By TIOL News Service

NEW DELHI, APRIL 24, 2018: THE issue is - Whether when there is a clear connect between the expenditure incurred and the transfer of property to the purchaser, such expenses are allowable deduction u/s 48(i) for the purpose of LTCG tax. YES IS THE ANSWER.

Facts of the case:

The assessee an Individual, Kaushalya Devi, since deceased was represented by her legal representative. The assessee had filed return for relevant AY and declared long term capital gains of Rs. 5,42,000/- from sale of certain immovable property. The assessee had purchased the property on 1st August, 1971 for Rs.30,000/-. The property was sold by a tripartite agreement to sell dated 4th November, 1993 amongst the purchaser who had paid Rs.45,00,000/- to the tenant to vacate the property and transfer possession, and Rs.55,00,000/- to the assessee for transfer of title and ownership rights in the property. Rs.55,00,000/- received by the assessee was treated as the sale consideration for transferring the property.

The dispute was relating to deduction of Rs. 25,00,000/- paid by the assessee to Anil Kumar Sharma, with whom the assessee had entered into an earlier agreement to sell the property. Under the said agreement, the assessee had received Rs.7,50,000/- as advance and part payment from Anil Kumar Sharma. As per mutual agreement the assessee had paid Rs.25,00,000/- to Anil Kumar Sharma for foregoing his right and claim under the agreement. Rs. 7,50,000/- was refunded by the purchaser by cheque to Anil Kumar Sharma and reduced from payment of Rs. 55,00,000/-, being actual sale consideration received by assessee. The assessee had treated the payment of Rs.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.

During assessment the AO held that Rs. 25,00,000/- paid as liquidated damages could not be allowed as a deduction for computation of capital gains as this payment was not incurred wholly and exclusively in connection with the transfer of the property to the purchaser. The amount paid was not towards cost of improvement or to remove an encumbrance. The AO applied Section 51 in respect of Rs. 7,50,000/- received from Anil Kumar Sharma in the FY 1989-90 to re-work the indexed cost of acquisition which was reduced from Rs.17,08,000/- to Rs.9,58,000/-. On appeal, reduction of cost of acquisition by Rs. 7,50,000/- by the AO by applying Section 51 of the Act was upheld by CIT(A). The CIT(A) accepted the contention of the assessee that payment of Rs.25,00,000/- was in connection with the transfer of property and, therefore, should be reduced from the full value of the consideration while computing capital gains. Both the assessee and Revenue preferred appeals before the Tribunal. The tribunal held that the amount of Rs. 25,00,000/- paid by the assessee to Anil Kumar Sharma for non-fulfillment of first agreement to sell was not incurred in connection with the transfer of property and, therefore, could not be deducted from the sale consideration for computing long term capital gains. Aggrieved assessee filed appeal before the High Court. Tribunal also held that Rs. 7,50,000/- could not be deducted from cost of acquisition u/s 51 of the Act. But this issue was not under challenge before High Court.

High Court held that,

++ 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 expenditure on the ground that it should not have been incurred or was unreasonably large. Tribunal and Courts cannot decide commercial expediency by putting themselves in the arm chair of the assessee to examine and consider whether they would have or the assessee should have incurred the said expenditure including the quantum having regard to the circumstances. Excessive expenditure cannot be disallowed when it is "wholly and exclusively" in connection with the transfer, on the ground that prudence did not require the assessee to incur the expenditure. Disallowance on such grounds must be specified and provided by the statute;

++ in case of Commissioner of Income Tax versus Abrar Alvi, demand of Rs. 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 Court in Commissioner of Income Tax, Kolkata-XI versus Satyabrata Dey, wherein the assessee was allowed deduction of Rs.72 lacs paid pursuant to an award to a third party with whom the assessee had entered into agreement to sell for transfer of flats. Calcutta High Court followed the judgment of the Bombay High Court in Shakuntala Kantilal and Madras High Court in Bradford Trading Company Private Limited;

++ assessee had always stated that the purchaser was aware of the agreement to sell with Anil Kumar Sharma and had directly paid Rs.7,50,000/- by way of cheque to him. The assessee and Anil Kumar Sharma had jointly located the purchaser, who had agreed to pay total consideration of Rs. 1 crore, which included Rs. 45,00,000/- to be paid to the tenant and Rs. 55,00,000/- to be paid to the assessee. Rs. 25,00,000/- was paid by the assessee to Anil Kumar Sharma vide cheque dated 16th December, 1993, which is after the agreement to sell dated 4th November, 1993. The assessee has also placed on record copy of the agreement dated 16th December, 1993 with Anil Kumar Sharma with regard to payment of liquidated damages as per the settlement. Anil Kumar Sharma was a signatory as a witness to some of the documents executed in favour of the purchaser at the time of transfer;

++ there was a close nexus and connect between the payment of Rs. 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 Rs.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, Rs. 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 Rs.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 Rs.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. Hence substantial question of law is passed in favour of the assessee and against the Revenue. Rs. 25,00,000/- paid by the assessee would be deducted under clause (i) to Section 48 of the Act while computing capital gains.

(See 2018-TIOL-771-HC-DEL-IT)