Capital gains transfer expenses and compensation classification determine deduction, timing, and exemption treatment under the tax code.

Amounts paid to a facilitator for securing or effecting transfer of a capital asset were treated as expenditure intrinsically connected with the transfer, not as income diverted at source, so the payment was deductible under section 48. On the facts, the transfer for capital gains purposes was completed in financial year 2010-11, making that year's cost inflation index applicable. A receipt labelled as interest on compensation was split on its real character: the compensation component fell within capital gains, while delay interest was taxable as income from other sources, with the corresponding statutory deduction under section 57(iv). The factual basis for deduction under section 54F was also accepted.

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Issues: (i) Whether payments made to the facilitator were diversion of income by overriding title or deductible expenditure in connection with transfer under section 48; (ii) whether the year of transfer for capital gains computation and the applicable cost inflation index were to be linked to financial year 2010-11; (iii) whether the amount described as interest on compensation was taxable partly as capital gains and partly as income from other sources, with consequential deduction under section 57(iv); (iv) whether deduction under section 54F was allowable.

Issue (i): Whether payments made to the facilitator were diversion of income by overriding title or deductible expenditure in connection with transfer under section 48.

Analysis: The payment obligation arose from the arrangement entered into to secure the transfer or realisation of the compensation, and the entire risk, effort, and litigation burden was undertaken by the facilitator. The amount was therefore not a case of income diverted at source by overriding title, but an expenditure integrally connected with the transfer and the receipt of compensation.

Conclusion: The payment was allowable as deduction under section 48 and the assessee succeeded on this issue.

Issue (ii): Whether the year of transfer for capital gains computation and the applicable cost inflation index were to be linked to financial year 2010-11.

Analysis: The earlier acquisition proceedings had been withdrawn and the transaction attained finality only after the later judicial orders and actual payment pursuant thereto. On those facts, the transfer for capital gains purposes was completed in financial year 2010-11, not in the earlier acquisition year.

Conclusion: The assessee was entitled to adopt the cost inflation index of financial year 2010-11.

Issue (iii): Whether the amount described as interest on compensation was taxable partly as capital gains and partly as income from other sources, with consequential deduction under section 57(iv).

Analysis: The receipt characterised as interest was examined in substance and found to represent the compensation component linked to the transfer up to the date of acquisition, which fell within section 45(5)(b) and was chargeable under capital gains. The balance amount represented interest for delay after the acquisition event and was taxable under income from other sources. Once brought under section 56(2)(viii), the statute mandated the corresponding fifty per cent deduction under section 57(iv).

Conclusion: The classification directed by the lower authority was upheld, and the Revenue failed on both the taxability and deduction questions.

Issue (iv): Whether deduction under section 54F was allowable.

Analysis: The factual material accepted by the appellate authority established the assessee's entitlement to the exemption to the extent computed by it, and no error was shown in that factual appreciation.

Conclusion: The deduction under section 54F was sustained.

Final Conclusion: The assessee obtained relief on the main computational issues relating to transfer expenses and capital gains timing, while the Revenue's objections to the compensation treatment, statutory deduction, and exemption were rejected.

Ratio Decidendi: Amounts paid to secure or effect the transfer of a capital asset are deductible under section 48 when they are intrinsically connected with the transfer, and compensation-related receipts must be classified according to their real character by distinguishing capital gain components from statutory interest on delayed payment.

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