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TMI Blog2002 (9) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 shares were transferred to A. M. Buhari and he paid a total sum of Rs. 5 lakhs. There was also an agreement to the effect that after the hotel was constructed, it should be sold to A. M. Buhari for a sum of Rs. 43 lakhs and he should be made the managing director of the hotel. Meanwhile, Abdul Aziz, the chairman of the assessee-company entered into negotiations with India Tobacco Company Ltd. for the sale of the entire undertaking for a total consideration of Rs. 46 lakhs and on September 2, 1973, an agreement was entered into for the sale of the undertaking. A. M. Buhari dissented the agreement and he filed a company petition in C. P. No. 84 of 1973 on the file of this court to set aside the agreement entered into between the chairman of the assessee-company and India Tobacco Company Limited on the ground that the decision to transfer the undertaking was taken be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 expenditure incurred wholly and exclusively in connection with the said sale and it was allowable as a deduction under section 48(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). The Income-tax Officer rejected the claim of the assessee on the ground that the company petition was filed by A. M. Buhari claiming to be a minority shareholder and the payment of Rs. 2 lakhs had no connection or nexus with the sale and the sale did not have any direct nexus with the expenditure and the matter was settled between the majority and minority shareholders and the assessee-company had nothing to do with the compromise. The Income-tax Officer therefore held that the sum of Rs. 1.5 lakhs received from India Tobacco Company Ltd. by way of reimbursement should be treated as a part of sale consideration. The Income-tax Officer also disallowed the balance sum of Rs. 50,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 and exclusively in connection with the transfer of the Bradford undertaking ? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the sum of Rs. 1.5 lakhs received by the assessee from India Tobacco Co. Ltd. and passed on to Shri A. M. Buhari did not become part of the consideration for sale in the hands of the assessee-company and as such the sum of Rs. 1.5 lakhs is not available for assessment in the hands of the assessee as part of the sale consideration ? 3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the amount of Rs. 16,000 spent by the assessee towards legal expenses in connection with the compromise agreement entered into with Shri Buhari is a permissible deduction in computing the capital gains in the assessee's case ?" Though three q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 the hotel undertaking which was to be transferred in favour of India Tobacco Company Limited and he received the money in full and final settlement of his claims against all the respondents in the company petition including the assessee-company. As far as the sum of Rs. 5 lakhs contributed by A. M. Buhari is concerned, it was paid to him under the same compromise. We are concerned only with the balance amount of Rs. 2 lakhs. We are of the view that if a sum of Rs. 2 lakhs was not paid, the litigation would go on, and the assessee-company with a view to purchase peace with A. M. Buhari to enable it to transfer the property in favour of India Tobacco Company Limited had paid the money to A. M. Buhari. We are of the view that the entire chain of events started from the contribution made by A. M. Buhari to the company and the payments made by the company to A. M. Buhari show that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 transfer" has wider connotation than the expression, "for the transfer". We are of the view that but for the payment of Rs. 2 lakhs, the transfer would not have taken place and the payment has necessarily to be made for the transfer of the hotel in favour of India Tobacco Company Limited. Hence, we are of the view that the sum of Rs. 2 lakhs was expended by the assessee wholly and exclusively in connection with the transfer of the capital asset and not de hors the transfer. A similar view was also taken by the Bombay High Court in a subsequent case in CIT v. Abrar Alvi [2000] 247 ITR 312 and the Bombay High Court held that the expenditure incurred in removing encumbrances would be deductible in the computation of capital gains. Learned counsel for the Revenue relied upon the decision of this court in D. D. Chittaranjan v. CIT [1992] 193 ITR 238, but the decision is distinguishabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 favour of the purchaser giving it a clear title and quiet enjoyment of the property. Secondly, in the case of mortgage, by the creation of mortgage, there is a transfer of interest in the property in favour of the mortgagee and after the creation of mortgage, the mortgagor has the right of redemption and when he sold the property, he is entitled to receive the entire sale consideration as the owner of the property and a part of it would go to discharge the mortgage which was created by him. Therefore, the decision in N. Vajrapani Naidu's case [2000] 241 ITR 560 (Mad) has no application to the facts of the case. Learned counsel for the Revenue also relied upon the decision of the Supreme Court in CIT v. Attili N. Rao [2001] 252 ITR 880 and the case has no application to the facts of the case as in that case the property was sold in auction and the entire money realised belonged to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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