Assessee purchased land whose vendors' title was later held to vest in their sisters; she paid about Rs.33 lakhs under a 2005 compromise to clear title before selling. The Court held the payment was incurred wholly and exclusively for the transfer and formed part of sale consideration, allowing its deduction under Section 48 in computing capital gains.
This page shows the compact analysis of this judgement. The full analysis — procedural history, issue-by-issue holdings with ratio and obiter, advocates, and paragraph-level evidence for every claim — is being added to the record in batches and will appear here when this judgement has been through it.
2025:MHC:413
T.C.(A)No.207 of 2013
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 27.11.2024
CORAM :
THE HONOURABLE DR.JUSTICE ANITA SUMANTH and THE HONOURABLE MR.JUSTICE G. ARUL MURUGAN
T.C.(A)No.207 of 2013
Smt.A.Rita
vs
The Commissioner of Income Tax Puducherry. .... Respondent
Prayer : Appeal filed under Section 260A of the Income Tax Act, 1961 against order dated 30.01.2013 made in I.T.A.No.904/Mds/2012 on the file of the Income Tax Appellate Tribunal, 'D' Bench, in respect of assessment year 2008-09.
For Appellant : Mr.A.S.Sriraman For Respondent : Mr.S.Rajesh Junior Standing Counsel for Mr.J.Narayanasamy Senior Standing Counsel
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JUDGMENT (Delivered by Dr. ANITA SUMANTH.,J)
The relevant sequence of dates and events are as follows:
(i) The appellant/assessee purchased a property at S.No.93/5,
Valudhareddy Village, Villupuram Taluk ad measuring 1.18 acres by way of a deed dated 22.01.1980 registered on the file of the Sub-Registrar, Villupuram (schedule property) from Shanmugam, Arumugam and Murugan (in short 'vendors').
(ii) That property formed part of a basket of assets that was under litigation inter se the family of the vendors.
(iii) A partition suit came to be filed in O.S.No.288 of 1981 by the sisters of the vendors, viz., Saraswathi and Lakshmi, which came to be decreed in favour of the sisters partly.
(iv) Assailing the decree in the Suit, the sisters of the vendors filed a first appeal before Sub-Court, Villupuram in A.S.No.135 of 1983, which confirmed the order of the Civil Court in regard to items 1 to 37 of the suit properties, which includes the schedule property at serial number 36 thereof.
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(v) A second appeal in S.A.No.458 of 1985 came to be filed by the
vendors and Cross objections were filed by the sisters.
(vi) The second appeal was disposed on 09.04.1986, a learned Judge of this Court confirming that the conclusion of the Civil Court was correct qua properties at 1 to 37.
(vii) Hence, and with the passing of the order in second appeal, the title to the schedule property was held to vest in the sisters.
(viii) An Execution Petition was filed by the sisters seeking to execute the decree.
(ix) Pending the proceedings for execution, the parties, that is, the appellant herein and the sisters, effected a compromise of the lis, and entered into Deed of compromise dated 07.10.2005 to following effect:
cld;gof;if gj;jpuk
2005 Mk; Mz;L mf;nlhgh; 7Mk; njjp tpGg;g[uk; lt[d; re;jhdnfhghyg[uk; bkapd; nuhL 34 ,yf;fj;jpy; trpf;Fk; me;njhdprhkp kidtp hPj;jh mk;khs; (1). tpGg;g[uk; jhYf;fh rhynkL fpuhkj;jpy; trpf;Fk; uhkfpUc&;zd; kidtp ru!;tjp (2). nkw;go tpGg;g[uk; jhYf;fh rhynkL fpuhkj;jpy; trpf;Fk; mnrhf ft[z;lh; kidtp yc&;kp (3) Mfpa ehk; K:tUk; vGjpf;bfhz;l xg;ge;jk; vd;dbtdpy;
ek;kpy; 2. 3 egh;fs; tpGg;g[uk; khtl;l chpikapay; ePjpkd;wj;jpy; tGjbul;o fpuhkk; g[";ir 93-5 epyk; Fwpj;J jhf;fy; bra;ag;gl;l E.P.236/97
