Real income and business expediency: promised construction excluded from capital gains, and shareholder-settlement payment allowed as revenue deduction.

For capital gains purposes, only consideration that has actually accrued in substance can be brought to tax; the promised 18,000 sq. ft. construction never materialised after the later tripartite conveyance, so its value was excluded from the transfer computation. Premium paid to purchase and cancel shares of a rival shareholder group was treated as revenue expenditure because it was incurred to resolve a business-disrupting dispute, secure smooth management, and improve commercial efficiency without creating a capital asset or enduring benefit in the capital field. Both additions were deleted and the assessee obtained relief on each claim.

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Issues: (i) Whether the value of the promised constructed area of 18,000 sq. ft. formed part of the full value of consideration for computing capital gains in the year of transfer, notwithstanding the subsequent tripartite conveyance and non-receipt of that benefit; (ii) Whether the premium paid by the assessee for purchase and cancellation of shares of the warring shareholder group was revenue expenditure allowable as a deduction.

Issue (i): Whether the value of the promised constructed area of 18,000 sq. ft. formed part of the full value of consideration for computing capital gains in the year of transfer, notwithstanding the subsequent tripartite conveyance and non-receipt of that benefit.

Analysis: The capital gains provisions charge tax on profits arising from transfer and require computation with reference to the full value of consideration received or accruing as a result of the transfer. The development agreement originally contemplated monetary consideration and free construction, but the later tripartite conveyance effectively modified the arrangement, and the promised construction never materialised. The subsequent events therefore had a direct bearing on what actually accrued to the assessee. Applying the real income principle, the consideration that never came into existence in substance could not be brought to tax merely because it was mentioned in the earlier agreement.

Conclusion: The value of the proposed constructed area was not includible in the capital gains computation, and the addition was deleted in favour of the assessee.

Issue (ii): Whether the premium paid by the assessee for purchase and cancellation of shares of the warring shareholder group was revenue expenditure allowable as a deduction.

Analysis: The expenditure was incurred to resolve a prolonged shareholder dispute that had impeded the smooth functioning and profitability of the company. The material on record showed that the dispute affected business operations and that the settlement improved the company's working and financial performance. The payment was made to secure peace, smooth management, and continued business efficiency, and did not result in acquisition of a capital asset or an advantage in the capital field. The expenditure was thus incurred wholly and exclusively for business purposes.

Conclusion: The premium paid for purchase and cancellation of shares was revenue in nature and allowable as a deduction in favour of the assessee.

Final Conclusion: Both additions made by the tax authorities were set aside, and the assessee succeeded on the capital gains issue as well as on the deduction claim for shareholder-settlement expenditure.

Ratio Decidendi: For capital gains, only consideration that has actually accrued in substance can be taxed, and for business deductibility, expenditure incurred to remove an obstacle to efficient commercial operations is revenue in nature if it does not create a capital asset or enduring benefit in the capital field.

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