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2015 (8) TMI 270 - MADRAS HIGH COURT

2015 (8) TMI 270 - MADRAS HIGH COURT - TMI - Computation of capital gain - claim of expenses u/s 48(1) - whether Tribunal was right in holding that the amount paid by the appellant to the Bank for discharge of the mortgage has to be taken as expenses relating to transfer and it is wholly and exclusively incurred for the transfer u/s 50? - Held that:- Section 48 provides that income chargeable under capital gains shall be computed by deducting from the full value of the consideration received or .....

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ing the mortgage loan, the appellant/assessee had sold the property and effect the one-time settlement with the bank. The Assessing Officer had held that since the mortgage loan had been long time after the acquisition of the property, the same would not stand covered under Section 48 (1) of the Act. That being the case, it does not appeal to us that the explanation relating to discharge of the mortgage to the bank, as submitted by the assessee, can be termed as expenditure, as the property had .....

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ischarged by the vendor prior to the sale and the case where the discharge of the mortgage is effected at the time of the sale by payment of the outstanding amount to the mortgagee by the vendor and the sale free from encumbrances, is untenable. The only point of relevance is whether the mortgage was created by the vendor or whether it subsisted at the time of acquisition of title thereto by the vendor and was burdened with the same at the time of such acquisition of title

In the pres .....

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resent case, the discharge was in the course of sale. We find that the payment of the outstanding amount in discharge of mortgage by the vendor, viz., appellant herein, cannot partake the character of an expenditure. It is not a case where the assessee had discharged the mortgage created at the time of acquisition of the property by the present appellant/assessee, to make a distinction otherwise. Thus Tribunal was right in law in holding that the amount of ₹ 22,51,220/- paid by the appella .....

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ce for the respondent/Department. 2. Aggrieved by the order of the Tribunal in allowing the appeal filed by the Revenue, the appellant/assessee is before this Court by filing the present appeal raising the following question of law :- "Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the amount of ₹ 22,51,220/- paid by the appellant to the Bank for discharge of the mortgage has to be taken as expenses relating to transf .....

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Bank. For clearing the mortgage, the appellant made a one-time settlement with the bank in respect of the aforesaid loan and paid a sum of ₹ 22,51,220/- to the bank. While computing the capital gain, this amount of ₹ 22,51,220/- was claimed as expenses by the appellant under Section 48 (1) (i) of the Act. The Assessing Officer, in the course of assessment, however, held that the loan in question had been obtained by mortgaging the property long time after acquiring the same and, the .....

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in accordance with Section 50 and deleted the amount paid by the appellant to the Bank for removal of the encumbrances. 5. Aggrieved by the abovesaid order, the Department pursued appeal before the Tribunal and the Tribunal, relying on the decision of the jurisdictional High Court in the case of CIT Vs Vajrapani Naidu (2000 (241) ITR 560), came to hold that the decision of the jurisdictional court insofar as the plea under Section 48 (1)(i) would directly cover the issue and allowed the appeal .....

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t that the appellant firm constructed superstructure with the help of bank loan and due to its inability to repay the loan, on the basis of the one time settlement arrived at with the bank, the sale of the property had taken place and, therefore, the entire amount paid towards the discharge of the loan should be construed as expenditure incurred wholly and exclusively in connection with the said transfer, which fact has not been appreciated by the Tribunal in proper perspective. It is further su .....

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ch has not been done in this case. For the reasons aforesaid, learned counsel for the assessee/appellant sought for setting aside the order passed by the Tribunal. 7. Per contra, Mr.Narayanasamy, learned standing counsel appearing for the respondent/Department vehemently contended that inspite of divergent views of two different High Courts, the Tribunal having considered the facts of the case in depth, by normal rule of precedence, followed the decision of the jurisdictional High Court in Vajra .....

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t case as also the judgment of this Court as well as the Calcutta High Court. We find, on facts, there is a sale by the present appellant/assessee of land and building for ₹ 75 Lakhs, which is not in dispute. Insofar as the one time settlement of ₹ 22,51,220/- paid to City Union Bank to satisfy the mortgage over the property, the assessee claimed the same as expenses incurred in connection with the transfer for the purpose of computing capital gains under Section 48 (1) (i) of the Ac .....

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om 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 asset and the cost of any improvement thereto. *********" 11. On a careful reading of the above provision, it is evident that Section 48 provides that income chargeable under capital gains shall be computed by deducting from the full va .....

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d for the purpose of clearing the mortgage loan, the appellant/assessee had sold the property and effect the one-time settlement with the bank. The Assessing Officer had held that since the mortgage loan had been long time after the acquisition of the property, the same would not stand covered under Section 48 (1) of the Act. That being the case, it does not appeal to us that the explanation relating to discharge of the mortgage to the bank, as submitted by the assessee, can be termed as expendi .....

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rty, which was the subject matter of sale. The Income Tax Officer and the Commissioner rejected the claim for deduction in terms of Section 48 (1). While the Tribunal reversed the view, this Court rejected the view of the Tribunal, in the following manner :- That view of the Tribunal is wholly unsustainable. The burden had been created by the vendor on the property sold by him. As the burden had been created for his own benefit by offering the property as security to his lenders, the amounts spe .....

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titutes the consideration for the sale. The fact that the vendee makes the payment directly to the mortgagee, instead of the vendor doing so, after receiving the money from the vendee, does not make any difference for the purpose of determining consideration for the sale and the extent of capital gain. The Supreme Court in the case of RM. Arunachalam v. CIT [1997] 227 ITR 222, had an occasion to consider the question as to whether the sum paid by the assessee for discharging the mortgage by the .....

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er after he has acquired the property, the clearing off of the mortgage debt by him prior to transfer of the property would not entitle him to claim deduction under section 48 of the Act because in such a case he did not acquire any interest in the property subsequent to his acquiring the same. It is undisputed that in this case, a mortgage had been created by the vendor-assessee and the amounts paid to the other creditors by the vendee was for the discharge of the debts which had been incurred .....

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r or whether it subsisted at the time of acquisition of title thereto by the vendor and was burdened with the same at the time of such acquisition of title. 13. We find no reason to depart from this finding of this Court in Vajrapani Naidu's case (supra). In the present case, mortgage has been created by the present appellant/assessee and consequent to the sale, the assessee has discharged the mortgage to City Union Bank. As the burden had been created for his own benefit by offering the pro .....

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case where the assessee had discharged the mortgage created at the time of acquisition of the property by the present appellant/assessee, to make a distinction otherwise. 14. The decision of the Calcutta High Court in Gopee Nath Paul's case (supra), on facts, is distinguishable and will not apply to the facts of the present case. In the said case, there were two firms and there were common partners. One of the firm was suffering a suit claim by Allahabad Bank. Simultaneously, another suit wa .....

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Fixed Deposit with Allahabad Bank free from loan and attachment until further orders of court. This was done for the purpose of effecting the transfer of the assets of the two firms for securing the payment of the liabilities towards Allahabad Bank by one of the firms. The property was sold and amount was received and the capital gains was assessed in the hands of the other firm, which claimed the expenditure relatable to the sum paid to Allahabad Bank under Section 48 (1) and in such circumstan .....

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