Text of Section 48(i)
[1][48. Mode of computation.
The
income chargeable under the head “Capital gains” shall be computed, by
deducting from the full value of the consideration received or accruing as a
result of the transfer of the capital asset the following amounts, namely: -
(i) expenditure incurred wholly and exclusively
in connection with such transfer;]
KEY NOTE
1. Substituted by the Finance Act, 1992, with
effect from 01.04.1993.
Wholly and exclusively
Expenditure incurred wholly and
exclusively in connection with transfer of capital asset is deductible from
full value of consideration. The expression “expenditure incurred wholly and
exclusively in connection with such transfer” means expenditure incurred which
is necessary to effect the transfer.
The main condition that any
expenditure has to fulfill for the purpose of being allowed as a deduction is
that this has to be wholly in connection with the transfer. It cannot be that
there is a small element that is related to the transfer and this leads to the
whole amount being considered for the deduction. There has to be an exclusive
element of the end use which has to be the transfer of the capital asset. So if
there are some vague claims saying that these are incurred for the purpose of
the transfer then they are likely to be disallowed. Since the basic conditions
are known it is important that there is a proper look at all the conditions to see
that they are in line with the requirements.
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.
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. In the absence of any statutory provision, on these
aspects discretion exercised by the assessee who has incurred the said
expenditure must be respected, for interference on subjective basis will lead
to unpalatable and absurd results. As in the case of section 37 of the Act,
jurisdiction of the authorities, Tribunal or Court is confined to investigate
and decide as to whether the expenditure was actually incurred, i.e., the
expenditure was genuine and was factually expended and paid to the third party.
Word ‘connection’ in section 48(i)
Word ‘connection’ in section 48(i)
reflects that there should be a causal connect and the expenditure incurred to
be allowed as a deduction must be united or in the state of being united with
the transfer resulting in income by way of capital gains on which tax has to be
paid. The expenditure, therefore, should have direct concern and should not be
remote or have indirect result or connect with the transfer. Practical and
pragmatic view in the circumstances should be taken to tax the real income,
i.e., the gain.
Deduction of expenditure
Section 48 makes it clear what can
be deducted under section 48(i) is expenses incurred wholly and exclusively in
connection with the transfer.
In case of sale of a house property
Following expenses are deductible
from the total sale price of capital asset:—
(i) Brokerage or Commission paid
for securing a purchaser
This is one of the most common
expenses that is incurred at the time of the transfer due to the fact that in
many cases it is not possible to sell the property or the capital asset without
the help of a broker or an intermediary. There would have to be some payment of
fees to the broker at the time of the transfer of the asset and hence this
would be a part of the total receipt that would have to be reduced in order to
arrive at the final figure.
(ii) Cost of Stamp Papers or
Registration Fees borne by the Vender (Seller)
There are different ways in which
the sale agreement could be structured. At the time of the transfer of the
property there would have to be stamp duty or registration fees that have to be
paid to the government for the change of name and other details in the
property. When this is the case then the next thing to look at is who is going
to bear these charges. It could be that the seller is bearing the charges in
which case the amount can actually be claimed as a reduction from the amount of
the total receipts.
(iii) Travelling Expenses in
connection with transfer (Sale)
It could also be that the
individual who holds the property is living at some other place and hence would
have to travel to the place where the property is located for the purpose of
completing the requirements of sale. This would ensure that there are some
amounts that are actually spent here which would actually be for the purpose of
the transfer process. If this is the case then it would be considered as an
amount that is spent for the property and this can be reduced from the amount
received in the process of calculation of the gains.
(iv) Litigation Expenses for
claiming Enhancement in Compensation
There are different kinds of
expenses that are incurred in the entire process of completing the sale of the
property and there are situations where there might be some expenses incurred
as litigation expenses. This could be for a property where there is a
compulsory acquisition so there is some dispute about the valuation and this
has been incurred in the process of getting a better compensation or for
highlighting a point that has been missed in the calculation. This might also
happen in case there is some dispute over the property valuation with the buyer
and hence this reason has to be taken carefully into consideration. The whole
idea is that the amount should have been spent as a part of the whole process
of transfer.
(v) Where property has been inherited,
expenditure incurred with respect to procedures associated with the will and
inheritance, obtaining succession certificate, costs of executor, may also be
allowed.
(vi) Advertisement cost incurred by the
seller to get buyer.
In case of sale of jewellery
Where jewellery is sold and a
broker’s services were involved in securing a buyer, the cost of these services
can be deducted.
Expenditure allowed under other
heads of income
The expenses that deduct from the
sale price of assets for calculating capital gains are not allowed as deduction
under any other head of the Income Tax, these can be claimed only once. In
other words, any expenditure allowed as deduction under any other heads of
income, i.e. Income from House Property, Profits and Gains of Business or
Profession or Income from Other Sources cannot be allowed as deduction from the
sale price of assets for calculating capital gains.