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epiwntw;W kDtpid bghWj;J. ek;kpy; Kjy; egh; nkw;go brhj;J mtUf;F jdpg;gl;l ghj;akhd brhj;J vd;W fl;rp Mo nkw;go E.P.236/97 js;Sgo bra;ag;gl ntz;Lbkd;W ek;kpy; Kjy; egh; E.A.2403/1997 vd;w kDtpid jhf;fy; bra;J nkw;go kD epYitapy; ,Ue;J tUfpd;w NH;epiyapy;. cga ghh;l;ofs; fl;rp vg;goapUe;j nghjpYk; ,e;j tHf;fpid tpiutpy; xU Kot[f;F bfhz;L tuntz;Lbkd;W vz;zj;jpdhy;. ehk; midtUk; uh$pahfp. mjd;go ek;kpy; 1 tJ egh; jhf;fy; bra;j chpikapay; rl;lk; Mh;lh; 21 tpjp 97 E.A.2403/1997 vd;w kDtpid mDkjpf;f 23 egh;fs; xg;g[f;bfhz;Ls;sdh;/ mjw;F gpujpgydhf ek;kpy; 1 Mk; egh; nkw;go g[y vz; 93-5 70 brz;l; brhj;jpid fpiuak; bra;J mjd; K:yk; fpilf;Fk; fpiua bjhifapy; ghjp bjhifapid ek;kpy; 1Mk egUk; kPjp bjhifapid ek;kpy; 2. 3 egh;fSk;. rhp rkkhf vLj;Jf;bfhs;tjhf ehk; midtUk; xg;g[f;bfhz;Ls;nshk;/ nkYk; 2. 3 egh;fSf;F chpa ghjp fpiua bjhifapid fpiuajhuhplkpUe;nj 2/ 3 egh;fs; neuoahf bgw;Wf;bfhs;tjpy; 1Mk; egUf;F vt;tpj Ml;nrgiza[k; ,y;iy/ mt;thW mth;fs; bgw;Wf;bfhs;Sk; fpua bjhiff;F chpa tUkhdthpapid 2. 3 egh;fns brYj;jp bfhs;sntz;oaJ/
nkYk; flY}h; tPl;L trjp thhpaj;jhy; Mh;$Pjk; bra;ag;gl;lJk; O.S.288/81y; rk;ke;jg;gl;l 9. 10. 11. 13. 16 mapl;l brhj;Jf;fs; bghWj;Jk; ekf;Fs; ehk; uh$pahfpa[s;sgoahy; mjd; xl;Lbkhj;j igrYf;fhf ek;kpy; 1Mk; egh; ek;kpy; 2. 3 egh;fSf;F xl;Lbkhj;jkhf U:/5.00.000-? (Ie;J yl;rk; kl;oy;) jUtjhft[k; 1Mk; egh; xj;Jf;bfhs;fpwhh;. mjd;go 2. 3 egh;fs; nkw;go brhj;Jf;fs; Fwpj;j epiwntw;W kD jhf;fy; bra;tjpy;iy vd;W cWjp TWtJld; mJ Fwpj;J 1Mk; egh; chpa kD (m) tHf;F jhf;fy; bra;a[k; gl;rj;jpy; nkw;go kD (m) tHf;fpid mDkjpf;f 2. 3 egh;fs; rk;kjKk; bjhptpf;fpwhh;fs;/ ,J rk;ke;jkhf 2. 3 egh;fs;
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brd;id cah;ePjpkd;wj;jpy; jhf;fy; bra;Js;s ePjp nguhiz W.P.No.40423/2002 tHf;fpida[k; thg!; bgw;Wf;bfhs;fpd;wdh;/ ,e;jgof;F ehk; K:tUk; rk;kjpj;J vGjpf;bfhz;l cld;gof;if gj;jpuk;/
(x) An application thus came to be filed by the Appellant in E.A.No.2403 of 1997 under Order 21 Rule 97 of the Civil Procedure Code
praying to dismiss E.P.No.236 of 1997.
(xi) In the course of the Execution proceedings, the Principal District Munsif, Villupuram passed an order dated 19.10.2005 recording the memo filed by Rita, Saraswathi and Lakshmi to the effect that they had no objection to E.A.No.2403 of 1997 being allowed. The litigation inter se the parties thus came to an end by virtue of the aforesaid order only.
(xii) The Appellant filed a return of income for assessment year
(AY) 2008-09 on 29.07.2008 returning capital gains computed on the basis that the amount paid by her to the sisters be taken into account in determining the computation of cost of acquisition of the subject property.
(xiii) An assessment came to be made on 31.10.2010 and in
completing the assessment, the Assessing Authority took the view that the
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amounts paid as compensation did not constitute expenditure that could be allowed in the computation of capital gains.
(xiv) Before the Commissioner of Income Tax (Appeals) in first appeal, the appellant reiterated its case that the compensation constituted part of the cost of acquisition. All relevant documents such as the deed of purchase dated 22.01.1980, order of the Civil Court dated 23.01.1985 in O.S.No.288 of 1981, order in First Appeal dated 23.01.1985 in A.S.No.235 of 1983, the order of the High Court in Second Appeal dated 09.04.1996 in S.A.No.458 of 1985, order passed by the Principal District Munsif on 19.10.2005 in the interim application filed by the appellant, compromise memo dated 07.10.2005, Agreement of sale between the appellant and the three sisters dated 07.10.2005 and the order of the Principal District Munsif dated 06.08.2008 closing the application based on the memo were placed before the CIT(A), who on consideration of the same, accepted the assessee's contention.
