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TMI Blog2018 (4) TMI 1137X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - Income Tax Appeal No. 600/2004 - - - Dated:- 20-4-2018 - MR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for transferring the property. To this extent there is no lis and dispute between the assessee and the Revenue. 4. The dispute relates to deduction of ₹ 25,00,000/- paid by the assessee to Anil Kumar Sharma, with whom the assessee had entered into an earlier agreement to sell dated 10th April, 1989 for sale of the property for ₹ 15,00,000/-. Under the said agreement, the assessee had received ₹ 7,50,000/- as advance and part payment from Anil Kumar Sharma. As per the agreement to sell and mutual agreement the assessee had paid ₹ 25,00,000/- on 16th December,1993 to Anil Kumar Sharma for foregoing his right and claim under the agreement dated 10th April, 1989. ₹ 7,50,000/- was refunded by the purchaser by cheque to Anil Kumar Sharma and reduced from payment of ₹ 55,00,000/- to be paid to the assessee. 5. The assessee had treated the payment of ₹ 25,00,000/- to Anil Kumar Sharma as expenditure incurred wholly and exclusively in connection with transfer under Section 48 (i) of the Act. In the alternative, it was submitted that the expenditure was incurred for improvement of the asset and was deductible under Section 48 (ii) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer of property and, therefore, should be reduced from the full value of the consideration while computing capital gains. 8. Both the assessee and Revenue preferred appeals before the Tribunal. Tribunal held that Section 48 of the Act permits deduction against sale consideration in three situations. Firstly, towards cost of acquisition; secondly on account of cost of improvement of the property and thirdly, on account of expenditure incurred wholly and exclusively in connection with transfer of property. ₹ 25,00,000/- was not a part of cost of acquisition and not paid by way of cost of improvement. Payment of ₹ 25,00,000/- to Anil Kumar Sharma, it was held, was personal liability of the assessee and not attached to the capital asset sold and, therefore, it cannot be held that the expenditure incurred was wholly and exclusively in connection with the transfer of property. Reference was made to the agreement to sell dated 4th November, 1993, which did not refer to the agreement with Anil Kumar Sharma or liability to pay liquidated damages and had stated that the property was to be transferred free from all encumbrances. Reliance placed by the assessee on R.M. Aruna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 3, 7 and 8 of the said agreement are also relevant and read as under:- 3. That the First party shall execute a proper Sale Deed in favour of Second party and shall deliver the vacant and peaceful possession to the Second party within a reasonable time. The second party shall be entitled for liquidated damages of ₹ 25 lakhs if the Sale Deed is not executed within a period of three years from the date of this Agreement. xxx 7. That the First party ensures the Second party that in case of failure to execute a proper Sale Deed and failure to hand over vacant and peaceful possession to the Second party, the Second party shall be entitled to receive liquidated damages of ₹ 25,00,000/-. The execution of Sale Deed and handing over of the vacant and peaceful possession into take place within a period of 3 years from the execution of this Agreement. 8. That the First party further assures the Second party and shall indemnify the Second party in case of any defect is found the title of the First party or if there is any creation of any encumbrance and defect found after execution this Agreement, the Second party shall be entitled to claim any loss besides liq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be adequately relieved by compensation in money; and (ii) that the breach of a contract to transfer movable property can be so relieved except in the following cases- (a) where the property is not an ordinary article of commerce, or is of special value or interest to the plaintiff, or consists of goods which are not easily obtainable in the market; (b) where the property is held by the defendant as the agent or trustee of the plaintiff. xxx 14. Contracts not specifically enforceable.- (1) The following contracts cannot be specifically enforced, namely:- (a) a contract for the non-performance of which compensation in money is an adequate relief; (b) a contract which runs into such minute or numerous details or which is so dependent on the personal qualifications or volition of the parties, or otherwise from its nature is such, that the court cannot enforce specific performance of its material terms; (c) a contract which is in its nature determinable; (d) a contract the performance of which involves the performance of a continuous duty which the court cannot supervise. (2) Save as provided by the Arbitration Act, 1940 (10 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formance of the contract and not for the purpose of giving to the party in default an option of paying money in lieu of specific performance. (2) When enforcing specific performance under this section, the court shall not also decree payment of the sum so named in the contract. 