Compensation paid to related parties to get them vacate the land transferred cannot be allowed as deduction under section 48(i) in computing capital gains
•
Compensation paid to firm owned 100% by assessee and co-owners of land (mother
and sister) and to private company owned 99% by assessee & co-owners for
vacating land transferred and obtaining peaceful possession, cannot be allowed
as deduction under section 48(i) as expenses incurred wholly and exclusively in
connection with such transfer.
• In
respect of payment of compensation to firm & Private company, from the
uncontroverted factual matrix we note that said claim made by the assessee as
deduction under section 48(i) tantamount to diversion of sale proceeds to the
related parties who are none other than the co-owners of the land sold under
the impugned transaction including that by the assessee.
• The
nature of payment which has been claimed to be compensation to the firm and
Private Company, is nothing but compensation made to the self since 99% of the
share/shareholding is with the co-owners including the assessee.
• The
occasion of getting the land vacated will arise only when it is occupied by
another third party which is not so in the present case since here the land is
occupied by the entities/concerns owned and controlled by the co-owners
including the assessee .
•
Further, the observation raised in respect of minority shareholders was only a
possibility. Also, there is no clarity from the material placed on record as to
how the issue relating to minority interest was resolved or were the minority
shareholders also compensated in the similar manner. (Related Assessment year :
2015-16) - [DCIT v. Jayapal Sanjay (2022) 142 taxmann.com 120 (ITAT
Chennai)]
Tax component on sale of shares to be distributed among all sellers even if entire tax was borne by one seller
Assessee and her husband
entered into share purchase agreement to sell her shares in four companies.
Assessee submitted that consideration agreed between parties for sale of its
shares was Rs. 2,70,32,278/- minus the tax component of Rs. 90,74,103/-.
Assessee had agreed to pay tax component as per clause 7(1) of share purchase
agreement. She claimed deduction under ‘capital gains’ on tax component under
section 48. Assessing Officer did not allow deduction on the ground that the
tax component does not fall within the definition of expenditure under section 48(1)
of the Act. Commissioner (Appeals) allowed appeal in part and appeal before
Tribunal, had been dismissed. Assailing orders passed by revenue, assessee
submitted that full value realised by assessee as consideration was amount
excluding tax component, therefore, view taken by revenue was unsustainable.
Held : Section 48 of the Income-tax Act provides for mode of computation in terms of which the income chargeable under the head ‘Capital Gains’ shall be computed by deducting full value of the consideration received. The expenditure incurred and cost of acquisition are deductible. The Revenue’s case is, payment of tax does not fall in these two categories. But in the facts of this case, the total amount realised or in other words, which the appellant got in her hand, is Rs. 1.80 Crores. The deduction is claimed based on the agreement between the parties. A careful perusal of the agreement shows that intention of the parties is clear to the effect that the value of the shares shall be the amount agreed between the parties excluding the tax component. However, the contention urged by assessee that tax component should be distributed among both sellers merits consideration. Therefore, appellant shall be entitled for deduction of only 50% of the tax component proportionate to her share holding. In view of the above, this appeal is allowed in part. [Partly in favour of revenue] – [Smt. Durga Kumari Bobba v. DCIT (2022) 142 taxmann.com 31 (Karn.)]
Upholds the disallowance of sum claimed by Assessee under Section 48(i) on account of land vacation expenses and interest on clearance of encumbrance due to cancellation of the Joint Sum paid to remove encumbrance to a property is an allowable deduction while computing capital gains
Any amount paid for removing
encumbrance to a property without which sale or transfer could not be effected,
is allowable as deduction under section 48(i). Assessing Officer noticed that
in original return of income assessee had offered long term capital gain of Rs.
