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Issues: (i) Whether compensation paid on cancellation of prior share-sale agreements was a genuine expenditure incurred wholly and exclusively in connection with transfer of shares so as to be deductible in computing long-term capital gains. (ii) Whether the appellate authority erred in considering material during further enquiry without violating the rule against admission of additional evidence.
Issue (i): Whether compensation paid on cancellation of prior share-sale agreements was a genuine expenditure incurred wholly and exclusively in connection with transfer of shares so as to be deductible in computing long-term capital gains.
Analysis: The assessees entered into earlier agreements to sell shares at a lower price and, upon securing a higher price from a third purchaser, cancelled those agreements in terms of the contractual clauses. The recipient companies were genuine, assessed to tax, had substantial turnover, and confirmed receipt through banking channels. The record did not show that the arrangements were sham, that the money came back to the assessee, or that the compensation lacked commercial substance. The payment had a proximate nexus with the eventual transfer of shares at a higher price and was incurred to honour the contractual consequences of the earlier agreements.
Conclusion: The compensation was allowable as expenditure in connection with transfer of shares and was not a colourable device; the issue is decided in favour of the assessee.
Issue (ii): Whether the appellate authority erred in considering material during further enquiry without violating the rule against admission of additional evidence.
Analysis: The material relied upon by the appellate authority consisted of facts already on record or documents available in the public domain, and the authority was entitled to make further enquiry under the appellate powers. The assessee's clarification that the recipient companies were not related parties and the supporting public documents did not amount to impermissible fresh evidence requiring rejection. No prejudice from a procedural breach was established.
Conclusion: There was no violation of the rule against additional evidence, and the procedural objection fails against the assessee.
Final Conclusion: The addition made by the Assessing Officer was not sustainable, and the Revenue's appeal failed.
Ratio Decidendi: A compensation payment made under genuine contractual arrangements to facilitate a higher-value transfer of shares, supported by banking records and absent evidence of sham or round-tripping, is deductible as expenditure incurred in connection with the transfer; further enquiry by the appellate authority on such material does not amount to a Rule 46A violation where the material is already on record or from public sources.
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