Cost of acquisition can include payments made to cure title defects and clear prior contractual claims in capital gains computation.

Expenditure incurred to remove a defect in title or to clear an outstanding contractual claim that impedes transfer can form part of the cost of acquisition for capital gains purposes under section 48 of the Income-tax Act, 1961. Here, payment made under an arbitration award arising from breach of an earlier transfer agreement was treated as having been incurred to perfect transferable ownership and remove the impediment created by the prior claim. The deduction was therefore allowable in computing capital gains, and the disallowance was set aside in favour of the assessee.

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Issues: Whether the amount paid under the arbitration award for breach of the prior transfer agreement was deductible while computing capital gains as expenditure incurred wholly and exclusively in connection with the transfer or as cost of acquisition under section 48 of the Income-tax Act, 1961.

Analysis: The assessee had entered into an earlier agreement to transfer the property and had received advance consideration. The subsequent arbitration award arose out of breach of that agreement and directed payment of damages, compensation and costs. The Tribunal held that the existence of the prior agreement and the assessee's interest in the property were not disproved by any cogent evidence. Relying on the principle that where title is defective, incomplete or imperfect, the expenditure incurred to make the title complete and perfect can form part of the cost of acquisition, the Tribunal concluded that the payment was incurred to clear the impediment created by the prior contractual claim and was deductible in capital gains computation.

Conclusion: The deduction was allowable under section 48 of the Income-tax Act, 1961 and the disallowance was set aside in favour of the assessee.

Ratio Decidendi: Expenditure incurred to remove a defect in title or to acquire the outstanding interest necessary to perfect transferable ownership is deductible as cost of acquisition for capital gains purposes under section 48 of the Income-tax Act, 1961.

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