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Issues involved: The judgment deals with the issue of whether expenditure incurred for litigation in a civil court for enhancement of compensation can be deducted u/s 48 of the Income Tax Act in computing capital gains.
Summary: The Commissioner of Income-tax held that the petitioner was not entitled to deduct the expenditure incurred for prosecuting a claim for enhancement of compensation in a civil court, stating that such expenditure was not connected with the transfer of a capital asset as per Section 45 of the Income Tax Act, 1961. The main question was whether the expenditure incurred for litigation pursuant to a reference under s. 20 of the Land Acquisition Act is wholly and exclusively connected with the transfer of the capital asset, as required by Section 48 of the Income Tax Act. The petitioner argued that any expenditure, whether incurred prior to or after the transfer, if intrinsically connected with the transfer, should be deductible in computing capital gains, citing the decision in Johnson v. Johnson and In re Nanaimo Community Hotel Ltd. The Court emphasized that the expenditure must be connected with the transfer, and in cases of compulsory acquisition, the litigation for enhancement of compensation is intimately connected with the acquisition process. Therefore, all expenditure incurred in connection with such litigation is deductible u/s 48 of the Income Tax Act, regardless of when it was incurred. The judgment concluded that the Commissioner's order was unsustainable as it wrongly held that the expenditure for litigation under s. 20 of the Land Acquisition Act was not deductible u/s 48(1) of the Income Tax Act. The Commissioner was directed to determine the nature of the amount and pass appropriate orders accordingly.
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