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2018 (4) TMI 1137 - HC - Income TaxDeduction to Section 48 while computing capital gains - expenditure of ₹ 25,00,000/- incurred by the assessee by way of liquidated damages paid to the first purchaser incurred in connection with the transfer of the property - whether be deducted from the sale consideration for computing the long term gain? - Held that - There was a close nexus and connect between the payment of ₹ 25,00,000/- and the transfer of the property to the purchaser resulting in income by way of capital gains. There was proximate link and the expenditure incurred was in furtherance and to effectuate the transfer/sale of the property and was not remote and unconnected. Expenditure of ₹ 25,00,000/-, therefore, has to be treated as expense incurred wholly and exclusively in connection with the transfer of immovable property and, hence, allowable as a deduction under clause (i) of Section 48 of the Act. As we would like to clarify that ₹ 7,50,000/- which was paid by Anil Kumar Sharma and subsequently refunded, cannot be allowed as a double deduction. Refund of ₹ 7,50,000/- would mean that the earlier payment made by Anil Kumar Sharma was squared off. The assessee had in fact incurred expenditure of ₹ 25,00,000/- which was paid to Anil Kumar Sharma to forego and give up his right under the agreement to sell dated 10th April, 1989. Wherever an assessee has paid an amount under an earlier agreement-to-sell in terms of the settlement or even a court decree, the said amount would be treated as expenditure wholly or exclusively in connection with the transfer, the subject matter of capital gains. The words used in clause (i) do not permit and allow expenditure incurred wholly and exclusively on the immovable property as an expenditure to be deducted while computing capital gains. Link and connection with the transfer of a capital asset and the expenditure must be inextricable and should be established. ₹ 25,00,000/- paid by the assessee would be deducted under clause (i) to Section 48 of the Act while computing capital gains. Answer the substantial question of law in favour of the appellant-assessee and against the Revenue.
Issues Involved:
1. Whether the expenditure of ?25,00,000/- paid by the assessee to Anil Kumar Sharma for non-fulfillment of the first agreement to sell can be deducted from the sale consideration for computing long-term capital gains under Section 48(i) of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Deductibility of ?25,00,000/- Paid as Liquidated Damages: - Facts and Background: The assessee had entered into an earlier agreement to sell the property to Anil Kumar Sharma for ?15,00,000/-, receiving ?7,50,000/- as an advance. Due to non-fulfillment of this agreement, the assessee paid ?25,00,000/- to Anil Kumar Sharma as liquidated damages for foregoing his rights under the agreement. The property was later sold for ?55,00,000/-. - Assessment Officer's View: The Assessing Officer disallowed the deduction of ?25,00,000/-, asserting it was not incurred wholly and exclusively in connection with the transfer of the property, and it was not towards cost of improvement or to remove an encumbrance. The genuineness of the agreement with Anil Kumar Sharma was also doubted. - Commissioner of Income Tax (Appeals) View: The Commissioner upheld the genuineness of the agreement with Anil Kumar Sharma and allowed the deduction of ?25,00,000/- as it was considered connected with the transfer of the property. - Tribunal's View: The Tribunal held that the payment of ?25,00,000/- was a personal liability of the assessee and not attached to the capital asset sold. Therefore, it could not be considered as expenditure incurred wholly and exclusively in connection with the transfer of the property. - High Court's Analysis: - Legal Position: The Court referred to Sections 10, 14, and 23 of the Specific Relief Act, 1963, emphasizing that the mere specification of liquidated damages does not preclude the possibility of specific performance of a contract. - Section 48 Interpretation: Section 48(i) allows deduction of expenditure incurred wholly and exclusively in connection with the transfer of the capital asset. The terms "wholly" and "exclusively" were interpreted to mean that the expenditure must have a proximate and perceptible nexus with the transfer. - Precedents: The Court referred to various precedents, including Sree Meenakshi Mills Limited, The Delhi Cloth and General Mills Co. Ltd., and Commissioner of Income Tax versus Shakuntala Kantilal, to elucidate that expenditure necessary to effectuate the transfer is deductible. - Nexus and Connection: The Court found a close nexus between the payment of ?25,00,000/- and the transfer of the property, considering it as expenditure incurred to effectuate the transfer. The payment was made to clear the impediment posed by the earlier agreement with Anil Kumar Sharma, making it deductible under Section 48(i). - Conclusion: The High Court concluded that ?25,00,000/- paid by the assessee to Anil Kumar Sharma should be treated as an expenditure incurred wholly and exclusively in connection with the transfer of the property and, therefore, allowable as a deduction under Section 48(i) of the Income Tax Act, 1961. Judgment: The appeal was allowed in favor of the appellant-assessee, permitting the deduction of ?25,00,000/- under Section 48(i) while computing long-term capital gains. The Court emphasized that the expenditure must have a direct and proximate link with the transfer of the property to be deductible. The decision was made with a caveat that not all payments under earlier agreements would automatically qualify as deductible unless they meet the criteria of being incurred wholly and exclusively in connection with the transfer.
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