$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ INCOME TAX APPEAL No. 600/2004
Reserved on: 13th December, 2017
% Date of Decision: 20th April, 2018
KAUSHALYA DEVI (DECEASED) THROUGH LEGAL
REPRESENTATIVES ..... Appellant
Through Mr. Prakash Kumar and Ms. Rashmi
Singh, Advocates.
versus
COMMISSIONER OF INCOME TAX ..... Respondent
Through Mr. Asheesh Jain, Senior Standing
Counsel.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MS. JUSTICE PRATHIBA M. SINGH
SANJIV KHANNA, J.
This appeal under Section 260A of the Income Tax Act, 1961 (Act,
for short) by Kaushalya Devi, since deceased and now represented by her
legal representative, relates to assessment year 1994-95 and arises from the
order of the Income Tax Appellate Tribunal ('Tribunal' for short) dated 5th
May, 2004 in ITA No.6259/Del of 1997 and ITA No. 826/Del of 1998.
2. The appeal was admitted for hearing vide order dated 18th October,
2005, on the following substantial question of law:-
ITA 600/2004 Page 1 of 31
"Whether ITAT was, on a true and proper
interpretation of Section 48 (i) of the Income Tax
Act, 1961, correct in holding that the expenditure of
Rs.25,00,000/- incurred by the assessee by way of
liquidated damages paid to the first purchaser 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
vacate the property and transfer possession, and Rs.55,00,000/- to the
assessee for transfer of title and ownership rights in the property.
Rs.55,00,000/- received by the assessee was treated as the sale consideration
ITA 600/2004 Page 2 of 31
for transferring the property. To this extent there is no lis and dispute
between the assessee and the Revenue.
4. The dispute relates to deduction of Rs.25,00,000/- paid by the
assessee to Anil Kumar Sharma, with whom the assessee had entered into an
earlier agreement to sell dated 10th April, 1989 for sale of the property for
Rs. 15,00,000/-. Under the said agreement, the assessee had received
Rs.7,50,000/- as advance and part payment from Anil Kumar Sharma. As
per the agreement to sell and mutual agreement the assessee had paid
Rs.25,00,000/- on 16th December,1993 to Anil Kumar Sharma for foregoing
his right and claim under the agreement dated 10th April, 1989. Rs.
7,50,000/- was refunded by the purchaser by cheque to Anil Kumar Sharma
and reduced from payment of Rs.55,00,000/- to be paid to the assessee.
5. The assessee had treated the payment of Rs.25,00,000/- to Anil
Kumar Sharma as expenditure incurred wholly and exclusively in
connection with transfer under Section 48 (i) of the Act. In the alternative,
it was submitted that the expenditure was incurred for improvement of the
asset and was deductible under Section 48 (ii) of the Act.
6. The Assessing Officer vide order dated 27th March, 1997 held that
Rs.25,00,000/- paid as liquidated damages cannot be allowed as a deduction
for computation of capital gains as this payment was not incurred wholly
and exclusively in connection with the transfer of the property to the
purchaser. The amount paid was not towards cost of improvement or to
remove an encumbrance. Even otherwise, as a principle, the amount spent to
get rid of any liability or encumbrance cannot be regarded as cost of
improvement of a capital asset or expenditure incurred to perfect ones title.
Anil Kumar Sharma had not paid the full consideration and was not the first
ITA 600/2004 Page 3 of 31
purchaser within the meaning of Section 53-A of the Transfer of Property
Act. The Assessing Officer had also doubted genuineness of the agreement
to sell dated 10th April, 1989 with Anil Kumar Sharma, observing that the
name of the stamp vendor and his license number were not mentioned on
the stamp paper. He observed that the agreement was a piece of paper 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
Commissioner of Income Tax (Appeals) accepted the contention of the
assessee that payment of Rs.25,00,000/- was in connection with the transfer
of property and, therefore, should be reduced from the full value of the
consideration while computing capital gains.