1.49 crores, however, in revised return of income, assessee had reduced long
term capital gain to Rs. 81.59 lakhs. Assessee explained that subsequent to
sale of property to ‘C’, another party claimed itself as owner of property
sold. Therefore, ‘C’ filed a suit for declaration of title. By virtue of
consent terms approved by High Court, assessee along with other co-owners had
to pay amount to buyer ‘C’ and submitted that, since amount was paid in
connection with transfer of capital asset, it was allowable under section
48(i). Assessing Officer, however, disallowed deduction claimed and computed
long term capital gain accordingly. It was found that undisputedly, payment
made by assessee to ‘C’ was certainly for removing encumbrance and perfecting
title over property sold, otherwise, transaction would have failed. Further,
payment made by assessee was established on record and hence, could not be
disputed. Therefore, amount paid by assessee to ‘C’ was an expenditure in
connection with transfer of a capital asset as per section 48(i) and hence
allowable. [In favour of assessee] (Related Assessment year : 2013-14) –
[Mahesh Pratapsingh Asher v. ACIT (2022) 135 taxmann.com 74 (ITAT Mumbai)]
Assessee as
co-owner sold property and while computing long-term capital gain on impugned
sale transaction claimed deduction under section 48(i) towards interest for
clearance of encumberance on land and payment towards compensation to related
parties which was nothing but compensation made to self as 99 per cent of
shareholding of property was with co-owners including assessee, disallowance
made by Assessing Officer towards claim of deduction was to be upheld
Chennai ITAT
allows Revenue’s appeal, upholds the disallowance of sum claimed by Assessee
under Section 48(i) on account of land vacation expenses and interest on
clearance of encumbrance due to cancellation of the Joint Development Agreement
(JDA), by holding that such expenses tantamount to diversion of sale proceeds
to the related parties; Assessee-Individual, for Assessment year 2015-16, sold
a jointly owned land property at a sale consideration of Rs. 22.11 Cr for his
share of 30.93% and computed the long term capital gain claiming Rs. 14.14 Cr
under Section 48 wherein Rs.11.58 Cr was on account of land vacating compensation
paid to two leaseholders and interest paid on security deposit to Ramaniyam
Real Estates for Rs. 2.55 Cr with respect of clearing the encumbrance owing to
cancellation of the JDA; Revenue disallowed Assessee’s claim under Section 48
which was set aside by CIT(A) ; On Revenue's appeal, ITAT notes that the
entities who were paid compensation for vacating the land, i.e. SAE and BJT are
Assessee's related parties as the Assessee with his mother and sister are
co-owners of the concerned land and held substantial and significant share
i.e., 99% directly or indirectly in the two entities; Observes that the
occasion of getting the land vacated will arise only when it is occupied by a
third party which is not so in the present case; Holds that nature of payment which
has been claimed to be compensation for vacating land and handing over peaceful
possession, is nothing but compensation made to the self; Opines that
Assessee’s claim of payment of compensation for land vacation under Section
48(i) tantamounts to diversion of sale proceeds to the related parties who are
none other than the co-owners of the concerned land, by relying upon
jurisdictional High Court ruling in Smt. D. Zeenath in TCA No. 2582 of 2006
dated 03.04.2019; Notes Assessee’s submission that payment of interest on
security deposit to Ramaniyam Real Estates was for clearance of encumbrance and
explains that, ‘encumbrance’, which is a charge or burden created by transfer
of any interest in a property, cannot be created by mere execution of an MOU,
agreeing to enter into an agreement to sell the property, or even by receipt of
advances or amounts in pursuance of an MOU, and unless by a reason of the
statute no burden on the title of the property which diminishes the value of
the land is created, it shall not constitute any encumbrance; Observes that in
the present facts and circumstances, it is nothing but a ‘self-created
encumbrance’ between the co-owners and Ramanaiyam by way of a JDA and that
there cannot be an encumbrance created between the two parties who have agreed
to transact under a JDA; Points out that nothing is placed on record by the
Assessee to demonstrate the efforts put in by them to fulfil the conditions
under the said JDA, failing which has resulted into an encumbrance as claimed;
Relies on Supreme Court ruling in Sumati Dayal v.
CIT (1995) 214 ITR 801 (SC) held that income tax proceedings are
civil proceedings and the degree of proof required is to be judged by
preponderance of probabilities. Further, the Hon’ble Apex Court in the case of CIT
v Durga Prasad More (1971) 82 ITR 540 (SC) has held that the taxing
authorities were not required to put on blinkers while looking at the documents
produced before them they were entitled to look into the surrounding
circumstances to find out the reality of the recitals made in those
documents....The apparent must be considered as real only it is shown that
there are reasons to believe that the apparent is not the real and that too
taxing authorities are entitled to look into the surrounding circumstances to
find out the reality and the matter has to be considered by applying the test
of human probability.... Science has not yet invented any instrument to test
the reliability of the evidence placed before a court or tribunal. Therefore,
the courts and tribunals have to judge the evidence before them by applying the
test of human probabilities; Observes that
Assessee’s claim is to be examined in the light of real life probabilities
instead of adopting superficial approach, sets aside CIT(A) order and upholds
the disallowance made by Revenue. [In favour of
revenue] (Related Assessment year : 2015-16) – [DCIT v. Jayapal Sanjay
(2022) 197 ITD 720 : 142 taxmann.com 120 (ITAT Chennai)]
Architect’s fees for
quantifying transferable area deductible against sale consideration for land
development rights
Mumbai ITAT allows Assessee’s
appeal, holds architect fees paid to determine the quantum of FSI and area to
be transferred to MCGM and MHADA deductible as transfer expenses in computing
capital gains; Assessee-Company sold development rights in land for Rs.
