Jagannatha Shetty, J.
1. This is a reference under section 256(1) of of the Income-tax Act, 1961. The questions referred are :
'(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the assessee is entitled for deduction of the legal expenses of Rs. 5,500 and the compensation of Rs. 15,000 paid to the tenant from the computation of capital gains
(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in not agreeing with the Department's contention that the tenant's right purchased for Rs. 15,000 by the assessee formed a distinct asset, the transfer of which gave rise to short-term capital gains ?'
2. The reference arises out of an order of assessment made on the assessee, an individual, for the assessment year 1976-77. The accounting year ended on March 31, 1976. The land belonging to the assessee was acquired by the Government. He received the entire compensation inclusive of the customary share which a tenant is ordinarily entitled to out of such compensation. The assessee had incurred legal expenses of Rs. 5,500 and had paid compensation of Rs. 15,000 to the tenant for surrendering his rights. The Income-tax Officer brought to tax the capital gains on the compensation received by the assessee. The assessee claimed two deductions : (i) Rs. 5,500 being the legal expenses; and (ii) Rs. 15,000 paid to the tenant. The Income-tax Officer did not allow those claims.
3. The Appellate Assistant Commissioner confirmed the finding of the Income-tax Officer and dismissed the appeal.
4. In the appeal before the Tribunal, it was urged on behalf of the assessee that both the said amounts should be allowed as expenditure since it was connected with the compulsory acquisition of the land. The Department, while resisting the claim, urged in the alternative that the assessee purchased the tenant's right and that would amount to a short-term capital gain. The amount of Rs. 15,000 paid by the assessee to the tenant should, therefore, be not allowable, but if it is considered to give rise to a short-term capital gain, then it has to be worked out separately as a cost of acquisition (sic). The Tribunal, after considering these contentions, allowed the claim of the assessee stating that both the expenses were incurred in connection with the transfer.
5. Section 48 of the Income-tax Act, 1961, provides for the mode of computation of capital gains. It reads :
'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 capital asset and the cost of any improvement thereto.'
6. There is no difficulty in accepting the claim of the assessee in regard to the legal expenses. The assessee undisputedly incurred legal expenses amounting to Rs. 5,500 for obtaining compensation for compulsory acquisition of his land. It can, therefore, be properly considered as an expenditure incurred wholly and exclusively in connection with such transfer under section 48(i). No assessee could be denied the legal expenses incurred for obtaining the compensation for compulsory acquisition of the property. Our view finds support from the decision of the Kerala High Court in V. A. Vasumathi v. CIT : 123ITR94(Ker) . There it was observed that all expenditure wholly and exclusively incurred in connection with litigation for obtaining compensation upon compulsory acquisition of land should be considered as an expenditure within the meaning of section 48 of the Income-tax Act, 1961 and it is immaterial whether the expenditure was incurred subsequent to the award or prior to the award. We respectfully share this view.
7. The question next to be considered is whether the amount of Rs. 15,000 paid by the assessee to his tenant for surrendering the latter's right should also be considered as an expenditure falling under section 48(i).
8. The Tribunal, while examining this aspect, has observed that the same reasoning which applies to the legal expenses would apply to the deduction of Rs. 15,000. Since the compensation was due to be paid to the assessee as well as the tenant and but for the payment of Rs. 15,000 to the tenant, the assessee would not have been entitled to the whole of the awarded amount.
9. We do not think that the reasonings given by the Tribunal could be accepted. The Tribunal has recognised the right of the tenant to receive a portion of the compensation. The landlord has paid Rs. 15,000 to the tenant to enable him to receive the entire compensation including the portion belonging to the tenant. Such a payment made by the landlord to the tenant cannot be considered as an expenditure in connection with such transfer. The transfer contemplated herein is only one transfer, i.e., a compulsory acquisition of property by the State and any payment made by the landlord to the tenant in regard to surrender of tenancy right cannot be considered as an expenditure incurred in connection with compulsory acquisition. Therefore, the Tribunal was not right in allowing Rs. 15,000 under section 48(i) of the Act.
10. In the view that we have taken, the second question does not call for an answer, since the authorities have not assessed the short-term capital gains in the hands of the assessee.
11. In the result, we answer question No. 1 in the affirmative so far as it relates to the deduction of the legal expenses of Rs. 5,500 and answer the question in the negative in so far as it relates to Rs. 15,000 paid to the tenant.
12. In the circumstances of the case, we make no order as to costs.