ITA 600/2004 Page 4 of 31
8. Both the assessee and Revenue preferred appeals before the Tribunal.
Tribunal held that Section 48 of the Act permits deduction against sale
consideration in three situations. Firstly, towards cost of acquisition;
secondly on account of cost of improvement of the property and thirdly, on
account of expenditure incurred wholly and exclusively in connection with
transfer of property. Rs.25,00,000/- was not a part of cost of acquisition and
not paid by way of cost of improvement. Payment of Rs.25,00,000/- to Anil
Kumar Sharma, it was held, was personal liability of the assessee and not
attached to the capital asset sold and, therefore, it cannot be held that the
expenditure incurred was wholly and exclusively in connection with the
transfer of property. Reference was made to the agreement to sell dated 4th
November, 1993, which did not refer to the agreement with Anil Kumar
Sharma or liability to pay liquidated damages and had stated that the
property was to be transferred free from all encumbrances. Reliance placed
by the assessee on R.M. Arunachalam versus Commissioner of Income
Tax, Madras, (1997) 227 ITR 222(SC) was rejected as inapplicable. An
amount paid to clear existing mortgage created by the predecessor would be
considered as cost of improvement inasmuch as the mortgage was an
encumbrance but the position would be different if the mortgage was
created by the owner after acquisition of the property. However, the
Tribunal held that there was merit in the contention of the assessee on
disallowance under Section 51 of the Act, as the first agreement had not
materialized, the assessee had paid Rs.25,00,000/- to Anil Kumar Sharma. It
could not be said that the advance received was forfeited. Rs.7,50,000/-
could not be deducted from the cost of acquisition and to this extent appeal
of the assessee was allowed.
ITA 600/2004 Page 5 of 31
9. Thus, as per facts elucidated and found by the Tribunal, genuineness
of the two transactions with Anil Kumar Sharma i.e. agreement to sell dated
10th April, 1989 for Rs.15,00,000/-, payment of advance and on
cancellation refund of Rs.7,50,000/- by the purchaser and payment of
Rs.25,00,000/- 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 the
tenancy is on month to month basis on the basis of
English calendar."
ITA 600/2004 Page 6 of 31
Clauses 3, 7 and 8 of the said agreement are also relevant and read as
under:-
3. That the First party shall execute a proper
Sale Deed in favour of Second party and shall
deliver the vacant and peaceful possession to the
Second party within a reasonable time. The second
party shall be entitled for liquidated damages of
Rs.25 lakhs if the Sale Deed is not executed within a
period of three years from the date of this
Agreement.
xxx
7. That the First party ensures the Second party
that in case of failure to execute a proper Sale Deed
and failure to hand over vacant and peaceful
possession to the Second party, the Second party
shall be entitled to receive liquidated damages of
Rs.25,00,000/-. The execution of Sale Deed and
handing over of the vacant and peaceful possession
into take place within a period of 3 years from the
execution of this Agreement.
8. That the First party further assures the Second
party and shall indemnify the Second party in case
of any defect is found the title of the First party or if
there is any creation of any encumbrance and defect
found after execution this Agreement, the Second
party shall be entitled to claim any loss besides
liquidated damages for non-registration of the Sale
Deed for handing over the vacant and peaceful
possession to the Second party, the First party shall
also responsible for any consequences flowing from
defect in the title or any hindrances in freely
transferring the said property in favour of the
Second party to make good any loss that might have
occasioned to the Second party."
ITA 600/2004 Page 7 of 31
A reading of the aforesaid clauses would indicate that the assessee had
assured Anil Kumar Sharma that the property was free from all
encumbrances, mortgage, liens or defect of title. The property was tenanted
and the assessee had undertaken to get the property vacated from the tenant
and handover vacant and peaceful possession to Anil Kumar Sharma within
a reasonable time. Sale deed was to be executed with delivery of vacant
peaceful possession. In the event of failure to execute the sale deed and
deliver vacant peaceful possession, Rs. 25,00,000/- was to be paid as
damages to Anil Kumar Sharma. Clause 7 had stipulated that execution of
sale deed etc. should take place within a period of three years from the date
of agreement. Clause 8 had stipulated that 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--
ITA 600/2004 Page 8 of 31
(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
immovable property cannot be adequately relieved
by compensation in money; and
(ii) that the breach of a contract to transfer movable
property can be so relieved except in the following
cases--
(a) where the property is not an ordinary article of
commerce, or is of special value or interest to the
plaintiff, or consists of goods which are not
easily obtainable in the market;
(b) where the property is held by the defendant as
the agent or trustee of the plaintiff."
