Capital gain – Expenditure incidental to sale – Section 48 – A. Y. 2006-07 – Expenditure for cancellation of earlier sale is deductible u/s. 48 as expenditure incidental to sale:

In the return of income for the A. Y. 2006-07, the assessee had disclosed capital gain on sale of residential house on which exemption u/s. 54 was claimed. In computing the capital gain the assessee had claimed a deduction of Rs. 7,50,000/- as expenditure incidental to the sale. Out of this amount, Rs. 5,00,000/- was the cancellation charges for cancelling the earlier agreement for sale and the balance Rs. 2,50,000/- is the brokerage paid for the same. The Assessing Officer disallowed the claim. The Tribunal allowed the claim.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The finding of the Tribunal is that the assessee had entered into an earlier agreement to sell the property and had recovered Rs. 10,00,000/- from one AS. However, this agreement was cancelled to enable the assessee to enter into the transaction resulting in the capital gain. Rs. 10,00,000/- was refunded to AS and Rs. 5,00,000/- was paid as cancellation charges. Rs. 2,50,000/- was paid to one RK who acted as a broker in the first deal.

ii) The payments cannot be challenged on the ground that they were not genuine or were not made. Findings of the Tribunal are factual and cannot be categorised or treated as perverse. Similarly, it cannot be said in the facts of the present case that these payments were not directly relatable to the transaction for sale dated 03-06-2005, which had resulted in income by way of capital gains.

iii) By cancelling earlier transaction and ensuring that the rights created by the earlier agreement to sell do not obstruct the sale transaction, payments of Rs. 5,00,000/- to AS and Rs. 2,50,000/- to AK, have been made. Finding of the Tribunal in the said aspect is quite clear and on the basis of the said facts, the Tribunal has rightly held that the expenditure was incurred and was wholly connected with the sale transaction dated 03-06-2005. We do not think that any substantial question of law arises and thus the present appeal is dismissed.”