Service charges under family arrangement treated as allowable transfer-related expenditure, not diversion by overriding title.

Service charges paid under a family arrangement were examined for genuineness, overriding title, and deductibility in computing capital gains. The Tribunal treated the mother's agreement as valid and operative in its second part when the contemplated outright sale did not occur, and accepted that the assessee inherited the related obligation. It found the compensation first accrued to the assessee, so the later payment was application of income rather than diversion by overriding title, but also concluded that the amount was genuinely incurred under a valid obligation in connection with the transfer proceedings and was therefore allowable as expenditure connected with the transfer.

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Issues: Whether the service charges paid under the family arrangement were a bogus device or a genuine contractual liability, whether the payment amounted to diversion of income by overriding title, and whether the amount was deductible while computing capital gains as expenditure incurred in connection with the transfer of the property.

Analysis: The agreement entered into by the assessee's mother was held to be valid and operative in its second part when the contemplated outright sale did not materialise because the property was not released by the Navy. The purchasers had undertaken to represent the vendor in the acquisition proceedings, assist in establishing market value, and incur litigation-related efforts and expenses. The assessee inherited the property along with the obligation created by the agreement and the payments were supported by the surrounding circumstances, including responses from the payees and proof of payment. The Tribunal held that the compensation first accrued to the assessee and the subsequent payment of service charges was only an application of income, not diversion at source by overriding title. However, the same payment was found to be genuinely incurred under a valid obligation in connection with the transfer proceedings and therefore allowable in computing capital gains.

Conclusion: The disallowance of service charges was rightly deleted and the assessee's claim for deduction was upheld.

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