Retrenchment compensation linked to sale conditions is deductible in capital gains computation when directly incurred to effect the transfer.

Retrenchment compensation paid under a sale agreement for a cinema theatre was treated as expenditure wholly and exclusively incurred in connection with the transfer because closure of the business, retrenchment of employees, and handing over of the property free from encumbrances were contractual conditions precedent to sale. The Tribunal held that the payment had a direct nexus with effectuating the transfer and was not an independent business outgo, so it was deductible in computing capital gains under section 48(1). On that basis, revision under section 263 was not justified.

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Issues: Whether retrenchment compensation paid to employees pursuant to an agreement for sale of a cinema theatre was an expenditure wholly and exclusively in connection with the transfer, deductible in computing capital gains, and whether the revision under section 263 was justified.

Analysis: The agreement for sale required the theatre business to be closed, employees to be retrenched, and the property to be handed over free from encumbrances as a condition precedent to transfer. The sale deed also recorded that the business had to be stopped and the employees retrenched with payment of compensation and other dues. The payment was therefore not an independent business outgo but an expenditure directly incurred to effectuate the transfer and to satisfy the contractual terms governing the sale. The Tribunal applied the principle that expenditure having an intrinsic and direct nexus with the transfer falls within section 48(1), and distinguished authorities dealing with revenue deductions or facts not arising from a contractual condition for transfer.

Conclusion: The retrenchment compensation was an allowable deduction under section 48(1), and the revisionary order under section 263 was not justified.

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