Expenses must be incurred wholly and exclusively in connection with the transfer to qualify for a permissible deduction under section 48(i) of the Income Tax Act, 1961.

Srinivasa Iyengar, J.—Pursuant to the order of this court in C.P. No. 54 of 1969, dated July 15, 1970, the Income Tax Appellate Tribunal, Bangalore Bench, has referred the following question of law arising out of its order in I.T.A. No. 14800(?) of 1964-65, for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal is justified in not deducting Rs. 41,517 while computing the capital gains ?

The computation of the capital gains was for the assessment year 1962-63 (the accounting year ending March 31, 1962). The assessee is the widow of J. B. Pinto who was a partner in five firms. The assessee filed a return, and thereafter a revised return, showing an income of Rs. 18,150 and a loss of Rs. 94,66 under capital gains. The revised return came to be filed consequent on it being pointed out by the Income Tax Officer that she had not shown any income in respect of capital gains arising on the release by her of her rights in the firms in which her husband was a partner to which she had become entitled on his death.

J. B. Pinto died on July 8, 1958. The total of the amounts standing to his credit in the accounts of the firms amounted to Rs. 3,14,837,35. Certain debits had been made in these accounts alleged to be on account of gifts and the genuineness of the same was disputed by the assessee. On April 2, 1960, an agreement was entered into between the assessee and the continuing partners where by Rs. 4,89,132 was agreed to be paid to the assessee in respect of her husband's interest in the firms. However, further disputes arose between the parties and there was an oral agreement entered into on June 11, 1961, and on June 21, 1961, are lease deed was executed by the assessee where by a sum of Rs. 5,76,582 was agreed to be paid to the assessee "in full and final settlement and quittance of right, title, interest, claim, demand of the party of the first part (viz., the assessee) against the party of the second part in respect of all and every part of the estate of her deceased husband, the late Joachim Bernard Pinto, as the sole heir representative and beneficiary thereto."

2. The Income Tax Officer did not accept the loss claimed under capital gains. There was no dispute in regard to the total consideration under the release deed, viz., Rs. 5,76,582. During the course of the assessment proceedings, the assessee in her letter dated January 28, 1964, gave a break-up of this consideration amount and one of the items was a sum of Rs. 41,517 which was stated to be "lawyer's fees and travelling expenses and damages for mental worry and suffering on account of wrongful withholding and detention of my property". The Income Tax Officer did not accept the explanation in this behalf and also in regard to certain other items. He noticed that the release deed itself did not specify any amount being paid towards such expenses or damages and no such explanation had been given in the estate duty proceedings and at earlier stages in the proceedings and the assessee was taking inconsistent stands.

3. It was urged before him that this amount was paid to her so as to dissuade her from going to court but he did not accept the plea as being unsupported from the circumstances in the case, He held that certain other adjustments sought to be made in arriving at a loss under capital gains were not tenable and the break-up given of the amount of consideration was not supported by any documentary evidence and could not be accepted. He computed the capital gains at Rs. 67,133.

4. Among other items the rejection of the claim in regard to this amount of Rs. 41,517 was contested before the Appellate Assistant Commissioner. He held that the claim was obviously misconceived as, according to the assessee, it represented expenses reimbursed and when expenses are reimbursed they cease to be expenses and the assessee would revert to the position where she was prior to the incurring of the expenditure and, referring to the pro