Expenses incurred “in connection with transfer” is allowable as deduction while computing capital Gain

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Expenses incurred “in connection with transfer” is allowable as deduction while computing capital Gain

While computing capital gains, expenses incurred “in connection with transfer” is an allowable deductible expenditure. It is eligible for deduction u/s 48.

Whether compensation paid to earlier buyer to cancel the agreement is deductible expenditure is the question in various cases. Whether it could be treated as expenses incurred “in connection with transfer”? The amount is paid to buyer to settle the disputes and to leave the claim of specific performance.

It may be noted that, so far as ol. (i) of s. 48 is concerned, the expression used by the legislature in its wisdom is wider than the expression “for the transfer”. The expression used is “the expenditure incurred wholly and exclusively in connection with such transfer.”

The expression “in connection with such transfer” is, certainly wider than the expression “for the transfer”. Here again, any amount the payment of which is absolutely necessary to effect the transfer will be an expenditure covered by this clause.

In other words, if, without removing any encumbrance including the encumbrance of the type involved in this case, sale or transfer could not be effected, the amount paid for removing that encumbrance will fall under cl. (i). The Tribunal was right in holding that the sale consideration requires to be reduced by the amount of compensation.

So, if expenditure is necessary to remove an encumbrance without which transfer could not be affected, such expenditure is allowable under s. 48.

Here is one interesting judgment by Bombay HC which has expressed above views.

COMMISSIONER OF INCOME TAX vs. SHAKUNTALA KANTILAL

HIGH COURT OF BOMBAY

T.D. Sugla & B.N. Srikrishna, JJ.

IT Ref. No. 261 of 1977

19th March, 1991

 (1991) 190 ITR 0056 : (1991) 58 TAXMAN 0106

Legislation Referred to

Sections 48, 55, 55(2)

Case pertains to

Asst. Year 1968-69

Decision in favour of:

Assessee

Counsel appeared:

Dr. V. Balasubramanian with J.P. Deodhar & K.C. Sidhwa, for the Revenue

T. D. SUGLA, J.:

In this Departmental reference relating to the assessee’s assessment for the asst. yr. 1968-69, the Tribunal has referred to this Court two questions of law under s. 256(1) of the IT Act,1961. The questions read thus :

“(1) Whether, on the facts and in the circumstances of the case, the compensation amount of Rs. 35,504 paid by the assessee to M/s Radia and Sons (Pvt.) Ltd. is deductible in computing the capital gains arising on sale of the plot of land under s. 45 of the IT Act, 1961?

(2) Whether, on the facts and in the circumstances of the case, the assessee was rightly allowed by the Tribunal to exercise the option of substituting the fair market value of the plot of land as on 1st Jan., 1954 for the actual cost thereof as contemplated under s. 55(2) of the IT Act, 1961, in computing the capital gains arising on sale of the plot under s. 45 of the IT Act, 1961 ?”

2. The assessee had purchased a plot of land admeasuring 5,072 sq. yards at Borivli in the year 1948 for Rs. 15,774. On 2nd Aug., 1963, the assessee entered into an agreement for sale of the said property with Radia and Sons (Pvt.) Ltd. at the rate of Rs. 29 per sq. yard. For reasons not necessary to be referred to, disputes and differences cropped up between the parties. Radia and Sons (Pvt.) Ltd. filed a suit against the assessee in our High Court being Suit No. 337 of 1965 for specific performance, inter alia, praying for (i) that the agreement for sale dt. 2nd Aug., 1963 be declared valid and subsisting between the parties; and (ii) in the alternative, Radia and Sons (Pvt.) Ltd. be given compensation of Rs. 75,720. Eventually, there was a settlement between the parties. It was agreed that the assessee shall pay to Radia and Sons (Pvt.) Ltd. compensation of Rs. 35,504 at the rate of Rs. 7 per sq. yard upon which Radia and Sons would withdraw the above suit.

3. In the meantime, that is, on 30th March, 1967, the assessee had entered into another agreement for sale in respect of the same property with M/s. Cosmos Co-operative Housing Society Ltd. at the rate of Rs. 51 per sq. yard. As a result of the settlement between the assessee and Radia and Sons (Pvt.) Ltd., the assessee’s solicitors had to give an undertaking to the solicitors of Radia and Sons (Pvt.) Ltd. that the amount of Rs. 35,504 will be paid to Radia and Sons (Pvt.) Ltd. as compensation. It appears that the mere undertaking did not satisfy Radia and Sons (Pvt.) Ltd. and, ultimately, the purchasers, M/s. Cosmos Co-operative Housing Society Ltd., had to give an assurance to Radia and Sons that, on the completion of sale, they would deduct Rs. 35,504 from the total sale consideration of Rs. 2,58,672 and would pay the same to Radia and Sons (Pvt.) Ltd.

