2025 (5) TMI 33 - HC - Income Tax

LTCG - allowability or otherwise of the amount as cost of acquisition in the computation of capital gains u/s 48 - whether the amount in question would constitute expenditure wholly and exclusively incurred in connection with the transfer of the asset? - HELD THAT - The purchase of the subject property by the appellant was on 22.01.1980. The vendors of the property were engaged in litigation with their sisters in regard to the title to various properties including the subject property. Their claim was negatived by the Civil court which held that the subject property would vest in the sisters of the vendors. Hence the title of the appellant to the subject property under deed dated 22.01.1980 was under a cloud. The Civil suit instituted qua the vendors and their sisters and other family members was in 1981 subsequent to the deed of purchase executed on 22.01.1980. By virtue of order of this Court in second appeal the sisters have been held to be the owners of the schedule property. The vendors of the Appellant thus held no title whatsoever to the property and it is only upon payment of a sum that the appellant has cleared his title and can be said to have acquired the property. We are thus of the view that payment has been wholly and exclusively incurred in connection with the transfer of the subject asset. As decided in Bradford Trading Co. (P) Ltd. 2002 (9) TMI 33 - MADRAS HIGH COURT as concerned with the allowability of an amount paid to get over difficulties in the sale of the property. The Bench holds that unless such amount was paid the transfer of property could not have taken place and hence such payment has an intimate connection to the transfer of the asset. Payment of the amount to end the litigation in respect of the property concerned was purely in the interests of the assessee. The position of the present appellant is far better as the title to the subject property vested only in the sisters and hence the amount is in a way part of the sale consideration itself. The amount has been paid not merely to get over difficulties in the transfer but to enable the transfer itself. This is amply clear from a reading of Agreement of Sale dated 07.10.2005. Decided in favour of the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Court was whether the amount of Rs.33,87,720/- paid by the appellant to the sisters of the original vendors could be allowed as part of the cost of acquisition of the property for the purpose of computing capital gains under Section 48 of the Income Tax Act. Specifically, the Court examined the applicability of the legal theory of 'Diversion by overriding title' and the precedential value of the decision reported in 261 ITR 222, regarding whether such payment qualifies as expenditure "wholly and exclusively" incurred in connection with the transfer of the capital asset.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Allowability of Rs.33,87,720/- as Cost of Acquisition under Section 48 of the Income Tax Act

Relevant Legal Framework and Precedents: Section 48 of the Income Tax Act governs the mode of computation of capital gains, allowing deduction of expenditure incurred wholly and exclusively in connection with the transfer of the asset and the cost of acquisition. The Court relied heavily on the Division Bench decision in Commissioner of Income Tax v. Bradford Trading Co. (261 ITR 222), which held that payments made to overcome difficulties in the transfer of property, which are indispensable for the transfer to take place, qualify as expenditure incurred wholly and exclusively in connection with the transfer.

Court's Interpretation and Reasoning: The Court noted that the appellant's title to the property, originally purchased in 1980, was under a cloud due to ongoing family litigation among the vendors and their sisters. The Civil Court and subsequent appellate decisions conclusively held that the sisters, not the vendors, held title to the property. Therefore, the appellant's title was defective until the payment of approximately Rs.33 lakhs to the sisters in 2005, which effectively cleared the title and enabled the appellant to acquire the property without dispute.

The Court emphasized that the payment was not a mere application of funds but was "wholly and exclusively" incurred to enable the transfer itself, distinguishing it from ordinary expenditures. The Agreement of Sale dated 07.10.2005 explicitly acknowledged the payment as part of the compromise resolving the litigation and securing the appellant's title. This was a critical factual finding, supported by documentary evidence including the compromise memo, civil court orders, and the agreement itself.

Key Evidence and Findings: The Court considered the sequence of litigation culminating in the High Court's second appeal order confirming the sisters' title, the execution petition proceedings, and the subsequent compromise deed. The Agreement of Sale recited the parties' mutual understanding that the payment was essential to settle disputes and establish undisputed ownership. The Court also noted the acceptance of this position by the Commissioner of Income Tax (Appeals), which was later reversed by the Tribunal.

Application of Law to Facts: Applying the principle from Bradford Trading Co., the Court held that since the payment was indispensable for the transfer to take place, it constituted expenditure incurred wholly and exclusively in connection with the transfer. The Court rejected the Tribunal's view that the payment was merely an application of the amount and not part of the cost of acquisition, clarifying that the payment was effectively part of the purchase consideration required to acquire the asset free from legal encumbrances.

Treatment of Competing Arguments: The revenue's contention was that the amount paid was not allowable as cost of acquisition and should not be excluded from the capital gains computation. The Tribunal supported this view. However, the Court found the revenue's argument untenable given the factual matrix and the binding precedent. The Court underscored that the payment was not a mere facilitation but a substantive acquisition cost, necessary to clear the title cloud and consummate the transfer.

Conclusions: The Court concluded that the payment of Rs.33,87,720/- must be allowed as part of the cost of acquisition under Section 48 of the Income Tax Act, thereby reducing the capital gains taxable on the subsequent sale of the property.

3. SIGNIFICANT HOLDINGS

The Court held: "The aforesaid payment has been 'wholly and exclusively' incurred in connection with the transfer of the subject asset."

It further stated: "The position of the present appellant is far better, as the title to the subject property vested only in the sisters and hence the amount of Rs.33 lakhs is, in a way, part of the sale consideration itself. The amount has been paid not merely to get over difficulties in the transfer, but to enable the transfer itself."

The Court relied on the principle from the Division Bench decision in Bradford Trading Co. (261 ITR 222): "Unless such amount was paid, the transfer of property could not have taken place and hence such payment has an intimate connection to the transfer of the asset."

Accordingly, the substantial question of law was answered in favour of the appellant, allowing the amount paid to be excluded from the capital gains computation as part of the cost of acquisition, and the appeal was allowed.