xxx
14. Contracts not specifically enforceable.--
(1) The following contracts cannot be specifically
enforced, namely:--
(a) a contract for the non-performance of which
compensation in money is an adequate relief;
ITA 600/2004 Page 9 of 31
(b) a contract which runs into such minute or
numerous details or which is so dependent on the
personal qualifications or volition of the parties, or
otherwise from its nature is such, that the court
cannot enforce specific performance of its material
terms;
(c) a contract which is in its nature determinable;
(d) a contract the performance of which involves the
performance of a continuous duty which the court
cannot supervise.
(2) Save as provided by the Arbitration Act, 1940
(10 of 1940), no contract to refer present or future
differences to arbitration shall be specifically
enforced; but if any person who has made such a
contract (other than an arbitration agreement to
which the provisions of the said Act apply) and has
refused to perform it, sues in respect of any subject
which he has contracted to refer, the existence of
such contract shall bar the suit.
(3) Notwithstanding anything contained in clause (a)
or clause (c) or clause (d) of sub-section (1), the
court may enforce specific performance in the
following cases:--
(a) where the suit is for the enforcement of a
contract,--
(i) to execute a mortgage or furnish any other
security for securing the repayment of any loan
which the borrower is not willing to repay at once:
Provided that where only a part of the loan has been
advanced the lendor is willing to advance the
remaining part of the loan in terms of the contract; or
ITA 600/2004 Page 10 of 31
(ii) to take up and pay for any debentures of a
company;
(b) where the suit is for,--
(i) the execution of a formal deed of partnership, the
parties having commenced to carry on the business
of the partnership; or
(ii) the purchase of a share of a partner in a firm;
(c) where the suit is for the 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 non-
performance 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
ITA 600/2004 Page 11 of 31
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 the party in default
an option of paying money in lieu of specific
performance.
(2) When enforcing specific performance under this
section, the court shall not also decree payment of
the sum so named in the contract."
12. The afore quoted Sections were interpreted in M.L. Devender Singh
and Ors. versus Syed Khaja, (1973) 2 SCC 515, to hold that it was not the
legislative intent that mere proof that a sum of money was specified as
liquidated damages and penalty for breach would be enough to prove that
the contract for transfer of immovable property cannot be specifically
enforced and could be adequately compensated by specified damages or
penalty. This, it was observed, would make the provisions of Section 23 of
the Act meaningless. Thus, mere specification of damages or penalty in
case of breach in order to compel performance of the contract would not be
a good defense to a prayer for specific performance. It was held as under:-
"15. We think that Section 23 of the Act of 1963
contains a comprehensive statement of the principles
on which, even before the Act of 1963, the presence
of a term in a contract specifying a sum of money to
be paid for a breach of the contract has to be
construed. Where payment is an alternative to
carrying out the other terms of the contract, it would
exclude, by the terms of the contract itself, specific
performance of the contract to convey a property.
16. The position stated above is in conformity with
the principles found stated in Sir Edward
ITA 600/2004 Page 12 of 31
Fry's "Treatise on the Specific Performance of
Contracts" (Sixth Edn. at p. 65). It was said there:
"The question always is: What is the contract? Is it
that one certain act shall be done, with a sum
annexed, whether by way of penalty or damages, to
secure the performance of this very act? Or, is it that
one of the two things shall be done at the election of
the party who has to perform the contract, namely,
the performance of the act or the payment of the sum
of money? If the former, the fact of the penal or
other like sum being annexed will not prevent the
court's enforcing performance of the very act, and
thus carrying into execution the intention of the
parties: if the latter, the contract is satisfied by the
payment of a sum of money, and there is no ground
for proceeding against the party having the election
to compel the performance of the other alternative.