16 Cr. during Assessment year 2007-08 and claimed Rs.
33,67,200/- on sale of development rights of land
paid as architect fees as deduction which was disallowed by the Revenue in
computing capital gains on transfer of development rights and
was confirmed by CIT(A); ITAT finds that the fees were inevitable and were
paid to determine the FSI available in order to determine the area to be
transferred to MCGM and MHADA in accordance with the development control
regulation without which it would not have been possible to transfer the
development rights; Notes that the CIT(A) also agreed that the fees were inevitable
which was also demonstrated by the Assessee from the copies
of agreement and invoice; Thus, allows Assessee’s claim for
expenditure incurred toward architect’s fees. Assessment Year: 2007-08 – [Standard Industries Ltd. v. DCIT – Date of
Judgement : 28.02.2022 (ITAT Mumbai)]
Property was mortgaged by assessee
after he had acquired property, amount paid by assessee to discharge mortgage
debt by sale of said property could not be treated as cost of acquisition so as
to allow same as deduction under section 48(i)
Mortgage discharge in connection
with property sale. Madras High Court upholds ITAT order and denies deduction under
section 48(i) to assessee-individual with respect to amount paid towards
discharge of mortgage in connection with a property sale during Assessment year
1995-96, holds it as ‘application of income’ over assessee’s claim of ‘diversion
by overriding title’; Assessee along with two other co-owners [in capacity as
guarantor] had offered property as collateral security, however, upon default
by borrower, the property was sold and total sale consideration was paid to the
Bank by the purchaser; Rejects assessee’s stand that since the sale consideration
had been paid towards the discharge of the loan it was actually the cost of
acquisition warranting deduction under section 48, further rejects assessee’s
stand that there was a diversion of the sale proceeds towards redeeming the
interest of the mortgagor; High Court holds that the consideration was not paid
to clear a cloud over the title but was paid to clear the interest or charge
over the property which had been offered as collateral security, therefore,
upholds capital gains taxability in the hands of the assessee and the two
co-owners, relies on Supreme Court ruling in R.M. Arunachalam and V.S.M.R.
Jagadishchandran (Decd.); Further, holds that there was no diversion of sale
proceeds by virtue of overriding title, but on the contrary, there was only a
mere application by the owners themselves of the profits realized on the sale
of land towards the discharge of loan obligations, distinguishes assessee’s
reliance on Bombay High Court ruling in Abrar Alvi,
Shakuntala Kantilal, Supreme Court ruling in Sunil Kinariwala and Kerala High
Court ruling in Thressiamma Abraham. [In favour of revenue] (Related Assessment
year : 1995-96) – [D. Zeenath v. ITO, Nagapattinam (2019) 413 ITR 258 ; 263
Taxman 569 : 105 taxmann.com 298 : [TS-209-HC-2019(MAD)] (Mad.)]
Legal-fees payment for advising
foreign company on transfer of Indian subsidiary’s shares, deductible under
section 48(i)
Mumbai ITAT allows deduction under
section 48(i) for legal/professional fees paid to Accounting/Law firms for
advising/assisting assessee (a foreign co.) in transfer of shares of Indian
subsidiary; While computing long-term capital gain on sale of subsidiary’s
shares, the assessee had claimed deduction of U.S. $13,27,609 towards legal
fees, ITAT notes that the condition precedent for claiming expenditure under
section 48(i), is that it must have been incurred wholly and exclusively in
connection with the transfer of the capital asset;
Holds that the phraseology “in
connection with the transfer of capital asset” used in Section 48(i) is wider
in scope than the expression “for the transfer” and that any expenditure
intrinsically connected to transfer shall qualify for Section 48 deduction,
cites jurisdictional High Court ruling in Shakuntala Kantilal b Kerala High
Court ruling in V. A. Vasumathi, Mumbai ITAT ruling in GIC
Housing Finance Ltd.; Referring to the correspondences between the assessee and
the Advocates/Accounting Firms and the invoices raised, ITAT observes that
services rendered were in relation to advise on sale of entire shareholding of
the Indian Subsidiary, and includes preparation of share sale/purchase
agreement, rendering advise on and preparing necessary closing documentation
including board resolution, share transfer forms, etc. (Related Assessment year
: 2010-11) - [AIG Offshore Systems Services Inc. v. ACIT - Date of Judgement
: 18.01.2019 - (ITAT Mumbai)]
Liquidated damages for cancelling earlier agreement to sell immovable property deductible under section 48(i)
During relevant year, assessee declared long-term
capital gains from sale of immovable property. Assessee had earlier entered
into agreement to sell for sale of said property with ‘A’. Under said agreement
assessee had received certain amount as advance and part payment from ‘A'. Since
said sale transaction did not materialise and assessee sold property
subsequently to another buyer, she had to pay certain amount as liquidated
damages to ‘A’ in terms of earlier agreement to sell. Assessee claimed
deduction of payment of liquidated damages under section 48(i). Assessing
Officer as well as Tribunal rejected assessee’s claim on ground that payment
was not incurred wholly and exclusively in connection with transfer of property
to purchaser. Since there was a close nexus and connect between payment of
liquidated damages and transfer of property resulting in income by way of
capital gains, it had to be treated as expenditure incurred wholly and
exclusively in connection with transfer of immovable property and, thus, it is
held that Rs. 25,00,000/- paid by the assessee would be deducted under clause
(i) to section 48 of the Act while computing capital gains. [In favour of
assessee] (Related Assessment year : 1994-95) – [Kaushalya Devi v. CIT (2018)
