Capital gains deduction fails where sale proceeds used for another entity's debt lack a direct nexus under section 48(1).

Sale proceeds from a capital asset were received in the assessees' personal bank account, placed in fixed deposits, and later said to have been used to settle bank dues of a connected company and firm. On the facts, no direct nexus was shown between the sale consideration and the later one-time settlement, and the repayment claim was traced to unsecured loans that had already been disbelieved in assessment. Payment of another entity's debt could not be treated as deductible expenditure or cost under section 48(1), consistent with the Supreme Court view that discharge of mortgage debt is not an allowable deduction. The claim was rejected and long-term capital gains remained taxable.

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Issues: Whether the sale consideration from the transfer of the property could be excluded from capital gains computation under section 48(1) on the ground that it was utilised to discharge bank dues of the connected company and firm.

Analysis: The property sold was a capital asset and the sale consideration was first received in the assessees' personal bank account, where it was also placed in fixed deposits and interest was earned. The material on record did not establish a direct nexus between the sale proceeds and the later one-time settlement with the bank. The settlement came after the sale, and the amount claimed to have been used for repayment originated from unsecured loans in the books of the company and firm, which had itself been disbelieved in assessment. On these facts, payment towards discharge of another entity's debt could not be treated as an allowable deduction in computing capital gains. The authorities relied on by the assessee did not override the binding Supreme Court view that discharge of mortgage debt is not deductible as cost or expenditure under section 48.

Conclusion: The claim for deduction under section 48(1) was rejected and the addition of long-term capital gains was sustained.

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