From what has 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
ITA 600/2004 Page 13 of 31
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 that the distinction
between a strict penalty and liquidated damages for a
breach of contract was important in common law
where liquidated damages were considered sufficient
compensation for breach of contract, but, sums
stipulated by way of penalty stood on a different
footing. He then said:
"But as regards the equitable remedy the
distinction is unimportant; for the fact that
the sum named is the amount agreed to be
paid as liquidated damages is, equally with a
penalty strictly so called, ineffectual to
prevent the court from enforcing the contract
in specie."
18. The equitable principles which regulated the
grant of specific performance by the separate Court
of Equity which existed in England at one time have
been given statutory form in India. It is, therefore,
immaterial that the stipulated payment under the
terms of the contract under consideration before us
could be viewed as one for payment of liquidated
damages. The question would still remain whether
the courts are relieved by the agreement between the
parties of the duty to determine, on the facts of a
particular case, whether damages, specified or left
unspecified, would really afford adequate
ITA 600/2004 Page 14 of 31
compensation to the party which wants a
conveyance of immovable property as agreed upon."
13. Section 20, it was held, would show that jurisdiction of the Court to
grant the relief of specific performance was discretionary and must be
exercised on sound and reasonable grounds. This jurisdiction, however, was
not curtailed by merely fixing a sum as liquidated damages. The Court had
to determine on the facts and circumstances of each case before it, whether
specific performance of a contract to convey an immovable property ought
to be granted. When the parties had specified a sum to be paid by a party
breaching the contract by itself would not remove strong presumption under
the aforesaid sections. The presumption could be negated by evidence,
sufficiency and insufficiency of which had to be examined on case to case
basis. The fact that parties had specified a sum of money in case of breach,
though a piece of evidence to be considered, would not be decisive or
conclusive while deciding whether the presumption had been repelled or
not. We need not refer to other decisions on the said point as the legal
position is clearly elucidated and stated in M.L. Devender Singh and Ors.
(supra).
14. We would now turn 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;
ITA 600/2004 Page 15 of 31
(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 capital in nature. Expenditure
would primarily connote and has the meaning of spending or paying out. In
a given case, it may also cover the amount of loss, which has gone out of the
assessee's pocket. Settlement of a claim and payment made can amount to
expenditure. Again the words "wholly and exclusively" used in Section 48
are also to be found in Section 37 of the Act and relate to the nature and
character of the expenditure, which in the case of Section 48 must have
connection i.e. proximate and perceptible nexus and link with the transfer
resulting in income by way of capital gain. The word "wholly" refers to the
quantum of expenditure and word "exclusively" refers to the motive,
objective and purpose of the expenditure. These two words give jurisdiction
to the taxing authority to decide whether the expenditure was incurred in
connection with the transfer. The expression "wholly and exclusively"
however, does not mean and indicate that there must exist a necessity or
compulsion to incur an expense before an expenditure is to be allowed.
ITA 600/2004 Page 16 of 31
Supreme Court in Chloro Controls India Private Limited versus Severn
Trent Water Purification Inc. and Others, (2013) 1 SCC 641, had noticed
and elucidated on dictionary meaning of the word "connection" in an
Arbitration clause and had observed:-
"145. The expression "connection" means a link or
relationship between people or things or the people
with whom one has contact [Concise Oxford
Dictionary (Indian Edition)]. "Connection" means act
of uniting; state of being united; a relative; relation
between things one of which is bound up with (Law
Lexicon, 2nd Edn., 1997). Thus, even the dictionary
meaning of this expression is liberally worded. It
implies expansion in its operation and effect both.