4. The assessee claimed that this amount of Rs. 35,504 should be allowed as deduction for the purpose of computing her income under the head “Capital gains” either as expenditure incurred in connection with the transfer or as cost of improvement or under s. 48 itself. The Departmental authorities rejected the claim. On further appeal, the Tribunal accepted the assessee’s contention that the transfer of the property to M/s. Cosmos Co-operative Housing Society Ltd. could not have taken place unless the compensation of Rs. 35,504 was paid to M/s. Radia and Sons (Pvt.) Ltd. It was held that the expenditure was thus incurred wholly and exclusively in connection with the transfer as contemplated under s. 48(i) of the Act. The Tribunal also held that the expenditure in question could be said to have been incurred with a view to remove the obstruction and obtain a clear title to the property before sale and, in that view of the matter, such expenditure would also form part of the cost of acquisition of the capital asset or the cost of improvement thereto as contemplated under s. 48(ii) of the Act. For this and other reasons stated in the order, the Tribunal allowed the assessee’s claim.

5. It must be stated in fairness to Dr. Balasubramanian for the Revenue that he did not dispute the fact of payment or even the necessity of making such a payment. His contention is that the language in which s. 48 is couched does not contemplate deduction of such an amount. Reference in this regard was made to s. 48 of the Act to show that the payment herein could neither be termed as expenditure incurred wholly and exclusively for the transfer or the cost of acquisition or of any improvement thereto. None had appeared on behalf of the respondent-assessee.

6. In order to appreciate Dr. Balasubramanian’s submission, it is desirable to refer to the provisions of s. 48 which read as under :

“The income chargeable under the head ‘Capital gains’ shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:

(i) expenditure incurred wholly and exclusively in connection with such transfer,

(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.”

The section broadly contemplates three amounts for the purpose of computing income chargeable under the head “Capital gains”. The first is the full value of the consideration for which the capital asset has been transferred. The second is the expenditure incurred wholly and exclusively in connection with such transfer and the third and the last is the cost of acquisition of the capital asset including the cost of any improvement thereto. We have already referred to the facts of the case in detail earlier. It cannot be disputed that, unless the assessee had settled the dispute with Radia and Sons (Pvt.) Ltd., the sale transaction with M/s. Cosmos Cooperative Housing Society Ltd., under the agreement dt. 30th March, 1967, would not, rather could not, have materialised. If this transaction had not materialised, there would perhaps have been no question of capital gains. The sale would then have taken place at the rate of Rs. 29 per sq. yard as against Rs. 61 per sq. yard. One way of looking at the problem could be to say that the full value of the consideration in this case was not the apparent consideration, i.e., Rs. 2,58,672, but Rs.2,23,168 (i.e., 2,68,672 minus Rs.35,504). The Legislature, while using the expression”full value of consideration”; in our view, has contemplated both additions to as well as deductions from the apparent value. What it means is the real and effective consideration. That apart, so far as cl. (i) of s. 48 is concerned, we find that the expression used by the Legislature in its wisdom is wider than the expression”for the transfer”. The expression used is”the expenditure incurred wholly and exclusively in connection with such transfer”. The expression “in connection with such transfer” is, in our view, certainly wider than the expression “for the transfer”. Here again, we are of the view that any amount the payment of which is absolutely necessary to effect the transfer will be an expenditure covered by this clause. In other words, if, without removing any encumbrance including the encumbrance of the type involved in this case, sale or transfer could not be effected, the amount paid for removing that encumbrance will fall under cl. (i). Accordingly, we agree with the Tribunal that the sale consideration requires to be reduced by the amount of compensation. The first question is, therefore, answered in the affirmative and in favour of the assessee.

Before concluding, it may be desirable to observe that Dr. Balasubramanian fairly stated that there are no judgments on the issue either way and that the question is required to be decided on first principles and that is what we have done.

7. As regards the second question, Dr. Balasubramanian’s argument appears to be that once an assessee exercises has option under s. 55(2)(i) to have the market value of the asset as on the 1st day of Jan. 1954 instead of the actual cost price in the case of an asset acquired prior to 1st Jan., 1954, there is no further scope for deduction on account of any type of expenditure whether it is in connection with the transfer or it is in connection with the improvement of the capital asset. This submission, to our mind, is too good to be accepted. Sec. 55(2)(i) clearly envisages the exercise of option by an assessee to opt for the market value of an asset as on the 1st day of Jan., 1954. Sec. 48, which provides the method for computation of the capital gains, does not, directly or indirectly, prohibit disallowance of any expenditure which can be claimed under that section in case a person has exercised his option under s. 55(2)(i). Even otherwise, we see no reason why after an assessee exercises the option and in case any expenditure has been incurred after that notional date, the said expenditure could not be taken into account.

8. Having regard to the above discussion, we are in agreement with the Tribunal on the second question also and answer the question accordingly in the affirmative and in favour of the assessee.

There will be no order as to costs.

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