Transfer-linked compensation deductible in capital gains, but no indexation; brokerage for completed land sale is allowable.

Compensation paid to cancel an earlier agreement to sell land may be deducted in computing capital gains when it is incurred to remove an impediment to transfer and secure clear title, but it is not treated as cost of improvement, so indexation is not available on that amount. Brokerage paid in connection with the completed sale is also allowable where the evidence supports that the services were rendered for effecting the transfer, and disallowance cannot rest only on timing of payment. The transaction-related deduction is therefore distinct from indexed cost computation.

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Issues: (i) Whether compensation paid for cancellation of an earlier agreement to sell land was deductible in computing capital gains, and whether indexation was admissible on such amount; (ii) whether brokerage paid in connection with the eventual sale of the land was allowable as a deduction.

Issue (i): Whether compensation paid for cancellation of an earlier agreement to sell land was deductible in computing capital gains, and whether indexation was admissible on such amount.

Analysis: The compensation was paid to cancel the earlier banakhat so that the property could be transferred with a clear title. Such payment was supported by the cancellation deed and the surrounding material, and the genuineness of the transaction could not be denied merely on the ground that the authorities doubted the need for the payment. However, the governing principle is that compensation paid to remove an impediment to transfer is an expenditure incurred wholly and exclusively in connection with the transfer and does not constitute cost of improvement. Therefore, while the amount was allowable in computation of capital gains, indexation was not available on that payment.

Conclusion: The compensation of Rs. 36 lakhs was allowable as a transfer-related deduction, but the claim for indexed cost as cost of improvement was not sustainable.

Issue (ii): Whether brokerage paid in connection with the eventual sale of the land was allowable as a deduction.

Analysis: The brokerage claim was rejected by the lower authorities mainly on the timing of payment, but the sale deed was executed in the year under consideration and there was nothing on record to disbelieve that brokerage services were rendered in connection with the transfer. The mere fact that the sale agreement and receipt of consideration had occurred earlier did not by itself justify disallowance when the brokerage was paid for effecting the completed sale.

Conclusion: The brokerage of Rs. 1.50 lakhs was allowable and the disallowance was deleted.

Final Conclusion: The assessee succeeded on the brokerage issue and on the allowance of compensation as a transfer-linked deduction, but failed on the claim for indexation of that compensation.

Ratio Decidendi: Compensation paid to cancel an earlier agreement enabling transfer of property is deductible as expenditure incurred wholly and exclusively in connection with the transfer, but it is not cost of improvement eligible for indexation.

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