404 ITR 136 : 255 Taxman 417 : 92 taxmann.com 335 : [TS-198-HC-2018(DEL)] (Del.)]
Assessee paid a certain sum to confirming
party for nominating buyers to assessee for sale of a land, payment could only
be considered as an expenditure incurred wholly and exclusively in connection
with transfer of property
Assessee entered into an agreement with a party
regarding sale of a property. While computing long term capital gains, assessee
claimed deduction on account of a sum paid to confirming party to said
transaction. Assessing Officer did not accept said claim. The payment has
directly effected by the purchaser is clear from the receipt memo given at page
28 of the paper book. In such circumstances, we are of the opinion that the
payment could only be considered as an expenditure incurred only and
exclusively in connection with the transfer of the property. It was an allowable
one under section 48(i) of the Act. Such addition therefore stands deleted. [In
favour of assessee] (Related Assessment year : 2008-09) – [Vivek Bose v. ITO
.(2015) 152 ITD 745 : (2014) 42 taxmann.com 35 (ITAT Kolkata)]
Expenditure for getting no objection
certificate (NOC) for sale of flat - Allowable under section 48(i)
Assessee owned a flat in housing
cooperative society. During the previous year, the assessee sold the said flat
and in computing capital gains claimed a sum of Rs. 4 lakhs as expenditure
under section 48, being the payment made to housing cooperative society for
getting the NOC from the society for the sale of the flat. The Assessing
Officer held that only a sum of Rs. 25,000 was paid as transfer charges and the
balance of Rs. 3,75,000 was voluntary contribution to the society and, hence,
it was not part of the transaction. He, therefore, disallowed the sum of Rs.
3,75,000. On appeal, the Commissioner (Appeals) confirmed the disallowance.
The memorandum of understanding
[MOU] between the assessee and the buyer of the flat provided a condition that
the assessee had to make the payment of Rs. 4 lakhs as transfer charges to the
society. The letter dated 25.08.1997 written by the assessee to the secretary
of the housing cooperative society also indicated that a cheque of Rs. 4 lakhs
was sent to the society for taking NOC for the sale of the flat. The cheque had
been returned unpaid. Therefore, the society wrote a letter to the assessee on
20.12.1997 indicating that on non-receipt of Rs. 4 lakhs within seven days, the
NOC would be withdrawn. There was another letter from the society dated 25.12.1997
directing the assessee to make the payment of Rs. 4 lakhs immediately on the
receipt of sale proceeds of the flat. The assessee vide his letter dated 02.01.1998
enclosed a DD for Rs. 4 lakhs stating that it was transfer charges against the
sale of flat. All these evidences showed that the society was demanding a sum
of Rs. 4 lakhs transfer charges for issuance of NOC. The Assessing Officer and
the Commissioner (Appeals) did not examine the society so as to find out as to
whether the demand of Rs. 4 lakhs was not in relation to the transfer of flat.
In fact, the authorities did not choose to confront the society but merely
relied on the accounting entry passed by it to adjust Rs. 4 lakhs in its books
of account. So far as the assessee was concerned, it was a consideration for
obtaining NOC from the society. The claim of the deduction under section 48
would depend on what was the nature of the transaction between the assessee and
the society and not in what manner the society finally adjusted the sum in its
books of account. Hence, the sum of Rs. 4 lakhs was a necessary expenditure for
transfer of flat and, therefore, allowable under section 48. [In favour of
assessee] (Related Assessment year : 1998-99) - [Damodar G. Nagalia v. ACIT (2007)
12 SOT 599 (ITAT Mumbai)]
If without removing any encumbrance, sale or transfer could not be effected, amount paid for removing that encumbrance will fall under clause (i) of section 48(1)
Section 48(1), as it stood
in the assessment year 1992-93, while providing for computation of capital
gains permitted in clause (i), deduction of the ‘expenditure incurred wholly
and exclusively in connection with such transfer’. The expression ‘in
connection with such transfer’ is wider than the expression ‘for the transfer’.
Any amount, the payment of which is absolutely necessary to effect the transfer
will be an expenditure covered by clause (i) of section 48(1). In other words,
if without removing any encumbrance, sale or transfer could not be effected,
the amount paid for removing that encumbrance will fall under clause (i) of
said section 48(1).
