TMI Blog1997 (9) TMI 93X X X X Extracts X X X X X X X X Extracts X X X X ..... reference pertains to the assessment year 1972-73, the previous year being the year ended on March 31, 1972. The material facts giving rise to this reference are as follows : The assessee is a charitable trust. During the relevant assessment year, the assessee-trust sold its right to obtain the conveyance of certain immovable property, which was a capital asset, to a co-operative housing society for a sum of Rs. 3,62,340 and in that process, obtained capital gain of Rs. 1,51,040. The assessee thereafter advanced a sum of Rs. 2,10,000 to the purchaser and obtained an English mortgage of the plot of land so purchased by the co-operative society. The assessee claimed that it had acquired another capital asset for a sum of Rs. 2,10,000 and hence its income from capital gain was exempt under section 11(1A) of the Income-tax Act, 1961, (for short "the Act"). This claim of the assessee was rejected by the Income-tax Officer. He, therefore, determined the total income of the assessee-trust at Rs. 1,51,040 and forwarded the draft assessment order to the assessee. The assessee having objected to the draft assessment order, it was forwarded by the Income-tax Officer to the Inspecting Assist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled to exemption of a portion of the short-term capital gains. Hence, this reference at the instance of the assessee. Mr. S. E. Dastur, learned counsel for the assessee, submits that the Tribunal committed a manifest error of law in holding that the mortgage debt was not a capital asset within the meaning of section 2(14) of the Act and that the utilisation of the sale consideration or any part thereof for acquisition of the mortgage debt did not result in acquisition of a new capital asset. Counsel submits that it is well-settled that by reason of the creation of mortgage in favour of the assessee, it is the interest in the land itself which is acquired by the mortgagee which is a capital asset, within the meaning of section 2(14) of the Act. Reliance is placed in support of this contention on the decisions in Perumal Ammal v. Perumal Naicker, AIR 1921 Mad 137, Bank of Upper India Ltd. v. Fanny Skinner, AIR 1929 All 161, Prahlad Dalsukhrai v. Maganlal Muljibhai Tewar, AIR 1952 Bom 454; [1952] 54 Bom LR 519, Ram Shankar Lal v. Ganesh Prasad [1907] ILR 29 All 385, 391 and Muthu Vijia Raghunatha Ramachandra Vacha Mahali Thurai v. Venkatachallam Chetti [1897] ILR 20 Mad 35. Our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Cama family. The terms and conditions of the agreement also provided that the co-operative housing society would pay a sum of Rs. 1,51,300, which was payable by the assessee to the Cama family as a part of the consideration, to the Cama family on its behalf, and the balance consideration shall be paid to the assessee. Accordingly, in terms of the said agreement, the immovable property, which was the subject-matter of the agreement of sale, was conveyed by the Cama family in favour of the co-operative housing society. On the very same day, the assessee advanced a loan of Rs. 2,10,000 to the co-operative housing society and obtained an English mortgage of the property in its favour by way of security for the same. On November 16, 1971, a deed of English mortgage was executed by the co-operative housing society in favour of the assessee. The assessee claimed exemption under section 11(1A) of the Act on the basis of the above mortgage, as according to it, this amounted to acquisition of a capital asset by the assessee. The question that arises for consideration is whether the acquisition of mortgage of the property by the assessee amounts to acquisition of a capital asset for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (1A) of section 11 of the Act that in a case where the assessee derives any capital gain from transfer of a capital asset held by it under trust for charitable or religious purposes, the capital gain arising from the transfer of such capital asset shall be deemed to have been applied for charitable or religious purposes to the extent specified therein, if the whole or any part of the sale consideration is utilised for acquiring another capital asset to be so held. In the instant case, the assessee acquired a right to obtain conveyance of immovable property for a sum of Rs. 2,10,000. The said asset, admittedly, was a capital asset held by the assessee-trust. It was transferred by the assessee in favour of the co-operative housing society for a consideration of Rs. 3,62,340. In this process, there was capital gain of Rs. 1,51,040 in the hands of the assessee, which was liable to be subjected to tax unless either it was applied in the manner laid down in sub-section (1) of section 11 of the Act or utilised for acquiring another capital asset as provided in sub-section (1A) thereof. The assessee in this case acquired mortgage of the property from the co-operative housing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gagor to the mortgagee. That being so, investment in the English mortgage of immovable property has to be regarded as utilisation for acquisition of another capital asset, viz., the English mortgage. Reference may be made in this connection to the decision of the Madras High Court in Perumal Ammal v. Perumal Naicker, AIR 1921 Mad 137, where, dealing with the question whether transfer of mortgages by way of gift could be regarded as gifts of immovable property, it was observed that the mortgagee's interest in land had all along been transferable as immovable property. Similarly, in Bank of Upper India Ltd. v. Fanny Skinner, AIR 1929 All 161, the Allahabad High Court also held that the mortgagee's interest is not a mere right to recover the debt due but to have a charge on the property and to follow it wherever it goes. It was accordingly held that a sale of a mortgagee's interest can only be effected by means of a registered deed of transfer. In Prahlad Dalsukhrai v. Maganlal Muljibhai Tewar, AIR 1952 Bom 454; [1952] 54 BLR 519, dealing with the nature of a mortgagee's interest, it was held by this court that under section 58(a) of the Transfer of Property Act, 1882, a mortgagee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile holding that a charge does not amount to a mortgage, observed that a charge differs from a mortgage in the sense that in a mortgage there is transfer of interest in the property mortgaged, in a charge no interest is created in the property changed, so as to reduce the full ownership to a limited ownership. It is clear from the above discussion that a mortgage is a capital asset because by the mortgage there is a transfer of interest in the property mortgaged from the mortgagor to the mortgagee. The investment of the net consideration or any part thereof in acquiring the English mortgage, therefore, has to be regarded as utilisation for acquisition of another capital asset within the meaning of section 11(1A) of the Act. In the instant case, when the mortgage was granted in favour of the assessee by the co-operative housing society, it was the owner of the said property. By the mortgage in favour of the assessee, there was a transfer of interest of the mortgagor in the property mortgaged to the assessee who was the mortgagee. As a result, the full ownership of the co-operative housing society was reduced to a limited ownership. In view of the above, we are of the clear opini ..... X X X X Extracts X X X X X X X X Extracts X X X X
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