ITAT Allows Deduction of Tenant Eviction Payments, Directs Recalculation of Capital Gains on Property Sale

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has allowed the appeal of taxpayer Saroj Makan and directed the Income Tax Department to recompute her capital gains after considering payments made to tenants for vacating a property before its sale.

The case related to the sale of a commercial property in Karol Bagh, Delhi, for Rs 2.52 crore during Assessment Year 2011-12. Saroj Makan, who owned a one-third share in the property, received Rs 84 lakh as her share of the sale consideration. She claimed that she paid Rs 53 lakh to two tenants to vacate the premises so that vacant possession could be handed over to the buyer. Accordingly, she argued that no taxable capital gain arose from the transaction.

The tax authorities rejected the claim on the grounds that the assessee failed to furnish sufficient evidence to prove the payments were genuinely made for tenant eviction. The aggrieved assessee filed an appeal before the first appellate authority, i.e., CIT(A), challenging the aforesaid decision; however, the impugned disallowance was upheld, observing that there were no municipal records, surrender deeds, or references to such payments in the property documents.

Before the Tribunal, the assessee produced copies of cheques, bank records, receipts, affidavits from the occupants, and utility bills showing that the property was occupied by tenants. The Tribunal noted that the sale deed recorded that vacant possession had been handed over to the buyer and also referred to the buyer’s right to deal with tenants and obtain possession.

The ITAT held that the evidence showed the payments were made to remove encumbrances and facilitate the transfer of the property. It is observed that such expenditure, incurred to obtain an unencumbered and marketable title, is allowable while computing capital gains. The tribunal, citing earlier judgements, including the Delhi High Court’s ruling in Kaushalya Devi and Shakuntala Rajeshwar, allowed the assessee’s appeal and directed the tax authorities to recompute the capital gains after granting the deduction for tenant eviction payments.

The tribunal rules that “law in this regard is quite settled that if in order to acquire the encumbrances from the property and to acquire an alienable title, any payment is made to persons in occupation, then the same should be considered to be the cost of acquisition or an expense incurred wholly and exclusively in connection with the transfer.”