Capital gains deduction covers settlement paid to release prior contractual rights directly enabling the property transfer.

A payment made to discharge enforceable rights under an earlier agreement to sell can qualify as expenditure incurred wholly and exclusively in connection with the transfer if it has a direct and proximate nexus with completing the sale. Where the settlement is made to secure release of the prior purchaser's claim, remove the obstacle to transfer, and enable vacant conveyance, it is deductible under Section 48(i) of the Income-tax Act, 1961. The earlier advance merged into the final settlement and was not separately deductible once squared off, so the operative expenditure was the amount paid for relinquishment of the prior contractual rights.

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Issues: Whether the sum of Rs. 25,00,000 paid to the earlier agreement holder for giving up rights under a prior agreement to sell was expenditure incurred wholly and exclusively in connection with the transfer of the property, and therefore deductible while computing capital gains under Section 48(i) of the Income-tax Act, 1961.

Analysis: The payment arose from an earlier agreement to sell under which the assessee had undertaken to convey the property free from encumbrances and to deliver vacant possession. The earlier agreement created enforceable rights in favour of the first purchaser, and the later settlement payment was made to obtain release from those rights so that the final transfer could be completed. The phrase "in connection with such transfer" requires a direct and proximate link between the expenditure and the transfer, and the expression "wholly and exclusively" requires the expenditure to be genuinely incurred for that transfer. The surrounding circumstances showed that the payment was not remote, but was made to effectuate the sale and remove an to transfer. The earlier advance of Rs. 7,50,000 could not be treated as a separate deductible amount once it had been squared off in the settlement, and the assessee's actual expenditure was Rs. 25,00,000 for relinquishment of the prior contractual rights.

Conclusion: The payment of Rs. 25,00,000 was deductible under Section 48(i) of the Income-tax Act, 1961 as expenditure wholly and exclusively in connection with the transfer, and the issue is decided in favour of the assessee.

Ratio Decidendi: A payment made to remove an enforceable prior claim that directly enables the transfer of an immovable property has the requisite proximate nexus with the transfer and is deductible under Section 48(i) as expenditure incurred wholly and exclusively in connection with such transfer.

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