Litigation expenditure in compulsory acquisition enhancement proceedings is deductible when directly connected with the transfer under capital gains law.

Litigation expenditure incurred in proceedings for enhancement of compensation on compulsory acquisition is deductible in computing capital gains if it is shown to have been wholly and exclusively incurred in connection with the transfer under Section 48 of the Income-tax Act, 1961. A compulsory acquisition is not complete until compensation is finally determined, so enhancement proceedings remain intrinsically linked to the transfer. The timing of the expenditure is not decisive; it is deductible even if incurred after the award, provided the direct connection with the acquisition is proved.

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Issues: Whether litigation expenditure incurred in proceedings for enhancement of compensation on compulsory acquisition is expenditure wholly and exclusively in connection with the transfer of a capital asset and deductible in computing capital gains.

Analysis: The computation provisions under Section 48 of the Income-tax Act, 1961 allow deduction of expenditure incurred wholly and exclusively in connection with the transfer. A compulsory acquisition is not complete until compensation is finally determined, and proceedings for enhancement of compensation are intrinsically and intimately connected with the acquisition. The timing of the expenditure, by itself, is not decisive if the expenditure is directly connected with the transfer.

Conclusion: Such litigation expenditure is deductible under Section 48 of the Income-tax Act, 1961 if it is proved to have been incurred wholly and exclusively in connection with the compulsory acquisition. The adverse view that it is disallowed merely because it was incurred after the award is incorrect.

Ratio Decidendi: Expenditure incurred wholly and exclusively for litigation arising from compulsory acquisition is deductible under the capital gains provisions if it has an intrinsic and direct connection with the transfer, irrespective of whether it was incurred before or after the award.

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