TMI Blog2002 (9) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... of the court was delivered by N. V. BALASUBRAMANIAN J. -This is a reference at the instance of the Commissioner of Income-tax, Tamil Nadu-III, Chennai. The respondent, here in after referred to as "the assessee", was incorporated as a private limited company on February 15, 1970, and its main object was to construct a multi storeyed four star hotel at Chennai at Cathedral Road, later known as Edward Elliots Road. The assessee purchased a plot to achieve the object and also to put up a construction thereon. The paid up capital of the assessee-company was Rs. 10 lakhs contributed by one Abdul Aziz, the chairman of the assessee-company and five others. The assessee became heavily indebted to Indian Overseas Bank and the assessee was in need of further finance and also expertise to complete the construction of the hotel and to make it a commercial venture. One A. M. Buhari was a hotelier in Chennai and he was approached by the chairman of the assessee-company to participate in the venture and take over the management of the hotel. A. M. Buhari agreed to advance a sum of Rs. 5 lakhs and he was to be allotted 2,500 shares in the assessee-company. Accordingly, on August 3, 1973, 2,500 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nced by him and in consideration of A. M. Buhari with drawing the company petition, appeal proceedings, etc., the assessee-company paid to A. M. Buhari a sum of Rs. 2,00,000 in full and final settlement of all claims, demands and outstandings against all the respondents including the assessee-company. India Tobacco Company Ltd. agreed to reimburse a sum of Rs. 1.50 lakhs to the assessee for the payment of Rs. 2 lakhs to be made to A. M. Buhari. A. M. Buhari also confirmed that on receipt of payment, he would have no claim against the shares of the assessee-company or any of its assets, whether movable or immovable including the assets disposed of by the assessee-company prior to the compromise or against any of the respondents therein. Accordingly, the appeal as well as the company petition was withdrawn and dismissed. The assessee-company had disclosed capital gain of a sum of Rs. 1,06,490 in its return for the assessment year 1974-75. The Income-tax Officer was of the view that the capital gain shown by the assessee-company was on the low side and proposed certain additions. The case of the assessee before the Income-tax Officer was that the sum of Rs. 2 lakhs was an expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Appellate Tribunal also took the view that even if the sum of Rs. 1.5 lakhs was taken as a part of sale consideration, the amount paid to A. M. Buhari would constitute an expenditure incurred wholly and exclusively in connection with the transfer. As far as Rs. 50,000 is concerned, the Appellate Tribunal held that it was incurred wholly and exclusively in connection with the transfer and it would be allowable under section 48(1) of the Act. The Appellate Tribunal, on the same reasoning, allowed the sum of Rs. 16,000 claimed as legal expenditure on the ground that it was incurred wholly and exclusively for the purpose of transfer of the capital asset. The Appellate Tribunal accordingly allowed the appeal preferred by the assessee. The Revenue sought for a reference and on the basis of the directions of this court, the Appellate Tribunal has stated a case and referred the following three questions of law for our consideration : "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding, and had valid materials to hold that the sum of Rs. 2 lakhs paid by the assessee to Shri A. M. Buhari is an expenditure incurred wholly an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hotel buildings in favour of India Tobacco Company Limited. His main case in the company petition before this court was that he had contributed share capital in the assessee-company and he had also lent money for participation in hotel business and in the running of hotel as managing director and if the assessee-company was allowed to transfer its hotel undertaking in favour of India Tobacco Company Limited, the substratum of the assessee-company would be lost and the main object with which the assessee-company was formed would be defeated. His case was that the shareholders are to participate in the running of the hotel and if the hotel undertaking of the assessee-company was disposed of in favour of India Tobacco Company Limited, it would do away with the entire business for which the company was formed and hence, he sought for interim injunction restraining the managing director of the assessee-company from transferring the hotel in favour of India Tobacco Company Limited. The proceedings in the litigation clearly show that a sum of Rs. 2 lakhs was paid to A. M. Buhari in settlement of his claim against the transfer of the assets of the company, more particularly, against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in CIT v. Shakuntala Kantilal [1991] 190 ITR 56 has dealt with a case where the assessee owned a piece of land and she entered into an agreement of sale of the said property with one R and a dispute subsequently arose and R filed a suit for specific performance and there was a settlement whereby the assessee agreed to pay certain sum of money to R and in the meantime, the assessee entered into another agreement of sale in 1967 in respect of the same property with one C and C gave an assurance to R that on the completion of the sale, they would deduct a sum of Rs. 35,504 from the total consideration and pay it to R. The assessee claimed that the sum of Rs. 35,504 should be allowed as, deduction for the purpose of computing her income from capital gains. The Bombay High Court held that unless the assessee had settled the dispute with R, the sale transaction with C could not have materialised and the sale consideration had to be reduced by the amount of compensation paid to R. We are in agreement with the view expressed by the Bombay High Court that the expression used in section 48 of the Act, viz., "expenditure incurred wholly and exclusively in connection with such transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in N. Vajrapani Naidu's case [2000] 241 ITR 560 (Mad) has no application at all as in that case, mortgage was created by the assessee subsequent to the acquisition of the property and therefore there is no difficulty in holding that the payment made to discharge the mortgage was not an expenditure incurred wholly and exclusively in connection with the transfer. The distinction pointed by the Supreme Court in Rm. Arunachalam's case [1997] 227 ITR 222 is that where the assessee acquired property subject to mortgage and later on it was discharged at the time of transfer by the vendee, then, it would become an expenditure incurred in connection with the transfer, and where the assessee himself created the mortgage after acquisition of capital asset, the amount would not go to reduce the full value of consideration received by the assessee. We are of the view that the decision in N. Vajrapani Naidu's case [2000] 241 ITR 560 (Mad) has no application. On the facts of the case, there were impediments against the transfer of the property by way of litigation and unless the amounts were paid, the litigation would not have been settled enabling the assessee to transfer the property in fav ..... X X X X Extracts X X X X X X X X Extracts X X X X
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