ORDER
R.P. Tolani J.M.
These are four appeals by assessees. Issues, being inter-connected and common, the appeals are disposed of by this common order for convenience.
ITA Nos. 5757 & 5758
2. Grounds raised are common. Out of which, ground Nos. 1 and 2 are not argued before us. Hence not adjudicated and dismissed accordingly. The other common grounds in both the appeals are as under:
“3 (a) The’learned Commissioner (Appeals)-XI erred in law and on facts by confirming the finding of the assessing officer that the sum of Rs. 6,00,000 paid to Miss Usha Bohnjkar is not deductible from the gross sale proceeds.
3 (b) The learned Commissioner (Appeals)-XI erred in law and on facts by confirming the finding of the assessing officer that the sum of Rs. 6,00,000 paid to Miss Usha Bolinjkar is not an income diverted at source and hence forms part of the income.
(4) The learned Commissioner (Appeals)-XI erred in law and on facts by confirming the disallowance of deduction under section 54 of the Income Tax Act, 1961.
(5) The assessment order passed by the Commissioner (Appeals)-XI is not in conformity with the legal provisions as the said order seeks to enhance the assessment without giving the appellant a reasonable opportunity of showing cause against the said enhancement.
ITA Nos. 5759 & 5760
Common grounds raised are as under :
“(1) The learned Commissioner (Appeals)-XI, Mumbai, erred-in law and on facts by adjudicating on other grounds of appeal after coming to the conclusion:
‘the assessment made on the Body of Individuals (BOI) is set aside with the direction that the individual members of the BOI should be assessed in the light of this order.
(2) The learned Commissioner (Appeals)-XI, erred in law and on facts by confirming the finding of the assessing officer that the sum of Rs. 18,00,000 paid to Ms. Usha Bolinikar is not deductible from the gross sale proceeds.
(3) The learned Commissioner (Appeals)-XI, erred in law and on facts by confirming the finding of the assessing officer that the sum of Rs. 18,00,000 paid to Ms. Usha Bolinjkar is not an income diverted at source and hence forms part of the income.
(4) The learned Commissioner (Appeals)-XI, erred in law and on facts by confirming the disallowance of deduction under section 54 of the Income Tax Act.”
3. Brief facts are the assessees are two brothers holding 1/3rd share in a property at Turner Road, Bandra. The third co-owner is their other brother, Shri Vasant Bolinjkar. The assessees had sold their 1/3rd ownership rights in the property in the year in question and filed return of income declaring capital gains thereon. In the return of income, both the assessee claimed Rs. 6,00,000 each paid to their sister, Mr. Usha Bolinjkar, for vacating the premises in, order to sell the said property (total consideration paid was Rs. 18,00,000). Besides, the assessees claimed exemption from capital gains under section 54. During the course of assessment proceedings, the assessing officer was of the view that both the three co-owners collectively constituted a BOI and framed the assessments on substantive basis on both the brothers as BOI While doing so, the assessing officer accepted the calculation of capital gains but disallowed the amount of Rs. 6 lakhs paid by each to the sister and further denied exemption under section 54 in the case of both the BOIs.
4. The assessment on the two individuals was also framed on protective basis, in which the computation of capital gain was accepted. However, the claim of Rs. 6,00,000 was disallowed. However, the assessing officer in individual cases allowed the claim of exemption under section 54. Against all these orders, the assessees went in first appeal. The Commissioner (Appeals) called for a remand report. The Commissioner (Appeals), while passing orders on two appeals filed by both the brothers and against the single assessment order of BOI held that these persons did not constitute any BOI in respect of this transaction. Therefore, the assessment orders on BOI were set aside by two orders of the Commissioner (Appeals) with direction that the individual members of the BOI should be assessed but in the light of observations made in his orders. The directions given by Commissioner (Appeals) in the orders of BOI appeals are as under :
(i) The payment made to Ms. Usha Bolinjkar was gratutious payment, which should not be deducted from the gross sale proceeds as income diverted at source or as expense in connection with the sale under section 48 of the Act.
(ii) Both the assessees had not fulfilled the conditions stipulated in section 54 to be eligible to claim the same.
