Compensation to Encroachers Allowed as LTCG Improvement Cost | ITAT

Case Details: Kailas Kalyan Creators (P.) Ltd. vs. ITO [2026] 185 taxmann.com 518 (Ahmedabad-Trib.)

Judiciary and Counsel Details

• Sanjay Garg, Judicial Member & Annapurna Gupta, Accountant Member
• Chetan Agarwal, A.R. for the Appellant.
• Alpesh Parmar, CIT-DR for the Respondent.

Facts of the Case

The assessee was engaged in the business of land development, as well as the buying and selling of land and buildings. During the year under consideration, the assessee sold land and offered Long-Term Capital Gain (LTCG) on the sale. While computing LTCG, the assessee claimed improvement cost as compensation paid to encroachers to obtain vacant possession. The Assessing Officer (AO) disallowed the entire improvement cost, as the assessee failed to furnish complete details of the persons, including their names, PANs, and the nature of payments (cash or bank), etc. Aggrieved by the order, the assessee preferred an appeal to the CIT(A).

The CIT(A) upheld the additions made by the AO. The matter then reached the Ahmedabad Tribunal.

ITAT Held

The Tribunal held that it was an admitted position that the land in question was encroached upon by various encroachers. Even after protracted litigation and various efforts, the assessee was unable to secure the land’s vacating. The assessee had to pay compensation to the said encroachers. The short issue raised before the Tribunal was only relating to the quantum of the amount of compensation paid and the veracity of evidence, such as bills and vouchers, etc., furnished by the assessee to claim the aforesaid compensation.

The CIT-DR stated at the bar that he had thoroughly examined the evidence furnished by the assessee, including the separate agreements entered into with each of the encroachers and also the details of payments made by the assessee to various encroachers, most of which were through the banking channel. He has pointed out that, though some payments were made in cash, they were preceded by an immediate withdrawal from the assessee’s bank account. The DR also did not dispute the justification for the payments made. There was protracted litigation between the AMC, Ahmedabad, and the encroachers to have the land vacated, along with police complaints. There were also newspaper cuttings, and the encroachers had allegedly threatened and filed complaints with the police against the family members and Directors of the assessee company.

Accordingly, the assessee pursued all available legal remedies, including approaching various authorities, both legal and administrative. Despite the orders of the Hon’ble Gujarat High Court in a petition filed by the encroachers against the Municipal Corporation, Ahmedabad, seeking removal of their encroachments on the land, the assessee was unable to remove the encroachers from the land.

The bills and vouchers, and the entire evidence, having been thoroughly examined by the CIT-DR, and there being no dispute about the factum of compensation paid by the assessee to the encroachers, there was no justification for the lower authorities in not allowing the said claim of improvement on account of the payments of compensation to the encroachers.

Therefore, the claim of improvement on account of payments of compensation to encroachers was to be allowed.