Connection can be direct or remote but it should not be
fanciful or marginal. In other words, there should be
relevant connection between the dispute and the
agreement by specific words or by necessary
implication like reference to all other agreements in
one (principal) agreement. The expression appearing in
Clause 30 has to be given a meaningful interpretation
particularly when the principal agreement itself, by
specific words or by necessary implication, refers to all
other agreements. ..."
Word "connection" in Section 48(i) reflects that there should be a causal
connect and the expenditure incurred to be allowed as a deduction 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
ITA 600/2004 Page 17 of 31
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". It may include
many other acts incidental to carrying on business.
16. In The Delhi Cloth and General Mills Co. Ltd., Delhi versus The
Commissioner of Income Tax, New Delhi, (1980) 125 ITR 96 (Delhi),
donation to a political party was disallowed as business expense. However,
it was observed that payment for political purposes could be for business
purposes where link between the trade and payment was established. It was
clarified that that expenditure incurred voluntarily but wholly and
exclusively for the expender's trade in given circumstances would be
permissible deduction even though it ensures to some extent benefit to a
third party. In Commissioner of Income-Tax, Delhi VIII versus
Shakuntala Rajeshwar, (1986) 160 ITR 840 (Delhi) payment made to
tenant to vacate was held as incurred to effectuate the transfer of immovable
property and therefore incurred wholly and exclusively in connection with
the transfer. In Smt. Sita Nanda versus Commissioner of Income Tax,
ITA 600/2004 Page 18 of 31
[2001] 251 ITR 575 (Del.) had held the payment made to the superior lessor
for permission to sell the leasehold rights in the form of unearned increase
was allowable as a deduction as the expense incurred was wholly and
exclusively in connection with the transfer. However, interest paid in the
shape of damages for late payment of unearned increase, it was held would
not be expenditure incurred wholly and exclusively in connection with the
transfer.
17. In Commissioner of Income Tax versus Shakuntala Kantilal, (1991)
190 ITR 56 (Bombay), the Bombay High Court had observed as under:-
"The Legislature, while using the expression "full
value of consideration", in our view, has
contemplated both additions to as well as deductions
from the apparent value. What it means is the real
and effective consideration. That apart, so far as
clause (i) of section 48 is concerned, we find that the
expression used by the Legislature in its wisdom is
wider than the expression "for the transfer". The
expression used is "the expenditure incurred wholly
and exclusively in connection with such transfer".
The expression "in connection with such transfer" is,
in our view, certainly wider than the expression "for
the transfer". Here again, we are of the view that any
amount the payment of which is absolutely
necessary to effect the transfer will be an
expenditure covered by this clause. In other words,
if, without 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,
ITA 600/2004 Page 19 of 31
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 a bearing on the sales
of the assessees' properties. The facts are not in
dispute. When the assessees entered into an agreement
for the sale of the properties in question, there were
tenants in occupation of those properties. The
purchasers, who had entered into the agreement of
purchase insisted that the assessees should render to
them vacant possession of the properties. In other
words, this was one of the conditions of the
conveyance. The assessees had, therefore, to arrange to
vacate the tenants in occupation of the properties, so as
to render vacant possession to the purchasers in terms
of the agreement of sale. It appears from the statement
of case, that there were two tenants, M/s. Dunlop India
Ltd. and M/s, Harrison and Company. They had to be
given Rs. 9,500 in all as consideration for their
agreeing to vacate the properties. This amount was paid
and the tenants vacated the properties, and in turn
ITA 600/2004 Page 20 of 31
vacant possession was rendered by the assessee to the
purchasers. In the assessment to capital gains on the
sale of the properties in question, the assessee claimed
that the payments made by them to the tenants in order
to secure vacant possession was expenditure incurred
wholly and exclusively in connection with the transfer
of the properties, within the meaning of s. 48(i) of the
Act. The Tribunal upheld this claim in appeal.
7. The department's contention is that this item of
expenditure cannot come in for reckoning under s.