In the instant case, the
amount was received out of the sale of assets of both the firms under orders of
the High Court subject to meeting of the liability of the bank. Unless that
liability was met, the transferee could not derive any title. In other words,
the sale consideration receivable by the assessee was less the liability of the
bank. Thus, meeting the liability of one of the firms, when the entire assets
were being sold, was an absolute necessity to effect the transfer. In other
words, it was an encumbrance without removing which the sale or transfer could
not be effected and the amount spent for removing that encumbrance would
definitely attract section 48(1)(i). The sale could not be effected without
meeting the liability, as it appeared from the different orders passed by the
High Court in the latter suit.
But the orders passed by
the High Court directing the sale of the assets of the two firms and confirmation
thereof were staring on the face of the inference drawn by the Commissioner
(Appeals). Thus, the liability met by the assessee towards the dues of the bank
was an expenditure incurred wholly and exclusively in connection with the
transfer. The criteria is the perfection of title in order to effect the sale.
In the instant case, without removing the liability of the bank, the title of
the purchaser could not be perfected. Having regard to the facts and
circumstances of the case, and the position in law, the meeting of the
liability of the bank relating to the assets of ‘GS’ was an expenditure
incurred wholly and exclusively in connection with the transfer. - [In favour of the assessee] (Related Assessment
year : 1992-93) – [Gopee Nath Paul & Sons v. DCIT, Special Range (2005)
278 ITR 240 : 198 CTR 116 : 147 Taxman 629 (Cal.)]
Assessee sold a house
property - While computing capital gains assessee deducted amount paid by her
to housing society towards repair funds and charity in connection with transfer
- Assessing Officer disallowed claim holding that it was voluntary contribution
and could not be regarded as transfer fee - Transfer of capital asset itself
could not have come about in absence of such payment, irrespective of
nomenclature being given to such payment, and, thus, it was an allowable
expenditure incurred by assessee wholly and exclusively in connection with such
transfer
During the relevant year,
the assessee sold a house property. While computing the capital gains, the
assessee deducted the amount paid by her to the society in connection with the transfer.
The Assessing Officer disallowed the claim holding that the voluntary
contribution towards repair funds could not be regarded as transfer fee.
However, on appeal, the Commissioner (Appeals) deleted the disallowance. On
revenue’s appeal :
Held : The transfer of the
capital asset itself could not have come about in the absence of such payment,
irrespective of the nomenclature being given to such payment. It was definitely
an allowable expenditure incurred by the assessee wholly and exclusively in connection
with such transfer and the payment should be deducted while computing the
income from capital gains in accordance with section 48(1).
It was not at all the case
of the department that the transfer of the capital asset in question would have
taken place or could have taken place if the said amount had not been paid by
the assessee. Moreover, it would also be against common behaviour of the
assessee to make unnecessary payment of such huge amount, if she was under no
compulsion to do so to get the transfer effected. The facts are self-speaking
and it is an un-rebutted practice that amounts are to be disbursed for
effective transfer of a house. The appeal was dismissed.
(Related Assessment year : 1996-97) –
[Addl. CIT v. Mrs.
Madhur I. Teckchandaney (2005) 93 ITD 65 : 93 TTJ 721 (ITAT Mumbai)]
Assessees sold their
ownership rights in a property and claimed deduction of certain amount paid to
their sister for vacating portion of property occupied by her peacefully - Amount
paid to sister was a deductible expenditure from sale proceeds for computation
of capital gains
In respect of payment
made to the sister, the lower authorities had banked upon the will, dated 03.12.1978,
which provided that the sister would have no right in the impugned house
property. She was given another flat, which was tenanted. According to them,
once she had no right in the will, she had no right to receive any
compensation. Besides, she had signed an affidavit before the High Court to
that effect at the time of taking probate. There were many other important
facts attached to the whole episode. Since the other house given to the sister
was tenanted, and since beginning she was residing with other family members in
the house in question and as the period of stay was more than 12 years there
was a possibility that she could have claimed right to property by way of
adverse possession in case of a dispute. Her stay in the house was not doubted.
