2025 (7) TMI 108 - AT - Income Tax

Capital gain arising from the compulsory acquisition of land sale proceeds of which were utilized by a bank to discharge the overdraft facility of a sister concern - application of income OR diversion of income by overriding title - overdraft facility has been obtained by the sister concern by putting the property of the assessee as collateral security HELD THAT - It is not a case where the sale proceeds were directly credited to the account of SBIL rather it is a case where the sale proceeds were first credited to the account of the assessee and then transferred to the account of SBIL in order to discharge the overdraft facility taken by the sister concern. Therefore it is not a case where any loan has been taken in lieu of mortgage of some property rather a case where overdraft facility has been obtained by the sister concern by putting the property of the assessee as collateral security. Assessee has also claimed the benefit of TDS deducted by the Government in lieu of the acquisition of the land. Therefore we are of the view that the present case is different from the case of Smt.Thressiamma Abraham 1996 (9) TMI 60 - KERALA HIGH COURT and hence it is a case of application of income and not diversion of income by overriding title. Before parting we would further like to observe that the assessee firm has shown loan to the sister concern as creditor under the had long term capital liabilities which fact has not been refuted by the Counsel for the assessee. Decided against assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

• Whether the capital gain arising from the compulsory acquisition of land, the sale proceeds of which were utilized by a bank to discharge the overdraft facility of a sister concern, can be treated as income of the assessee or is it income diverted under the principle of overriding title in favour of the bank?
• Whether the assessee, who stood as a guarantor and whose land was given as collateral security for the overdraft facility of the sister concern, can avoid taxation on capital gains by contending that the sale proceeds were appropriated by the bank directly towards the sister concern's liability?
• Whether the precedent laid down in the judgment of the jurisdictional High Court in the case of CIT v. Smt. Thressiamma Abraham is applicable to the facts of the present case?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Treatment of capital gain arising from compulsory acquisition of land whose sale proceeds were appropriated by bank towards sister concern's overdraft liability

Relevant legal framework and precedents: The taxation of capital gains under the Income Tax Act is triggered when an assessee transfers a capital asset and realizes gains on such transfer. The principle of overriding title permits a bank or financier to appropriate sale proceeds of mortgaged property to recover dues, which may lead to diversion of income. The precedent in CIT v. Smt. Thressiamma Abraham was relied upon by the assessee to argue diversion of income by overriding title, which exempts the assessee from taxation on such capital gains.

Court's interpretation and reasoning: The Tribunal carefully examined the facts and distinguished the present case from the precedent. It noted that the sale proceeds were first credited to the assessee's bank account and then transferred to the sister concern's overdraft account with the bank. This evidences that the sale proceeds were initially received by the assessee and subsequently applied to discharge the overdraft facility of the sister concern.

The Tribunal observed that the assessee's land was given as collateral security for the overdraft facility availed by the sister concern, but the bank did not directly appropriate the sale proceeds from the acquisition to itself without passing through the assessee's account. The bank's demand for repayment prior to releasing documents was conditional on the sale proceeds being adjusted against the outstanding loan, but the assessee failed to provide evidence of any default or invocation of overriding title clauses by the bank.

Key evidence and findings: The Tribunal relied on the bank statement entries showing credit of Rs. 12,36,84,422/- into the assessee's account followed by transfer to the sister concern's overdraft account. It also noted the balance sheet disclosure by the assessee showing a loan to the sister concern as a creditor under "long term liabilities" amounting to Rs. 12,49,46,380/-, which was not controverted. The letter dated 07.08.2013 from South Indian Bank to the Special Tahsildar was also considered, confirming the bank's condition to adjust compensation receipts against the loan before releasing documents.

Application of law to facts: The Tribunal applied the principle that capital gains arise in the hands of the person who receives the sale proceeds of the capital asset. Since the proceeds were credited to the assessee's account, the capital gain accrued to the assessee. The subsequent transfer of funds to the sister concern's overdraft account was an application of income by the assessee, not a diversion of income by operation of overriding title.