In fine, the Commissioner (Appeals) held that the assessment should not be made in the hands of BOI but while passing these orders gave directions that the assessees: claim about payment to their sister, Ms. Usha Bolinjkar, should not be allowed and further for the reasons mentioned in his order exemption under section 54 in the cases of individuals should not be given while passing fresh assessment orders in individual hands in pursuance of his setting aside order. Aggrieved, the assessees are before us in all these appeals, i.e. two BOI appeals and two individual appeals. The BOI appeals are filed as a matter of abundant caution as though assessments in BOI have been set aside but there are certain directions passed in these orders, which are prejudicial to the individual assessments/appeals of the assessees.
5. The learned counsel for the assessees reiterated the facts and contended that as far as the BOI is concerned, the department has not filed any appeal against the Commissioner (Appeals) holding that the assessees shall be assessed in individual capacity on their respective shares. Therefore, this part of the controversy stands concluded. Now the two issues, which arise in the case of individual assessees, are :
(i) Payment of Rs. 6 lakhs: each to sister for vacating the premises; and
(ii) Claim of exemption under section 54.
The learned counsel on first issue contended that in the will dated 3-12-1978. Miss Usha was not given any interest in the impugned property. However, one flat No. 15 situated at 36th Road, Bandra, was given to her, which was tenanted property. Therefore, Miss Usha was all through residing in the residential house, which is subject-matter. Though in the will there was no express right, but by consent of all family members, she was living in this house since beginning and being a lawful occupant, could only be evicted by due process of law. When the property was agreed to be sold on 14-5-1993, the same was with clear stipulation that vacant possession will be given to the purchaser. The will of Shri Babaji Bohnjkar, who expired on 9-11-1984, was not probated. There was every possibility that if the probate was applied for, Miss Usha might have raised objection resulting in lingering of proceedings and thereby delaying the execution of sale agreement. To avoid this eventuality, a family settlement was arrived at dated 10-4-1993, according to which a sum of Rs. 18 lakhs was agreed to.be given to Miss Usha out of the sale proceeds of the property for surrendering her occupation rights and other rights whatsoever and handing over vacant and peaceful possession of the portion of premises occupied by her. After this family settlement, the probate was applied on 8-9-1993, during the course of these proceedings because of the family settlement, Miss Usha filed an affidavit stating that the terms of probate were agreeable to her. The execution of family settlement resulted into smooth probate of the will. In the will dated 3-12-1978 of Babaji Bolinjkar, there is indication that Miss Usha was residing in the house and since she was living with consent of everybody till the date of sale, the intervening period is more than 12 years and though there was no express right in the will, nevertheless by her stay in the property, she had a right of adverse possession and in such contingency she could have claimed title over the property by way of adverse possession. She is an advocate by profession and knew her right very well. It was further contended that the will may say that a particular legal heir may not have any right in the property but by efflux of time new rights are created and one can always take protection of law and at least create complications. In order to avoid any such eventuality, the family settlement was made. After this money was given to her, she purchased a flat at Versova. and shifted there in 1995.
6. In fine, the learned counsel contended that Miss Usha had legal rights in the property, which were capable of creating complication; the assessees had to sell the property with vacant possession, which could have been defeated resulting into complications, Therefore, the payment of Rs. 18 lakhs to her was for proper reason and allowable. The Commissioner (Appeals) held that this amount can be at best treated as application of income and a gratuitous payment out of the capital gains that exclusively accrued to the assessees. The Commissioner (Appeals) has mainly relied on the will of Shri Babaji Bolinjkar and held that she cannot approbate and reprobate at, once the will of her deceased father. The Commissioner (Appeals) has held that Miss Usha by affidavit before the High Court accepted the terms of the probate. The learned counsel contended that the Courts have held that in a family settlement even if one party has no right in it, to settle the dispute between the family members, amount paid to the party to relinquish right and title cannot be treated as gift (Kale v. Dy. Director of Consolidation AIR 1976 SC 807, and CIT v. R. Ponnammal (1987) 164 ITR 706 (Mad)). Following other case laws were relied on :
(1) Income Tax Officer v. Kumaraswamy Reddiar & Sons (1991) 39 TTJ (Coch) 656
(2) Bava Cherian v. ITO (1993) 45 TTJ (Coch) 357
(3) CIT v.. Piroja C. Patel (2000) 242 ITR 582 (Bom)
(4) CIT v. Shakuntala Kantflal (1991) 190 ITR 56 (Bom)
(5) CIT v. Abrar Alvi (2001) 247 ITR 312 (Bom)
(6) CIT v. Brad Ford Trading Co. (P) Ltd. (2003) 261 ITR 222 (Mad).