The assessees agreed to sell the house with a condition that the same could be
sold in vacant possession. The will was not probated; to effect the sale, the same
was necessary. The brothers anticipated the situation and a family settlement
was arrived at providing that the sister could be given certain amount out of
the sale proceeds of the house being sold for vacating the portion of the
property occupied by her peacefully. The sister subsequently bought another
flat out of the money received and shifted there. After family settlement,
probate was applied in the course of which the sister signed an affidavit
agreeing to the terms of probate according to will. The swearing of affidavit
on the part of the sister could not be questioned as she had the support of
family settlement, which was duly executed. She did her part of performance in
probate proceedings as agreed in family settlement terms. There was a strong possibility
that the sister because of her having possession of portion of the house and
family settlement, constituted an encumbrance on the property in question and,
therefore, any payment given to clear the same was a deductible expenditure
from sale proceeds for computation of capital gains. Therefore, the assessees
were entitled to reduce the amount paid to the sister in their respective hands
in that behalf. [In favour of assessee] (Related Assessment
year : 1994-95) – [Ketan Bolinjkar v. ACIT (2004)
2 SOT 868 (ITAT Mumbai)]
Amount paid for removing
encumbrance in order to effect transfer of capital asset, deductible under
section 48(i) while computing capital gain
The assessee agreed to sell a plot of land to a
company. A dispute arose between them, as a consequence of which the assessee agreed
to pay certain amount as compensation to the company. The assessee then sold
the same plot to another person and claimed that the amount paid as
compensation to the company was liable to be deducted while computing capital
gain arising on such sale. Bombay High Court ruled in favor of the assessee,
holding that the amount was deductible under section 48. High Court held that any amount, the payment of which is absolutely necessary to effect the
transfer (of a capital asset), would be an expenditure covered by section
48(i). In other words, if without removing any encumbrance including the
encumbrance of the type involved in this case, sale or transfer could not be
effected, the amount paid for removing that encumbrance will fall under clause
(i). [In favour of assessee] (Related Assessment year
: 1968-69) - [CIT v. Smt. Shakuntala
Kantilal (1991) 190 ITR 56 : 58 Taxman 106 : [TS-6-HC-1991(BOM)](Bom.)]
Expenditure incurred on payment of
legal fees, brokerage, commission, etc. in connection with the transfer was
allowable as deduction under section 48
Petitioner is a HUP and owns a
house named ‘Roop Mahal’ at Mount Abu. Most of it was in use and occupation for
the residence of the members of the family. This property was sold along with
the furniture and fixtures to the State Bank of Bikaner and Jaipur on 27.08.1976,
for a sum of Rs. 2,20,000. The petitioner incurred a sum of Rs. 2,520 in
travelling and other legal expenses and claimed as deduction under section 48(i)
of the Act, but the same was disallowed by the ITO. On appeal, the Commissioner
(Appeals) partly accepted the contention of the petitioner and allowed the
relief for Rs. 550 out of expenditure on legal fee but did not allow other
reliefs. On further appeal, the Tribunal confirmed appellate order allowing
legal expenses but not other item. On application under section 256(2), held
that none of the questions mentioned by the assessee were questions of law
arising out of the Tribunal’s order. Therefore, the Tribunal was justified in
refusing the assessee’s application for reference. - [Sah Roop Narain v. CIT
(1987) 32 Taxman 453 (Raj.)]
Expenditure incurred in conducting
land acquisition reference case before the Civil Court for enhanced
compensation is expenditure incurred wholly and exclusively in connection with
the transfer of capital asset and is an allowable deduction
Assesses owned certain agricultural
land situated within municipal area. By virtue of the Finance Act, 1970 said
land was brought under definition of capital asset with effect from 01.04.1970.
Government acquired that land and it was duly transferred during accounting
period relevant to assessment year 1973-74. Amount of solatium received by assesses formed
pari of profits or gains arising from transfer of capital asset and had to be
taken into account in computation of capital gains. Expenditure incurred by
assessee in conducting land acquisition reference case before sub-Judge for
getting enhanced compensation was an allowable deduction under section 48. Compensation
received by assessee for injurious effect on account of severance to its
remaining extent of land was not to be taken into account in computation of
capital gains. For purposes of computation of capital gains, cost of
acquisition of said land was to be taken as per section 55(2) not as on 01.04.1970
when said land became a capital asset but as on 01.01.1954
The cost of acquisition of a
capital asset within the meaning of section 48 is not the cost on the date on
which the asset transferred became a capital asset. The incidence of levy under
section 45 is on the capital gains to be computed in the manner provided for in
section 48 read with section 55(2). The deduction permissible under section 48
is the cost of acquisition of the capital asset transferred for consideration,
whether or not it was a capital asset on the date of its acquisition. What is
taxable under section 45 are the profits or gains arising from the transfer of
a capital asset and the charge of income-tax on the capital gains is as income
of the previous year in which the transfer took place. It is clear from
sections 45 and 48 that exigibility of capital gains to tax is not on the basis
that what was transferred was a capital asset on the date of its acquisition,
but on the basis that the subject-matter of transfer is a capital asset within
the meaning of the Act. Accordingly, it could not be said that the cost of
acquisition of the land should be taken as on the date on which the property
transferred became a capital asset.
So far as the solatium amount was
concerned, even though solatium is an extra payment provided for under the Land
Acquisition Act for the reason of the compulsory nature of the acquisition, it
is nevertheless compensation and forms part of the consideration received or
accruing as a result of the transfer by way of acquisition of a capital asset
within the meaning of section 48. Hence, the solatium received by the assessee
as a result of the transfer of the capital asset and forming part of the
profits or gains arising there from was exigible to tax under section 45.
