TaxTMI 
TaxTMI 
2018 (4) TMI 1137
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....ser was not incurred in connection with the transfer of the property and could not therefore be deducted from the sale consideration for computing the long term gain?" We feel that the aforesaid question of law as framed requires a slight modification and should read as under:- "Whether the ITAT, on true and proper interpretation of Section 48 (i) of the Income Tax Act, 1961, was correct in holding that the amount of Rs. 25,00,000/- paid by the assessee to Anil Kumar Sharma for non-fulfillment of first agreement to sell was not incurred in connection with the transfer of property and, therefore, could not be deducted from the sale consideration for computing long term capital gains?" 3. The appellant, an individual and herein after referred to as the assessee, in her return of income for the assessment year 1994-95 had declared long term capital gains of Rs. 5,42,000/- from sale of immovable property No.80, Adhchini, New Delhi (the property, for short). The assessee had purchased the property on 1st August, 1971 for Rs. 30,000/-. The property was sold by a tripartite agreement to sell dated 4th November, 1993 amongst the purchaser who had paid Rs. 45,00,000/- to the tenant to va....
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....r and not class-one evidence. The Assessing Officer nevertheless invoked and applied Section 51 in respect of Rs. 7,50,000/- received from Anil Kumar Sharma in the Financial Year 1989-90 to re-work the indexed cost of acquisition which was reduced from Rs. 17,08,000/- to Rs. 9,58,000/-. 7. Agreeing with the assessee, the Commissioner of Income Tax (Appeals) held that the agreement to sell with Anil Kumar Sharma was an enforceable contract in law and under the Specific Relief Act, even if the name and license number of the stamp vendor were not indicated. The assessee had received advance of Rs. 7,50,000/- which included Rs. 4,50,000/- paid by cheque on 10th April,1989 from Anil Kumar Sharma. However, the Commissioner of Income Tax (Appeals) held that the agreement to sell with Anil Kumar Sharma had not stipulated for refund of Rs. 7,50,000/- in case of failure to execute the sale deed. The agreement had stipulated lump-sum payment of liquidated damages of Rs. 25,00,000/-, which was not in addition to repayment of advance of Rs. 7,50.000/-. Reduction of cost of acquisition by Rs. 7,50,000/- by the Assessing Officer by applying Section 51 of the Act was upheld. In other words, the C....
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....5,00,000/- by the assessee to Anil Kumar Sharma for giving up his rights under the agreement to sell are not in doubt. Revenue has not preferred any cross-appeal or objections. Direction that Rs. 7,50,000/- could not be deducted from cost of acquisition under Section 51 of the Act is not under challenge before us. 10. We would first refer to the agreement to sell dated 10th April, 1989 between the appellant-assessee and Anil Kumar Sharma for Rs. 15,00,000/-, out of which Rs. 7,50,000/- was paid as advance. Clauses 4 and 5 of the said agreement had stated as under:- "4. That the Second party has already inspected the premises and is satisfied with the documents furnished to the Second party. The property is in occupation of a tenant M/s Kochar Carpets Pvt. Limited and the First Party undertakes to get the said property vacated from the tenant and hand over the vacant and peaceful possession of the said property to the Second party. 5. That the first party herein assures the Second party that the said property is free from all encumbrances, mortgages lines or defect in the title of the property. There are leasehold rights vested in the tenant M/s Kochar Carpets Pvt. Limited and th....
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....at in case title of the assessee was found to be defective or if there was any creation of encumbrances or defect, the assessee would be liable to pay damages/loss besides liquidated damages for non-registration of sale deed or handing over of vacant peaceful possession. The assessee, it was agreed, shall be responsible for any consequences flowing from defect in the title or any hindrances in free transfer of property in favour of Anil Kumar Sharma and to make good any loss that might be occasioned. 11. Appropriate, at this stage, would be to refer the legal position in terms of Sections 10, 14 and 23 of the Specific Relief Act, 1963, which read as under:- "10. Except as otherwise provided in this Chapter, the specific performance of any contract may, in the discretion of the court, be enforced- (a) when there exists no standard for ascertaining the actual damage caused by the non-performance of the act agreed to be done; or (b) when the act agreed to be done is such that compensation in money for its non-performance would not afford adequate relief. Explanation.- Unless and until the contrary is proved, the court shall presume- (i) that the breach of a contract to transfer ....
