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Issues involved: Interpretation of u/s 48(i) of the Income-tax Act, 1961 regarding deduction of retrenchment compensation in connection with the sale of property.
Summary: The High Court of Bombay considered a reference u/s 256(1) of the Income-tax Act, 1961, regarding the deduction of retrenchment compensation paid to ex-employees in connection with the sale of a business property. The assessee, a film exhibitor, closed its business and sold the property, claiming the compensation as a deduction in capital gains. The Income-tax Officer and Commissioner rejected the claim, leading to an appeal before the Income-tax Appellate Tribunal. The Tribunal accepted the assessee's contention that the compensation was incurred in connection with the sale as per the sale agreement's clause 15, obligating the assessee to clear all liabilities before transfer. However, the High Court disagreed, stating that the compensation was not related to the property transfer but to the business closure in 1972. The Court emphasized that u/s 48(i) allows deductions for expenditures directly linked to the transfer, such as broker commissions, which the compensation did not qualify as. The Court concluded that the compensation was not incurred wholly and exclusively for the sale, ruling in favor of the Revenue. In conclusion, the High Court held that the Tribunal's decision was incorrect, as the retrenchment compensation was not directly connected to the property sale. The question was answered in the negative, favoring the Revenue. The reference was disposed of with no costs.
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