decision in Goetze (India) and clarified the distinction between the powers of the Assessing Officer and appellate authorities.

The questions considered by the High Court included whether an assessee could make an additional deduction claim otherwise than by filing a revised return and whether the appellate authorities could entertain such a claim. The High Court held that the Supreme Court’s ruling in Goetze was confined to the power of the assessing authority and did not curtail the powers of the Tribunal under Section 254.

The ITAT accordingly held that while the AO’s power to entertain a fresh deduction claim otherwise than through a revised return may be limited, the powers of appellate authorities are wider. Such authorities can entertain additional grounds or claims where they are necessary for a just decision of the case.

Applying this principle, the Mumbai ITAT held that the taxpayer was entitled to legitimate deductions even though the claims had been raised for the first time during the proceedings.

The Tribunal emphasised that the taxpayer had already furnished a revised computation before the AO during the assessment proceedings. More importantly, the Revenue had examined the supporting documents and had not disputed the genuineness of the expenditure.

The Bench therefore concluded that the taxpayer’s substantive rights could not be defeated merely because of the procedural manner in which the claims were raised.

A significant factor in the Tribunal’s decision was that the disputed expenses were not unsupported claims. The taxpayer had produced documents substantiating the expenditure, and the AO had examined those documents during the assessment proceedings.

The Tribunal therefore found that this was not a case where an entirely new or unverified expenditure was sought to be introduced at the appellate stage. Instead, the claims had already been placed before the AO through the revised computation and had been examined during the assessment.

This factual distinction was central to the relief granted by the Tribunal.

Ultimately, the ITAT directed the Assessing Officer to delete the additions made in respect of the disputed capital-gain computations.

The Tribunal held that the taxpayer was entitled to claim the deductions before the appellate authorities where the claims were otherwise legally allowable. Since the revised computation had been furnished during the assessment proceedings and the supporting claims had already been examined, the additions could not be sustained.

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