In view of the decision of the
instant Court in CIT v. Dr. P. Rajendran (1981) 127 ITR 810, in the
present case, the Tribunal was right in deducting the expenditure incurred by
the assessee before the sub-Judge for getting enhanced compensation in
computing the capital gains.
The compensation for severance, for
the reason that the acquisition had injuriously affected the property other
than the property acquired, could not be treated as part of the consideration
received or accrued as a result of the transfer of the capital asset. The
compensation for severance was by way of damages for injurious effect of other
land belonging to the assessee and was not related to the transfer of the
capital asset. This could not, therefore, be considered for computation of
capital gains. - [CIT v. M. Subaida Beevi (1986) 160 ITR 557 : 57 CTR 324 :
(1987) 30 Taxman 50 (Ker.)]
Amount paid to mother having right
of residence in the property, for obtaining relinquishment of such right was deductible
under section 48(i)
A property was allotted to the
assessees, who were brothers, under a deed of partition. The partition deed
conferred a right of residence in the property in favour of the mother of the
assessees. Subsequently, the property was sold. The assessees claimed deduction
of a certain sum on the ground that they had paid this amount to their mother for
relinquishment of her right of residence in the property sold, in order to
obtain a fair and reasonable price. The ITO allowed the assessee’s claim but,
acting under section 263, the Commissioner set aside the ITO's order. The
Tribunal, however, held that the money received by, the mother was for
extinguishment of her right of residence in the property and that it could not
be included in the computation of capital gains by the assessees. It,
therefore, allowed the assessee's claim. On application under section 256(2) :
Held : When the interest of the
mother in the property had been purchased by getting a relinquishment for a
certain consideration, the said sum could not be taken to be a part of the
consideration received by the assessees in respect of their interest in the
property. The payments made to the sons towards their interest in the property
alone could be taken for the purpose of computation of the capital gains. The
Tribunal was, therefore, right in its conclusion that the sum paid to, the mother
should be excluded in computing capital gains in the hands of the assessees. Accordingly,
there was no justification to direct a reference in this case. The reference
petitions are, accordingly, rejected. - [CIT v. Soundararajan (CV) (1984)
150 ITR 80 (Mad.)]
Expenditure in connection with
transfer need not necessarily to have been incurred prior to passing of title -
Expenditure incurred in litigation for enhancement of compensation before civil
courts could be regarded as expenditure wholly and exclusively incurred in
connection with transfer of assessee’s property
It is not necessary that the
expenditure must have been incurred prior to the passing of the title. It is
immaterial whether it was incurred prior or subsequent to the transfer. What is
important is, it must be incurred and exclusively in connection with or in
relation to the transfer.
The words “in connection with” used
in section 48(i) were very wide in their ambit. There was, thus, no warrant for
importing a restriction that to qualify for deduction the expenditure must
necessarily have been incurred prior to the passing of title. The crucial test
was whether the expenditure was incurred wholly and exclusively in connection
with the transfer and it was immaterial whether it was incurred prior or subsequent
to the passing of title. Further, by virtue of the definition contained in
section 2(47), the expression “transfer” would include the compulsory
acquisition of a capital asset under any law. Hence, the compulsory acquisition
of property under the Land Acquisition Act, 1964, had to be treated as a “transfer”
for computing capital gains. The fixation of the quantum of consideration for
the transfer was finally effected only by the decision rendered by the civil
court. Such fixation formed an integral part of the process of transfer by way
of compulsory acquisition provided by the Land Acquisition Act. The Tribunal
was, therefore, right in holding that the expenses incurred by the assessee in
his litigation before the civil courts to claim enhanced compensation for the
compulsory acquisition of his property was an expenditure incurred wholly and
exclusively in connection with its transfer. - [CIT v. Dr. P. Rajendran (1981)
127 ITR 810 : 20 CTR 364 : 5 Taxman 311 (Ker)]
Vague claim for expenses is not
allowable
In the case of B. N. Pinto, it was
observed that what can be deducted under section 48(i) is expenses incurred
wholly and exclusively in connection with the transfer. The damages for mental
worry and suffer in on account of wrongful withholding and detention of her
property cannot, by any stretch of imagination, be said to be expenses incurred
wholly and exclusively in connection with the transfer. The claim in respect of
lawyer’s fees is also indefinite and vague and is not specific that it was in
connection with the transfer, like, for example, drafting of the deed or such
purpose intimately connected with the transfer. Similarly, regarding the
travelling expenses, it is not specific that it was in connection with the
transfer.
Therefore, the nature of expenses
as represented by the assessee would not bring them within the ambit of section
48(i) of the Income-tax Act, 1961, so as to be a permissible deduction. We,
therefore, answer the question in the affirmative and against the assessee,
i.e., that the Tribunal was justified in not deducting Rs. 41,517 while
computing the capital gains.” - [B. N. Pinto v. CIT (1974) 96 ITR 306 (Mys)]
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