(xv) The above order was reversed on 30.01.2013 by the Income Tax Appellate Tribunal ('ITAT'/'Tribunal') at the instance of the revenue. The Tribunal took the view that the compensation paid would, at best, only
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amount to application of the amount and not cost of acquisition under
Section 48 of the Act. Hence this appeal.
learned counsel for the appellant and Mr.Rajesh, learned Junior Standing Counsel for the respondent.
admitted thus far. Hence, on a consideration of the substantial questions of law raised for decision, the following question of law is admitted and the matter taken up for final hearing with the consent of both learned counsel:
Whether the Appellate Tribunal is correct in law in sustaining the action of the respondent in rejecting the claim for exclusion of Rs.33,87,720/- out of the sale proceeds from the sale of the property/capital asset in the computation of Long Term Capital Gains overlooking the applicability of the legal theory of 'Diversion by overriding title' as well as the decision of this Hon'ble Court reported in 261 ITR 222?'
1 and the sub-paragraphs thereunder are admitted by both learned counsel.
The legal question to be decided relates to the allowability or otherwise of the amount of Rs.33,87,720/- as cost of acquisition in the computation of capital gains under Section 48 of the Act.
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48. Mode of computation.
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;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto:
amount of Rs.33 lakhs (approx.) would constitute expenditure wholly and exclusively incurred in connection with the transfer of the asset.
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.
and other family members was in 1981, subsequent to the deed of purchase executed on 22.01.1980.
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09.04.1996 in S.A.No.458 of 1985, 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 of Rs.33 lakhs (approx.) that the appellant has cleared his title and can be said to have acquired the property.
This Agreement is made on the 7th October of 2005 between Reetha Ammal W/o Anthony Samy and residing at No.34, Santhana Gopalapuram Main Road, Villupuram (1) Saraswathi W/o Ramakrishnan and residing at Salamedu, Villupuram Taluk (2) Lakshmi W/o Ashoka Gounder and residing at Salamedu, Villupuram Taluk (3)
Whereas No.2 & 3 of us had filed E.P. 236/1997 in respect of dry land comprised in S.No.93/5 on the file of District Munsif Court, Villupuram and
Whereas No.1 of us had filed E.A.2403/1997 to dismiss E.P.236/1997 on the ground that it is her separate property and that the said application is pending enquiry and
Whereas the parties have decided to amicably settle the dispute at the earliest and arrived at the compromise and
Whereas Nos.2 & 3 of us have agreed for the application E.A.2403/1997 filed under order 21 Rule 97 C.P.C. being allowed in favour of No.1 of us and
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Whereas the parties have agreed that in consideration of the same No.1 of us had agreed that when an extent of 70 cents in S.No.93/5 was sold, the total sale consideration would be divided in equal moieties between Nos.2 & 3 on the one part and No.1 of us on other part and
That No.1 of us have also no objection for the said amount shall be received directly from the purchaser by Nos.2 & 3 of us and
That the Income Tax payable on the said sale price received by Nos.2 & 3 of us shall be paid by Nos.2 & 3 of us and
That No.1 of us had agreed to pay a sum of Rs.5,00,000/- to Nos.2 & 3 of us in full discharge of the compromise arrived at in respect of items 9, 10, 11, 13 & 16 of the suit properties comprised in O.S.288/81 which had been acquired by the Cuddalore Housing Board and
That Nos.2 & 3 of us assure that they would not file any execution of application in respect of those items and further agree that they would have no objection for the petition as and when filed by No.1 of us in that respect being allowed, and that Nos.2 & 3 of us agreed to withdraw the writ petition No.40423/2002 pending on the file of the Hon’ble High Court of the Judicature at Madras.
The parties have thus agreed and executed this agreement.
Witness: Signed by N.Ramakrishnan 1.A.Reetha S.Ashokan 2.Saraswathi A.Raphel 3.Lakshmi
‘wholly and exclusively’ incurred in connection with the transfer of the
subject asset.
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Tax V. Bradford Trading Co. (P) Ltd. (261 ITR 222) was 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.
[A.S.M., J] [G.A.M., J]
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sl Index:Yes Neutral Citation:Yes Speaking order
27.11.2024
To
The Commissioner of Income Tax Puducherry.
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DR.ANITA SUMANTH,J. and G.ARUL MURUGAN,J.
Sl
T.C.(A)No.207 of 2013
27.11.2024
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2 issues framed by the court
Whether compensation of Rs.33,87,720 paid to settle title litigation constitutes cost of acquisition or expenditure deductible under Section 48 in computing capital gains.
Whether the Tribunal erred in rejecting the assessee's claim based on the doctrine of diversion by overriding title and Bradford Trading Co.
Colour shows how this judgement treated each authority
Commissioner of Income Tax V. Bradford Trading Co. (P) Ltd.Relied on¶12
261 ITR 222
3 provisions across 2 enactments
Smt.A.Rita
The Commissioner of Income Tax Puducherry
Dr.Anita Sumanth
G.Arul Murugan
As recorded by the court registry
Judgements on the same questions, provisions and authorities, from every court
