TMI Blog1984 (12) TMI 104X X X X Extracts X X X X X X X X Extracts X X X X ..... uded the interest on the amount, came to Rs. 73,570 as on 31-12-1978. On 23-8-1979, the father, Shri Varkey, executed a registered will by which he bequeathed 45 cents of land along with the building to the assessee. At the same time, he created a charge over the property for the amounts due to the wife of the assessee. Shri Varkey died on 30-9-1979 and thereupon the property devolved on the assessee. The assessee assigned the property to his wife under two documents dated 15-10-1979 and 22-10-1979. The total consideration under the two sale deeds came to Rs. 83,700. Out of this, Rs. 78,156 was adjusted towards the amount due to the wife as per the credit balance till date in the accounts of the father. Only the balance amount of Rs. 5,544 was actually received by the assessee under the sale deeds. The assessee claimed that this is the sale consideration as far as he is concerned and that the capital gains, if any, arising out of the transaction, should be worked out with reference to this amount. The contention was negatived by the ITO, who held that the sale consideration as far as the assessee was concerned was Rs. 83,700. The assessee had also claimed that a sum of Rs. 49,047 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the full value of the consideration received or accruing to the assessee as a result of the transfer was only Rs. 5,544 and not Rs. 83,700. The fact that a charge was created over the property inherited by the assessee for the amounts due to the wife of the assessee was not disputed by the department. It is specifically stated by the assessee in grounds 20 and 21 that it is not the case of the assessee that the payment of the amounts due to the wife of the assessee will constitute cost of improvement. Such a claim will not stand in the light of the decision of the Kerala High Court in Ambat Echukutty Menon's case. In that case, the property inherited by the assessee was subjected to a mortgage and out of the land acquistion compensation received by the assessee, the mortgage amount was paid of. The High Court held that the payment will not constitute cost of improvement of the capital asset. But a reading of the decision of the Kerala High Court would show that the claim was negatived not only on the ground that the amount will not constitute cost of improvement but also on the ground that it will not constitute cost of acquisition of the capital asset. One of the contentions ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to the obligation is diverted at the source and, therefore, not deemed to have accrued or arisen. In the latter case, the income has accrued or arisen but has to be applied in a particular manner. In the former case, the income is not to be included at all in the taxable income ; in the latter case, it is M.K. Bros. (P.) Ltd. v. CIT (1967) 63 ITR 28, 36-37 (All.). affirmed in [1972] 86 ITR 38 (SC). In order that a payment should be treated as a diversion at source, it is necessary that it should have been made under some legal obligation. Such obligation must attach to the source of income. In other words, for such a payment there should be an overriding charge, a charge which is created under any law for the time being in force or by virtue of any court's decree or by an agreement or by a voluntary settlement or the obligation must be such, though not made a specific charge on the property, as can be enforced in a court of law--Addl. CIT v. Rani Pritam Kunwar [1980] 125 ITR 102, 116 (All.) " The commentary has referred to two decisions. In M.K. Bros. (P.) Ltd. v. CIT [1967] 63 ITR 28 (All.) and M.K. Bros. (P.) Ltd. v. CIT [1972] 86 ITR 38 (SC), while relinquishing a sol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e consideration received should first and immediately be applied to discharge the encumbrances, when an encumbered property is sold. It is perfectly possible that a vendor may make other arrangements of his own to discharge the encumbrances or that he may postpone the payment of the encumbrances. In such a case, he may be able to persuade the purchaser to pay the full consideration after giving sufficient indemnity to the purchaser against the failure of the vendor to discharge the encumbrances subsequently. There may also be cases where the encumbrances are to be actually discharged on a subsequent date. It cannot, therefore, be said that there is always compulsory diversion of the sale consideration for discharging the prior encumbrances. It is only a case of the vendor applying the consideration to discharge the encumbrances on the property. It may happen that a mortgage was created over the property by the vendor himself and not by his predecessor. In that case, discharge of the encumbrance from out of the sale consideration will clearly be application of the amount to discharge a debt of the vendor. If this is treated as a case of diversion of income at source, the charge of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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