12. The afore quoted Sections were interpreted in M.L. Devender Singh and Ors. versus Syed Khaja, (1973) 2 SCC 515 , to hold that it was not the legislative intent that mere proof that a sum of money was specified as liquidated damages and penalty for breach would be enough to prove that the contract for transfer of immovable property cannot be specifically enforced and could be adequately compensated by specified damages or penalty. This, it was observed, would make the provisions of Section 23 of the Act meaningless. Thus, mere specification of damages or penalty in case of breach in order to compel performance of the contract would not be a good defense to a prayer for specific performance. It was held as under:- 15. We think that Section 23 of the Act of 1963 contains a comprehensive statement of the principles on which, even before the Act of 1963, the presence of a term in a contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecific performance of the other alternative of the contract. 17. Sir Edward Fry pointed out that the distinction between a strict penalty and liquidated damages for a breach of contract was important in common law where liquidated damages were considered sufficient compensation for breach of contract, but, sums stipulated by way of penalty stood on a different footing. He then said: But as regards the equitable remedy the distinction is unimportant; for the fact that the sum named is the amount agreed to be paid as liquidated damages is, equally with a penalty strictly so called, ineffectual to prevent the court from enforcing the contract in specie. 18. The equitable principles which regulated the grant of specific performance by the separate Court of Equity which existed in England at one time have been given statutory form in India. It is, therefore, immaterial that the stipulated payment under the terms of the contract under consideration before us could be viewed as one for payment of liquidated damages. The question would still remain whether the courts are relieved by the agreement between the parties of the duty to determine, on the facts of a particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause (i) in Section 48 should be given the same meaning as used in Section 37 of the Act, except that expenditure may be also capital in nature. Expenditure would primarily connote and has the meaning of spending or paying out. In a given case, it may also cover the amount of loss, which has gone out of the assessee's pocket. Settlement of a claim and payment made can amount to expenditure. Again the words wholly and exclusively used in Section 48 are also to be found in Section 37 of the Act and relate to the nature and character of the expenditure, which in the case of Section 48 must have connection i.e. proximate and perceptible nexus and link with the transfer resulting in income by way of capital gain. The word wholly refers to the quantum of expenditure and word exclusively refers to the motive, objective and purpose of the expenditure. These two words give jurisdiction to the taxing authority to decide whether the expenditure was incurred in connection with the transfer. The expression wholly and exclusively however, does not mean and indicate that there must exist a necessity or compulsion to incur an expense before an expenditure is to be allowed. Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, (1964) 53 ITR 140 (SC) that these are words of a wide range and scope and much broader than the expression for the purpose of earning profit . It may include many other acts incidental to carrying on business. 16. In The Delhi Cloth and General Mills Co. Ltd., Delhi versus The Commissioner of Income Tax, New Delhi, (1980) 125 ITR 96 (Delhi), donation to a political party was disallowed as business expense. However, it was observed that payment for political purposes could be for business purposes where link between the trade and payment was established. It was clarified that that expenditure incurred voluntarily but wholly and exclusively for the expender's trade in given circumstances would be permissible deduction even though it ensures to some extent benefit to a third party. In Commissioner of Income-Tax, Delhi VIII versus Shakuntala Rajeshwar, (1986) 160 ITR 840 (Delhi) payment made to tenant to vacate was held as incurred to effectuate the transfer of immovable property and therefore incurred wholly and exclusively in connection with the transfer. In Smt. Sita Nanda versus Commissioner of Income Tax, [2001] 251 ITR 575 (Del.) had held the payment made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessees under s. 48 of the Act. The claim was disallowed by the ITO, but his decision was reversed on appeal by the Tribunal. The claim arose in the following circumstances, having a bearing on the sales of the assessees' properties. The facts are not in dispute. When the assessees entered into an agreement for the sale of the properties in question, there were tenants in occupation of those properties. The purchasers, who had entered into the agreement of purchase insisted that the assessees should render to them vacant possession of the properties. In other words, this was one of the conditions of the conveyance. The assessees had, therefore, to arrange to vacate the tenants in occupation of the properties, so as to render vacant possession to the purchasers in terms of the agreement of sale. It appears from the statement of case, that there were two tenants, M/s. Dunlop India Ltd. and M/s, Harrison and Company. They had to be given ₹ 9,500 in all as consideration for their agreeing to vacate the properties. This amount was paid and the tenants vacated the properties, and in