Treatment of competing arguments: The assessee's argument that the sale proceeds were taken away by the bank under overriding title was rejected on the ground that the bank did not directly appropriate the proceeds from the acquisition but only adjusted the amount after it was credited to the assessee's account. The CIT-DR's contention that the precedent relied upon by the assessee was distinguishable was accepted.

Conclusions: The Tribunal concluded that the capital gain was rightly assessed in the hands of the assessee. The case did not fall under the principle of diversion of income by overriding title but was a case of application of income by the assessee firm towards repayment of the sister concern's overdraft facility.

Issue 2: Applicability of the precedent in CIT v. Smt. Thressiamma Abraham

Relevant legal framework and precedents: The precedent in CIT v. Smt. Thressiamma Abraham deals with the principle of overriding title and the circumstances under which income can be said to have been diverted and thus not taxable in the hands of the assessee.

Court's interpretation and reasoning: The Tribunal found that the facts of the present case were materially different from those in the precedent. In the precedent, the sale proceeds were directly appropriated by the bank under overriding title without passing through the assessee's account. In contrast, here the sale proceeds were credited to the assessee's account and then transferred to the sister concern's overdraft account.

Key evidence and findings: The Tribunal emphasized the bank statement entries and the balance sheet disclosures as critical evidence distinguishing the present case from the precedent.

Application of law to facts: The Tribunal applied the principle that diversion of income by overriding title requires direct appropriation of income by the bank or financier without receipt by the assessee. Since the proceeds were received by the assessee, the precedent was held inapplicable.

Treatment of competing arguments: The Tribunal rejected the assessee's reliance on the precedent, accepting the CIT-DR's argument that the facts were on a different footing.

Conclusions: The precedent was held not applicable, and the capital gain was taxable in the hands of the assessee.

3. SIGNIFICANT HOLDINGS

"I find that an amount of Rs. 12,36,84,422/- was deposited in the appellant's account on 17.01.2013 ... and the same was transferred to the overdraft bank account of the GTCCPL in South Indian Bank Ltd. The entries in the bank statement clearly shows that the sales proceeds were first credited into the account of the appellant firm with the bank and then debited to transfer the money to the overdraft account of GTCCPL."

"Further, the AO has pointed out one main aspect saying that the appellant firm has shown loan to the GTCCPL as creditor under the head 'long term liabilities' in the balance sheet as on 31.03.2013 ... but the appellant didn't controvert this fact during the appellate proceedings."

"It is also pertinent to note that the appellant didn't file any evidence such as recovery communication from the bank on default to show that the GTCCPL was defaulted in repayment of loan and therefore, the property kept as collateral security was sold by the bank for recovering the outstanding loan by invoking the clauses of over riding title of the loan agreement. Thus, it is not a case of sale of mortgaged property by bank to recover the loan of defaulted loanee by invoking the clauses of overriding title."

"Therefore, it is not a case where any loan has been taken in lieu of mortgage of some property rather a case where overdraft facility has been obtained by the sister concern by putting the property of the assessee as collateral security."

"We are of the view that the present case is different from the case of Smt.Thressiamma Abraham (supra) and hence it is a case of application of income and not diversion of income by overriding title."

"The assessee firm has shown loan to the sister concern as creditor under the head 'long term capital liabilities' which fact has not been refuted by the Counsel for the assessee."

"With these observations, we hereby dismiss the present appeal of the assessee."

Core principles established include:

• Capital gains arising from compulsory acquisition are taxable in the hands of the person receiving the sale proceeds, notwithstanding subsequent application of such proceeds to discharge liabilities of related entities.
• Diversion of income by overriding title requires direct appropriation of income by the creditor without receipt by the assessee.
• Collateral security and overdraft facilities granted to sister concerns do not automatically result in diversion of income in the hands of the assessee.
• Precedents on overriding title must be applied strictly on facts; factual distinctions are crucial in determining applicability.

Final determination: The appeal of the assessee was dismissed, affirming the addition of capital gains in the hands of the assessee for the assessment year 2013-2014.