1. The assessee's lands were acquired by the Government of Tamil Nadu under the Tamil Nadu Land Acquisition Act. The compensation awarded by the Land Acquisition Officer (LAO) was enhanced by the civil court. The expenditure incurred by way of legal charges was claimed as deductible in computing the capital gain. The ITO disallowed the claim on the ground that they are not incurred wholly and exclusively in connection with such transfer. Accordingly, he computed the capita] gain.
2. The assessee appealed to the Commissioner (Appeals). In the original grounds of appeal the ground relating to deduction of legal expenditure was not taken. But that ground was taken by way of additional ground which was admitted by the Commissioner (Appeals). Dealing with the additional ground on merits, he held that the sum of Rs. 58,064 being the legal expenditure incurred in connection with the determination of compensation is an allowable deduction in computing the capital gain.
Accordingly, he directed the ITO. Against the same, the revenue has preferred this appeal.
3. In the grounds it is urged that the Commissioner (Appeals) erred in admitting the additional ground. We are unable to agree with this submission. Firstly, the claim for deduction of legal expenses of Rs. 58,064 was urged before the ITO but it was not taken in the original grounds of appeal. Hence, it was raised by way of additional ground.
The Commissioner (Appeals) was perfectly justified in admitting the additional ground.
4. The learned departmental representative submitted that the sum of Rs. 58,064 being the legal expenses in connection with the determination of compensation is not an allowable deduction under Section 48 of the Income-tax Act, 1961 ('the Act'). The Commissioner (Appeals) was not justified in allowing the same. The learned counsel for the assessee supported the order of the Commissioner (Appeals).
5. We have considered the rival submissions. Any profit or gain arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head 'Capital gains'.
Section 48 deals with the mode of computation and deductions. It reads as under : 48. Mode of computation and deductions.-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.
Under the above provision, the expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the capital asset and the cost of improvement thereto is allowable as deduction from the full value of the consideration received. The question for consideration is whether the legal expenditure incurred by the assessee in respect of determination of the compensation in the civil court is an allowable deduction under Section 48. In our view, the claim of the assessee is allowable. Under Section 48 the expenditure incurred wholly and exclusively in connection with transfer is an allowable deduction. The compensation awarded by the LAO was not accepted by the assessee and the matter was carried in reference to the civil court where the compensation awarded was enhanced. Enhanced compensation granted by the civil court has been taken as the amount received for the transfer of the asset and, accordingly, the capital gain was computed. Once the amount received on account of enhancement of compensation by the civil court is taken as the value received by the assessee, legal expenditure incurred by the assessee for getting compensation enhanced in the civil court is an allowable deduction as the said expenditure has been incurred in connection with compensation of the asset transferred. It is well settled that it is only upon a final determination by the competent court under the Land Acquisition Act, 1894, acquisition proceedings come to an end. This is well settled by the decision of the Supreme Court in Raja Harish Chandra Raj Singh v. Dy. LAO AIR 1961 SC 1500.
Once reference is made to the civil court the litigation proceedings therein are intimately connected with the acquisition proceedings. All expenditure incurred in connection with such litigation in the civil court is an expenditure within the meaning of Section 48 as it is an expenditure wholly incurred in connection with compulsory acquisition proceedings. Thus, in our view, the sum of Rs. 58,064 claimed as legal expenditure incurred in the litigation in the civil court for getting the compensation enhanced is an allowable expenditure as it is incurred wholly in connection with acquisition proceedings.
6. In V.A. Vasumathi v. CIT  123 ITR 94 the Kerala High Court considered the question whether the legal expenditure incurred in the civil court subsequent to the award in connection with enhancement of compensation is an allowable expenditure. The Kerala High Court held that where a reference is made under Section 20 of the Land Acquisition Act, the litigation which results therefrom is a proceeding intimately and intrinsically connected with the acquisition and all expenditure wholly and exclusively incurred in connection with such litigation is, therefore, an expenditure within the meaning of Section 48. The above decision was again approved by the same Court in CIT v. Dr. P.Rajendran  127 ITR 810. It was held by the Division Bench of the Kerala High Court that the compulsory acquisition of the property under the Land Acquisition Act has to be treated as a transfer for the purposes of computation of capital gain. In a case where the matter is taken to the civil court by way of reference under Section 20 of the Land Acquisition Act, the fixation of quantum of consideration for the transfer is finally effected only by the decision rendered by the civil court and such fixation forms an integral part of the process of transfer by way of compulsory acquisition provided by the Land Acquisition Act. It was held that the expenditure incurred by the assessee in conducting the land acquisition reference proceedings before the civil court cannot, therefore, but be regarded as expenditure wholly and exclusively incurred in connection with the transfer. In CIT v. A. Venkataraman  137 ITR 846 the Madras High Court held that the amount paid to the tenants to get the vacant possession of the land which has been sold is an expenditure incurred wholly and exclusively in connection with the agreement of sale which preceded the transfer and in fulfilment of a condition of sale and the said expenditure incurred is an allowable deduction under Section 48 in computing the capital gains. The ratio laid down in the above decisions squarely applies to the instant case.
7. In Miss Dhun Dadabhoy Kapadia v. CIT  63 ITR 651 the Supreme Court observed that in working out capital gain or loss the principles that have to be applied are those which are a part of the commercial practice or which an ordinary man of business will resort to when making computation for his business purposes. In CIT v. Mohanbhai Pamabhai  91 ITR 393 the Gujarat High Court dealing with Section 45 of the Act held that the object of charging provision is to tax 'profits or gains' and this expression means real or net profits or gains.
The ratio laid down in the above cases squarely applies to the instant case. The legal expenditure incurred in litigation before the civil court in connection with enhancement of the compensation awarded by the LAO is an allowable expenditure under Section 48 while computing the capital gains. The Commissioner (Appeals) was perfectly justified in directing the ITO to allow the sum of Rs. 58,064 as deduction in computing the capital gains.