(Per T. D. Sugla, J.)

In this departmental reference relating to the assessee's assessment for the assessment year 1968-69, the Income-tax Appellate Tribunal has referred to this Court two questions of law under section 256(1) of the Income-tax Act, 1961. The questions read thus :

"(1) Whether, on the facts and in the circumstances of the case, the compensation amount of Rs. 35,504 paid by the assessee to M/s. Radia and Sons (Pvt.) Ltd. is deductible in computing the capital gains arising on sale of the plot of land under section 45 of the Income-tax Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the assessee was rightly allowed by the Tribunal to exercise the option of substituting the fair market value of the plot of land as on January 1, 1954 for the actual cost thereof as contemplated under section 55(2) of the Income-tax Act, 1961, in computing the capital gains arising on sale of the plot under section 45 of the Income-tax Act, 1961 ?"

The assessee had purchased a plot of land admeasuring 5,072 sq. yards at Borivli in the year 1948 for Rs. 15,774. On August 2, 1963, the assessee entered into an agreement for sale of the said property with Radia and Sons (Pvt.) Ltd. at the rate of Rs. 29 per sq. yard. For reasons not necessary to be referred to, disputes and differences cropped up between the parties. Radia and Sons (Pvt.) Ltd. filed a suit against the assessee in our High Court being Suit No. 337 of 1965 for specific performance, inter alia, praying for (i) that the agreement for sale dated August 2, 1963 be declared valid and subsisting between the parties; and (ii) in the alternative, Radia and Sons (Pvt.) Ltd. be given compensation of Rs. 75,720. Eventually, there was a settlement between the parties. It was agreed that the assessee shall pay to Radia and Sons (Pvt.) Ltd. compensation of Rs. 35,504 at the rate of Rs. 7 per sq. yard upon which Radia and Sons would withdraw the above suit.

In the meantime, that is, on March 30, 1967, the assessee had entered into another agreement for sale in respect of the same property with Messrs Cosmos Co-operative Housing Society Ltd. at the rate of Rs. 51 per sq. yard. As a result of the settlement between the assessee and Radia and Sons (Pvt.) Ltd., the assessee's solicitors had to give an undertaking to the solicitors of Radia and Sons (Pvt.) Ltd. that the amount of Rs. 35,504 will be paid to Radia and Sons (Pvt.) Ltd. as compensation. It appears that the mere undertaking did not satisfy Radia and Sons (Pvt.) Ltd. and, ultimately, the purchasers, Messrs Cosmos Co-operative Housing Society Ltd., had to give an assurance to Radia and Sons that, on the completion of sale, they would deduct Rs. 35,504 from the total sale consideration of Rs. 2,58,672 and would pay the same to Radia and Sons (Pvt.) Ltd.

The assessee claimed that this amount of Rs. 35,504 should be allowed as deduction for the purpose of computing her income under the head "Capital gains" either as expenditure incurred in connection with the transfer or as cost of improvement or under section 48 itself. The departmental authorities rejected the claim. On further appeal, the Tribunal accepted the assessee's contention that the transfer of the property to Messrs Cosmos Co-operative Housing Society Ltd. could not have taken place unless the compensation of Rs. 35,504 was paid to Messrs. Radia and Sons (Pvt.) Ltd. It was held that the expenditure was thus incurred wholly and exclusively in connection with the transfer as contemplated under section 48(i) of the Act. The Tribunal also held that the expenditure in question could be said to have been incurred with a view to remove the obstruction and obtain a clear title to the property before sale and, in that view of the matter, such expenditure would also form part of the cost of acquisition of the capital asset or the cost of improvement thereto as contemplated under section 48(ii) of the Act. For this and other reasons stated in the