turn vacant possession was rendered by the assessee to the purchasers. In the assessment to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim of A.M. Buhari, the money was received by the assessee in connection with the transfer of the hotel undertaking and it would form part of sale consideration. However, since the money was paid by the assessee-company, it would also constitute an expenditure wholly and exclusively in connection with the transfer. In the case of payment of ₹ 50,000, the same analogy would apply. In so far as the litigation expenditure of a sum of ₹ 16,000 is concerned, we hold that the Appellate Tribunal was right in holding that the litigation expenditure was also incurred wholly and exclusively in connection with the transfer and thus, it was deductible. Reference was also made to Commissioner of Income Tax versus Abrar Alvi, [2001] 247 ITR 312 (Bom.). In the said case, demand of ₹ 2 lacs made in respect of the former transaction was allowed as a deduction holding that there were impediments against the transfer by way of litigation and unless the amount were paid, litigation would not have been settled enabling the assessee to transfer the property in favour of the assessee giving up clear title and acknowledgement. Similar view has been taken by the Calcutta High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chalam (supra) question arose whether estate duty paid on inheritance of the immovable property, which was subsequently sold, could be allowed as a deduction while computing capital gains. The contention of the assessee was that Section 74(1) of the Estate Duty Act creates a first charge on the immovable property of the deceased for the purpose of securing payment of estate duty. The contention was rejected on the ground that estate duty paid on inheritance by the assessee on the property, which was subsequently sold, cannot be treated as cost of acquisition or cost of improvement. Referring to Section 53 of the Estate Duty Act, it was observed was a liability of the assessee as the accountable person, which was personal but limited to the assets of the deceased actually received or which might have been received by the accountable person. Section 74(1) of the Estate Duty Act cannot be construed as a creating interest in the property, i.e., the charge, for the provision was related to the matter of recovery of estate duty and that Revenue had priority over other liability of the accountable persons. Provision had incorporated principle of precedence over claim of the mortgagee. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owner had mortgaged the property and the assessee and his coowners cleared off the mortgage so created, it could not be said that they incurred any expenditure by way of effecting any improvement to the capital asset that was originally purchased by the previous owner. This decision has been followed in subsequent decisions of the High Court in Salay Mohamad Ibrahim Sait v. ITO [(1994) 210 ITR 700 (Ker)] and K.V. Idiculla v. CIT [(1995) 214 ITR 386 (Ker)]. A contrary view has been taken by the Gujarat High Court in CIT v. Daksha Ramanlal [(1992) 197 ITR 123 (Guj)]. In taking the view that in a case where the property has been mortgaged by the previous owner during his lifetime and the assessee, after inheriting the same, has discharged the mortgage debt, the amount paid by him for the purpose of clearing off the mortgage is not deductible for the purpose of computation of capital gains, the Kerala High Court has failed to note that in a mortgage there is transfer of an interest in the property by the mortgagor in favour of the mortgagee and where the previous owner has mortgaged the property during his lifetime, which is subsisting at the time of his death, then after his deat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was being transferred free from all encumbrances and did not whisper or refer to the contents of the first agreement to sell or liability to pay Anil Kumar Sharma. There was nothing in the agreement to sell dated 4th November, 1993 that the said transfer could not be affected till payment of ₹ 25,00,000/- to Anil Kumar Sharma and, therefore, the liability was personal to the assessee and not attached to the property. Accordingly, the decision in the case of Shakuntala Kantilal (supra) was distinguishable for in the said case the payment was absolutely necessary to affect the transfer and, therefore, was an expenditure incurred allowable as a deduction. 24. The words wholly and exclusively require and mandate that the expenditure should be genuine and the expression in connection with the transfer require and mandate that the expenditure should be connected and for the purpose of transfer. Expenditure, which is not genuine or sham, is not to be allowed as a deduction. This, however, does not mean that the authorities, Tribunal or the Court can go into the question of subjective commercial expediency or apply subjective standard of reasonableness to disallow the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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. However, 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. In other words, 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. 27. Aforesaid ratio and findings should not be interpreted to mean that wherever an assessee has paid an amount under an earlier agreement-to-sell in terms of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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