7. In the case of Abrar Alvi cited (supra), the property was in the name of the assessee, one of the sons was residing with him, father wanted to sell the property and the son instituted a suit restraining the assessee from selling the property. The dispute was resolved. ultimately by paying a sum of Rs. 8 lakhs to his son, the Tribunal allowed the expenditure from sale proceeds. On revenue appeal, the Hon’ble Bombay High Court confirmed the order of the Tribunal about the deductibility of expenditure. In the instant case, the assessees have avoided the situation of litigation and by a family settlement the amount has been paid, which is not doubted by the lower authorities, the amount has been paid and Miss Usha has bought another flat at Versova and shifted there. The transaction is genuine and uncontroverted. The amount paid is not application of capital gain as without vacant possession, the assessees could not have sold the premises and the question of capital gain won’t have arisen. The expenditure was for perfecting the title/vacant possession and was allowable.
8. Regarding the other issue, the learned counsel contended that exemption under section 54 was granted by the assessing officer in the case of individuals. Having set aside the assessment in the hands of BOI, the individual appeals should have been decided separately in which the assessees had not raised any ground in this behalf as the exemption was allowed. Surprisingly, the Commissioner (Appeals), without there being any ground in this behalf, has disallowed the claim in the hands of individual assessees in the appellate order of BOI. This has clearly resulted into enhancement of income and no notice of enhancement has been given. Therefore, the directions of Commissioner (Appeals) are liable to be quashed on this ground alone. On merit, it was contended that the assessee entered into MOU to sell this property on 14-5-1993, a supplementary agreement was made on 4-12-1993 providing for purchase of three flats by the two assessees and their brother in the new building proposed to be constructed on this plot of land and the purchase price of three flats of Rs. 36,40,000 was to be adjusted out of the balance sale consideration of Rs. 67,55,000. Three separate agreements were entered into by three brothers with the purchaser of property in this behalf. The Commissioner (Appeals) held that the assessing officer has not examined this important aspect of exemption in the assessment order. The Commissioner (Appeals) held that even the plans of proposed new building were not approved by BMC on the date of agreement. The agreement executed by the assessees with the builder purchaser dated 4-12-1993, does not give specific allotment of flat, which mentions merely a flat on 2nd floor admeasuring 310 sq. ft. There is nothing in the agreement to establish that the assessees acquired a domain over the flats as they did not get specific flat. He held that there was no formal agreement for purchase of flat and conditions stipulated in section 54 were not satisfied and the assessees did not deposit the money in capital gain account scheme; the exemption under section 54 was not allowable. The learned counsel contended that section 54 requires an assessee to acquire a residential unit within two years from the date of transfer of the house. The conveyance of the house sold was executed on 12-1-1994, which is the date of sale and as per period of two years provided by section 54, the time limit for purchase of new house ends on 12-1-1996. The assessees purchased the house vide agreement dated 4-12-1993 and though the numbers of flats may not be mentioned but the possession of new flat is taken by the assessees on 10-12-1995. Therefore, as on date of taking the possession, the assessees had a clear domain over a specific flat. Therefore, the assessees have fully complied with section 54. The payment of the flats was made in advance as the amount of consideration was to be adjusted from the sale proceeds of original asset, which was transferred. Letter from builder to this effect and occupation certificate of new building are placed on paper book. All the conditions have been complied with. The rejection of claim under section 54 was totally justified. The reliance placed by the Commissioner (Appeals) in CIT v. Mrs. Hilla JB. Wadia (1993) 113 CTR (Bom) 173: (1995) 216 ITR 376 (Bom) was distinguished and similarly reference to CBDT Circular No. 471 dated 15-10-1986, was not applicable.