48(i). We do not accept this contention as well
founded. The finding of the Tribunal is that the
purchasers of the property from the assessees insisted
on vacant possession being rendered as part of the
condition of purchase of the properties. It, therefore,
behoved the assessees to arrange with the tenants, who
were then in possession of the properties, to render
vacant possession. But the tenants were unwilling to
vacate unless they were paid the sum of Rs. 9,500.
These facts clearly show that the expenditure was
incurred wholly and exclusively in connection with the
agreement of sale, which preceded the transfer and in
fulfilment of a condition of sale. We have no doubt
whatever that the Tribunal was quite right in bringing
the expenditure under s. 48(i) of the Act. Our answer to
the second question in both the groups of references is,
therefore, against the department."
19. More direct would be the decision of the Madras 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
ITA 600/2004 Page 21 of 31
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-company, it
would also constitute an expenditure wholly and
exclusively in connection with the transfer. In the case
of payment of Rs. 50,000, the same analogy would
apply. In so far as the litigation expenditure of a sum of
Rs. 16,000 is concerned, we hold that the Appellate
Tribunal was right in holding that the litigation
expenditure was also incurred wholly and exclusively
in connection with the transfer and thus, it was
deductible."
Reference was also made to Commissioner of Income Tax versus
Abrar Alvi, [2001] 247 ITR 312 (Bom.). In the said case, demand of Rs.2
lacs made in respect of the former transaction was allowed as a deduction
holding that there were impediments against the transfer by way of litigation
and unless the amount were paid, litigation would not have been settled
enabling the assessee to transfer the property in favour of the assessee
giving up clear title and acknowledgement. Similar view has been taken by
the Calcutta High Court in Commissioner of Income Tax, Kolkata-XI
versus Satyabrata Dey, (2014) SSC Online Cal 9978 wherein the assessee
ITA 600/2004 Page 22 of 31
was allowed deduction of Rs.72 lacs paid pursuant to an award to a third
party with whom the assessee had entered into agreement to sell for transfer
of flats. Calcutta High Court followed the judgment of the Bombay High
Court in Shakuntala Kantilal (supra) and Madras High Court in Bradford
Trading Company Private Limited (supra).
20. Reliance placed by the Revenue on the judgment of Bombay High
Court in Commissioner of Income Tax, Mumbai City-XIII versus
Roshanbabu Mohammed Hussein Merchant, (2005) SCC Online Bombay
83, is misconceived for the said decision was again a case of mortgage
wherein payment made was to redeem the mortgage. Decision in
Shakuntala Kantilal (supra) was distinguished after referring to judgments
of the Supreme Court in R.M. Arunachalam (supra), V.S.M.R.
Jagdishchandran (Dead) By LRs. versus Commissioner of Income Tax,
Madras, [1997] 227 ITR 240 (SC) and Commissioner of Income Tax,
Vishakapatanam versus Attili N. Rao, [2001] 252 ITR 880. It was
observed that there was a distinction between an obligation to discharge the
mortgage debt created by the previous owner and the obligation to discharge
the mortgage debt created by the assessee himself. In the former case, the
assessee does not acquire absolute interest in the property from the previous
owner and, therefore, discharge 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
ITA 600/2004 Page 23 of 31
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
creates a first charge on the immovable property of the deceased for the
purpose of securing payment of estate duty. The contention was rejected on
the ground that estate duty paid on inheritance by the assessee on the
property, which was subsequently sold, cannot be treated as cost of
acquisition or cost of improvement. Referring to Section 53 of the Estate
Duty Act, it was observed was a liability of the assessee as the accountable
person, which was personal but limited to the assets of the deceased actually
received or which might have been received by the accountable person.
Section 74(1) of the Estate Duty Act cannot be construed as a creating
interest in the property, i.e., the charge, for the provision was related to the
matter of recovery of estate duty and that Revenue had priority over other
liability of the accountable persons. Provision had incorporated principle of
precedence over claim of the mortgagee. It does not affect the title or the
inheritance making them incomplete or imperfect in any way. Payment of
ITA 600/2004 Page 24 of 31
estate duty would not result in acquisition of a new right, tangible or
intangible in the inherited assets and, therefore, could not be treated as
either cost of acquisition or cost of improvement. This judgment
specifically referred to Section 100 of the Transfer of Property Act, 1887 on
the question of charge.