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.... enforcement of a contract for the construction of any building or the execution of any other work on land: Provided that the following conditions are fulfilled, namely:- (i) the building or other work is described in the contract in terms sufficiently precise to enable the court to determine the exact nature of the building or work; (ii) the plaintiff has a substantial interest in the performance of the contract and the interest is of such a nature that compensation in money for nonperformance of the contract is not an adequate relief; and (iii) the defendant has, in pursuance of the contract, obtained possession of the whole or any part of the land on which the building is to be constructed or other work is to be executed." XXXXX "23. .....(1) A contract, otherwise, proper to be specifically enforced, may be so enforced, though a sum be named in it as the amount to be paid in case of its breach and the party in default is willing to pay the same, if the court, having regard to the terms of the contract and other attending circumstances, is satisfied that the sum was named only for the purpose of securing performance of the contract and not for the purpose of giving to t....
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....s been said it will be gathered that contracts of the kind now under discussion are divisible into three classes- (i) where the sum mentioned is strictly a penalty - a sum named by way of securing the performance of the contract, as the penalty is a bond; (ii) where the sum named is to be paid as liquidated damages for a breach of the contract; (iii) where the sum named is an amount the payment of which may be substituted for the performance of the act at the election of the person by whom the money is to be paid or the act done. Where the stipulated payment comes under either of the two first-mentioned heads, the court will enforce the contract, if in other respects it can and ought to be enforced, just in the same way as a contract not to do a particular act, with a penalty added to secure its performance or a sum named as liquidated damages, may be specifically enforced by means of an injunction against breaking it. On the other hand, where the contract comes under the third head, it is satisfied by the payment of the money, and there is no ground for the court to compel the specific performance of the other alternative of the contract." 17. Sir Edward Fry pointed out t....
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....our attention to the legal position and refer to the first portion of Section 48 of the Act, which reads as under:- "48. Mode of computation and deductions.-The income chargeable under the head „Capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely: (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto." The provision states that the income chargeable under the head "capital gains" shall be computed on the basis of full consideration received or accruing as a result of transfer of capital asset after reducing expenditure incurred wholly or exclusively in connection with such transfer, cost of acquisition of the asset and cost of improvement of the asset. We are not required and need not examine other provisions of Section 48 for deciding the present controversy. The expression "expenditure" used in clause (i) in Section 48 should be given the same meaning as used in Section 37 of the Act, except that expenditure may be also c....
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....duction must be united or in the state of being united with the transfer resulting in income by way of capital gains on which tax has to be paid. The expenditure, therefore, should have direct concern and should not be remote or have indirect result or connect with the transfer. Practical and pragmatic view in the circumstances should be taken to tax the real income i.e. the gain. We have applied the said dictum while interpreting clause (i) of Section 48 of the Act. The view we have taken is in consonance and resonates with the ratio of the judgments noted below. 15. Supreme Court in Sree Meenakshi Mills Limited, Madurai versus Commissioner of Income Tax, Madras, (1967) 63 ITR 207 (SC) had observed that the expression "for the purpose of business" in Section 37 of the Act was wider than the expression "for the purpose of earning income" and would, therefore, mean for the purpose of enabling a person to carry on and earn profits in trade as was also observed in Commissioner of Income Tax, Kerela versus Malyalam Plantations Limited, Quilon, (1964) 53 ITR 140 (SC) that these are words of a wide range and scope and much broader than the expression "for the purpose of earning profit".....
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....removing any encumbrance including the encumbrance of the type involved in this case, sale or transfer could not be effected, the-amount paid for removing that encumbrance will fall under clause (i). Accordingly, we agree with the Tribunal that the sale consideration requires to be reduced by the amount of compensation. The first question is, therefore, answered in the affirmative and in favour of the assessee." In the said case, the first transaction/agreement to sell had resulted in litigation, which was settled on payment of money, a pre-condition and mandate in the second transaction. The consideration paid to the first party was, therefore, allowed as an expenditure incurred wholly and exclusively in connection with such transfer. 18. In an earlier decision in Commissioner of Income Tax, Tamil Nadu- II versus A. Venkataraman and Others, (1982) 137 ITR 846(Mad.), it was observed as under:- "6. The second question of law in both the groups of reference relates to a claim for deduction made by the assessees under s. 48 of the Act. The claim was disallowed by the ITO, but his decision was reversed on appeal by the Tribunal. The claim arose in the following circumstances, having....