9. The learned departmental Representative supported the orders of lower authorities.
10. We have heard the rival submissions and perused the material available on record. As far as the question of assessment in BOI is concerned, as the Commissioner (Appeals) has set aside the assessment in this status and revenue is not in appeal, the assessments have to be finalised in the hands of individuals. Coming to the payment of Rs. 18 lakhs to Miss Usha Bolinjkar, the lower authorities have bank upon the will dated 3-12-1978, of late of Shri Babaji Bohnjkar, which provides that Miss Usha will have no right in the impugned house property. She was given another flat, which was tenanted. According to them, once she has no right in the will, she has no right to receive any compensation. Besides, she has signed an affidavit before High Court to this effect at the time of taking probate. We are of the view that there are many other important facts attached to the whole episode.
11. Since the other house given to Miss Usha Bolinjkar was tenanted, since beginning she was residing with other family members in this house and the period of stay is more than 12 years. Under these circumstances, there is a possibility that she could have claimed right on property by way of adverse possession in case of a dispute. Her stay in the house is not doubted. The assessees agreed to sell the house with a condition that the same could be sold in vacant possession. The will of Shri Babaji Bolinjkar was not probated; to effect the sale, the same was necessary. The brothers anticipated the situation and a family settlement was arrived at on 10-4-1993 providing that Miss Usha Bolinjkar could be given Rs. 18 lakhs out of the sale proceeds of the house being sold for vacating peaceful possession of the portion of the premises occupied by her. The veracity of the family settlement is not disputed. As the facts emerge, Miss Usha Bolinjkar subsequently bought another flat at Versova. out of this money and shifted there. After family settlement, probate was applied in the course of which Miss Usha signed an affidavit agreeing to the terms of probate according to will. The swearing of affidavit on the part of Miss Usha cannot be questioned as she had the support of family settlement, which was duly executed. She did her part of performance in probate proceedings as agreed in family settlement terms. We are of the view that it is a strong possibility that Miss Usha Bolinjkar because of her having possession of portion of the house and family settlement constituted an encumbrance on the property in question and any payment given to clear the same is a deductible expenditure from sale proceeds for computation of capital gain. Our view is strengthened by the Hon’ble Bombay High Court judgment in the case of Abrar Alvi (supra) to which one of us (JM) was a party. We, therefore, hold that the assessees are entitled to reduce the amount of Rs. 6,00,000 in their respective hands in this behalf. This ground of the assessees is allowed.
12. Coming to the issue of denial of exemption under section 54, we are of the view that the issue was not raised as a ground in the individual appeals. Having set aside the assessments in the case of BOI, the Commissioner (Appeals) should not have decided this issue. If Commissioner (Appeals) was keen to raise this issue, the same could be done only by enhancement of assessment in the hands of individuals. Having not issued any notice in this behalf, Commissioner (Appeals) cannot decide the issue which is not raised by individuals. Therefore, we find merit in the preliminary plea of the learned counsel in this behalf. We are inclined to allow the ground of the assessees on this issue alone. How6ver, the merits are very simple in this case. Therefore, it is desirable to decide the same also. The conveyance of original asset was executed on 12-1-1994, by which the amount of new flats to be purchased was adjusted out of the sale proceeds. The limit of two years expires on 11-1-1996. The assessees executed the agreement for purchase of new house on 4-12-1993 and the possession was taken on 10-12-1995, i.e., before 12-1-1996. The copies of the letter from builder to this effect and occupation certificate from BMC are also placed on record. With these clear facts, we find no merit in the technical objection raised by the Commissioner (Appeals) that in the absence of numbers of specific flats, the assessees did not obtain the domain in the property as after allotment letter and possession of the flat on 10-12-1995, the domain of the assessees in specific flats is clearly established. According to us, the conditions prescribed by section 54 are complied with by the assessees. The assessing officer was right in allowing the exemption. Therefore, on merits also, we reverse the finding of the Commissioner (Appeals) on this issue. This ground of the assessees is also allowed.
13. In effect, assessees’ appeals are allowed.