22. Supreme Court on interpreting Section 74 of the Estate Duty Act had
held that no interest had been created in the immovable property, which was
subject matter of prior charge. However, while affirming the decision of the
High Court, the Supreme Court deemed it appropriate to specifically
overrule the ratio in Ambat Echukutty Menon versus Commissioner of
Income Tax, (1978) 111 ITR 880 (Ker). It was observed as under:-
"30. While we are affirming the impugned judgment of
the High Court, we are unable to endorse the view of
the Kerala High Court in Ambat Echukutty
Menon v. CIT [(1978) 111 ITR 880 : 1978 KLT 6
(Ker)] to which reference has been made by the High
Court in the impugned judgment. In that case, the
assessee, as one of the heirs, had inherited property
from the previous owner who had mortgaged the same
during his lifetime and after his death the heirs,
including the assessee, had discharged the mortgage
created by the deceased. The said property was
subsequently acquired under the Land Acquisition Act
and for the purpose of 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
ITA 600/2004 Page 25 of 31
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 co-
owners 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
decision has been followed in subsequent decisions of
the High Court in Salay Mohamad Ibrahim
Sait v. ITO [(1994) 210 ITR 700 (Ker)] and K.V.
Idiculla v. CIT [(1995) 214 ITR 386 (Ker)] . A
contrary view has been taken by the Gujarat High
Court in CIT v. Daksha Ramanlal [(1992) 197 ITR 123
(Guj)] . In taking the view that in a case where the
property has been mortgaged by the previous owner
during his lifetime and the assessee, after inheriting the
same, has discharged the mortgage debt, the amount
paid by him for the purpose of clearing off the
mortgage is not deductible for the purpose of
computation of capital gains, the Kerala High Court
has failed to note that in a mortgage there is transfer of
an interest in the property by the mortgagor in favour
of the mortgagee and where the previous owner has
mortgaged the property during his lifetime, which is
subsisting at the time of his death, then after his death
his heirs only inherit the mortgagor's interest in the
property. By discharging the mortgage debt his heir
who has inherited the property acquires the interest of
the mortgagee in the property. As a result of such
payment made for the purpose of clearing off the
mortgage the interest of the mortgagee in the property
ITA 600/2004 Page 26 of 31
has been acquired by the heir. The said payment has,
therefore, to be regarded as "cost of acquisition" under
Section 48 read with Section 55(2) of the Act. The
position is, however, different where the mortgage is
created by the owner after he has acquired the property.
The clearing off the mortgage debt by him prior to
transfer of the property would not entitle him to claim
deduction under Section 48 of the Act because in such
a case he did not acquire any interest in the property
subsequent to his acquiring the same. In CIT v. Daksha
Ramanlal [(1992) 197 ITR 123 (Guj)] the Gujarat High
Court has rightly held that the payment made by a
person for the purpose of clearing off the mortgage
created by the previous owner is to be treated as cost of
acquisition of the interest of the mortgagee in the
property and is deductible under Section 48 of the Act.
The aforesaid ratio observed that where the property was mortgaged
by a previous owner during his lifetime, the inheritor would be entitled to
deduct the amount paid to discharge the mortgage debt for computing
capital gains. The reason being that the mortgage had created interest in the
property, 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.
ITA 600/2004 Page 27 of 31
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 4 th November, 1993 that
the said transfer could not be affected till payment of Rs.25,00,000/- to Anil
Kumar Sharma and, therefore, the liability was personal to the assessee and
not attached to the property. Accordingly, the decision in the case of
Shakuntala Kantilal (supra) was distinguishable for in the said case the
payment was absolutely necessary to affect the transfer and, therefore, was
an expenditure incurred allowable as a deduction.