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....ras High Court in Commissioner of Income Tax versus Bradford Trading Co. Pvt. Ltd., (2003) 261 ITR 222(Mad.) wherein it has been held as under:- "13. We therefore hold that the amount of Rs. 2 lakhs was paid to get over the difficulties created by A.M. Buhari for the sale of the property and unless the amount was paid, the transfer of property would not have taken place at all. We, therefore, hold that the Appellate Tribunal was right in holding that the payment had an intimate connection with the transfer of the undertaking as by allowing the litigation to go on the hands of the company would be tied against the transfer of the undertaking in favour of India Tobacco Company Limited and the assessee would not have realised the sale consideration from the prospective purchaser. In so far as a sum of Rs. 1.5 lakhs paid by India Tobacco Company Limited is concerned, we are of the view that though the sum of Rs. 1.5 lakhs was paid by the said company only to settle the claim of A.M. Buhari, the money was received by the assessee in connection with the transfer of the hotel undertaking and it would form part of sale consideration. However, since the money was paid by the assessee-compa....
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....ge of the mortgage debt was deductible. In the latter case, the assessee had acquired the property, which was unencumbered and, therefore, the assessee had absolute interest in that property on acquisition. If the assessee would subsequently encumber the property and for transferring the property had repaid the mortgage debt, the said expenditure was not deductable. V.S.M.R. Jagdishchandran (supra) was again a case of mortgage created by the assessee himself and, therefore, repayment of mortgage debt, it was observed was not either cost of acquisition or cost of improvement. Attili N. Rao (supra) rejected the contention that repayment of the mortgage amount and the diversion of income by overriding title observing that the sale price received belonged to the assessee from the sale price, if same amount is paid towards instalments and interest on another account, it cannot be allowed as a deduction. 21. In R.M. Arunachalam (supra) question arose whether estate duty paid on inheritance of the immovable property, which was subsequently sold, could be allowed as a deduction while computing capital gains. The contention of the assessee was that Section 74(1) of the Estate Duty Act crea....
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.... capital gains the assessee sought deduction of the amount spent to clear the mortgage. The High Court held that the capital asset had become the property of the assessee by succession or inheritance on the death of the previous owner under Section 49(1) of the Act and the cost of acquisition of the asset is to be deemed to be the cost for which the previous owner acquired it, as increased by the cost of any improvement of the assets incurred or borne either by the previous owner or by the assessee. According to the High Court, having regard to the definition of the expression "cost of improvement" contained in Section 55(1)(b) of the Act, in order to entitle the assessee to claim a deduction in respect of the cost of any improvement, the expenditure should have been incurred in making any additions or alterations to the capital asset that was originally acquired by the previous owner and if the previous owner had mortgaged the property and the assessee and his coowners cleared off the mortgage so created, it could not be said that they incurred any expenditure by way of effecting any improvement to the capital asset that was originally purchased by the previous owner. This decisio....
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.... which was subsisting at the time of death of the original owner. Payment by the inheritor would be cost of acquisition for acquiring the right. Albeit, the position would be different where the mortgage was created by the owner after he had acquired the property for in such cases the mortgage debt prior to the transfer of property would not entitle him to claim deduction under Section 48 of the Act. Reference was made to the ratio in Commissioner of Income Tax versus Daksha Ramanlal, [1992] 197 ITR 123 (Guj.). The position would have been still different if the property was mortgaged for the purpose of upgrading and making addition to the immovable property. In that event, money paid to redeem the mortgage could be reduced treating it as the cost of improvement. 23. The Tribunal in the impugned order has observed that the agreement dated 4th November, 1993 had mentioned that the property was being transferred free from all encumbrances and did not whisper or refer to the contents of the first agreement to sell or liability to pay Anil Kumar Sharma. There was nothing in the agreement to sell dated 4th November, 1993 that the said transfer could not be affected till payment of Rs. ....
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....que to him. The assessee and Anil Kumar Sharma had jointly located the purchaser, who had agreed to pay total consideration of Rs. 1 crore, which included Rs. 45,00,000/- to be paid to the tenant and Rs. 55,00,000/- to be paid to the assessee. Rs. 25,00,000/- was paid by the assessee to Anil Kumar Sharma vide cheque dated 16th December, 1993, which is after the agreement to sell dated 4th November, 1993. The assessee has also placed on record copy of the agreement dated 16th December, 1993 with Anil Kumar Sharma with regard to payment of liquidated damages as per the settlement. Anil Kumar Sharma was a signatory as a witness to some of the documents executed in favour of the purchaser at the time of transfer. 26. Looking at the totality of the aforesaid circumstances and on the basis of findings recorded by the Tribunal, we would hold that there was a close nexus and connect between the payment of Rs. 25,00,000/- and the transfer of the property to the purchaser resulting in income by way of capital gains. There was proximate link and the expenditure incurred was in furtherance and to effectuate the transfer/sale of the property and was not remote and unconnected. Expenditure of R....