24. The words "wholly and exclusively" require and mandate that the
expenditure should be genuine and the expression "in connection with the
transfer" require and mandate that the expenditure should be connected and
for the purpose of transfer. Expenditure, which is not genuine or sham, is
not to be allowed as a deduction. This, however, does not mean that the
authorities, Tribunal or the Court can go into the question of subjective
commercial expediency or apply subjective standard of reasonableness to
disallow the expenditure on the ground that it should not have been incurred
or was unreasonably large. In the absence of any statutory provision, on
these aspects discretion exercised by the assessee who has incurred the said
expenditure must be respected, for interference on subjective basis will lead
to unpalatable and absurd results. As in the case of Section 37 of the Act,
jurisdiction of the authorities, Tribunal or Court is confined to investigate
and decide as to whether the expenditure was actually incurred, i.e., the
ITA 600/2004 Page 28 of 31
expenditure was genuine and was factually expended and paid to the third
party. Secondly, the authorities, Tribunal and Court can examine whether
the said expenditure was "wholly and exclusively" connected with the
transfer, but once the amount was spent and paid, the authorities, Tribunal
and Courts cannot decide commercial expediency by putting themselves in
the arm chair of the assessee to examine and consider whether they would
have or the assessee should have incurred the said expenditure including the
quantum having regard to the circumstances. Excessive expenditure cannot
be disallowed when it is "wholly and exclusively" in connection with the
transfer, on the ground that prudence did not require the assessee to incur
the expenditure. Disallowance on such grounds must be specified and
provided by the statute.
25. The assessee had always stated that the purchaser was aware of the
agreement to sell with Anil Kumar Sharma and had directly paid
Rs.7,50,000/- by way of cheque 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 16 th
December, 1993, which is after the agreement to sell dated 4 th 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.
ITA 600/2004 Page 29 of 31
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 Rs.25,00,000/-, therefore, has to be treated as
expense incurred wholly and exclusively in connection with the transfer of
immovable property and, hence, allowable as a deduction under clause (i) of
Section 48 of the Act. However, we would like to clarify that Rs.7,50,000/-
which was paid by Anil Kumar Sharma and subsequently refunded, cannot
be allowed as a double deduction. In other words, refund of Rs.7,50,000/-
would mean that the earlier payment made by Anil Kumar Sharma was
squared off. The assessee had in fact incurred expenditure of Rs.25,00,000/-
which was paid to Anil Kumar Sharma to forego and give up his right under
the agreement to sell dated 10th April, 1989.
27. Aforesaid ratio and findings should not be interpreted to mean that
wherever an assessee has paid an amount under an earlier agreement-to-sell
in terms of the settlement or even a court decree, the said amount would be
treated as expenditure wholly or exclusively in connection with the transfer,
the subject matter of capital gains. The nature and character of the
agreement, timing of the earlier agreement and payment claimed as
expenditure and the date of transfer resulting in capital gains, are relevant
aspects, which should be taken into consideration. For example, an
agreement-to-sell rescinded or cancelled and payment made long before the
ITA 600/2004 Page 30 of 31
date on which immovable property was transferred resulting in capital gains,
may not be expenditure incurred wholly and exclusively in connection with
such transfer. The words used in clause (i) do not permit and allow
expenditure incurred wholly and exclusively on the immovable property as
an expenditure to be deducted while computing capital gains. Link and
connection with the transfer of a capital asset and the expenditure must be
inextricable and should be established.
28. Recording the aforesaid caveat, we would answer the substantial
question of law in favour of the appellant-assessee and against the Revenue.
Rs. 25,00,000/- paid by the assessee would be deducted under clause (i) to
Section 48 of the Act while computing capital gains. The appeal is allowed
to the extent indicated above. In the facts of the case, there would be no
order as to costs.
-sd-
(SANJIV KHANNA)
JUDGE
-sd-
(PRATHIBA M. SINGH)
JUDGE
APRIL 20, 2018
NA/VKR
ITA 600/2004 Page 31 of 31
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