TMI Blog2019 (4) TMI 817X X X X Extracts X X X X X X X X Extracts X X X X ..... al gains is to be computed on the full value of consideration received or agreed as a result of transfer of the capital assets. The entire sale consideration which was the full value of the capital assets was paid directly to the bank. This was not paid to clear a cloud over the title. This was paid to clear the interest or charge over the property which had been offered as collateral security. In the present case, mortgage deed was never registered and State Bank of India, Pondicherry did not have a right to bring the property to sale. The assessee in the present case, continued to have title over the property along with her co-owners. They brought the property to sale through Bank. In Thressiamma Abraham's [1996 (9) TMI 60 - KERALA HIGH COURT] case, the mortgagee/financier namely, Kerala Financial Corporation sold the property in auction and realized the sale consideration. Thressiamma Abraham (supra) did not voluntarily sell the property. In view of the above reasonings, we hold that in the present case, there was no diversion of sale proceeds by virtue of overriding title, but on the contrary, there was only a mere application by the owners themselves of the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty had been offered as collateral security in a loan obtained by M/s.M.O.Hassan Kuthoos Maricar Pvt. Ltd., from State Bank of India, Pondicherry, to an extent of ₹ 3.75 Crores, and the assessee and the other two co-owners stood as guarantors, for the said loan. Mortgage was by deposit of title deeds. No registered mortgage deed was executed. Since the loan was not repaid, the assessee and the other two co-owners consented for sale of the property by Bank to realize its dues. This was purchased by M/s. Royal Park, Tiruchirapalli, for a total consideration of ₹ 1,96,18,200/-. The sale was effected during the Assessment Year 1995-1996. The total sale consideration was paid to the Bank by the purchaser M/s.Royal Park, Tiruchirapalli. 5. The assessee did not file her Returns under section 139(1) of the Act, till 05.03.1998. She filed it belatedly on 06.03.1998 declaring a total income of ₹ 55,26,120/-. The assessment was re-opened under Section 147 of the Act and notice was issued under Section 148 on 24.03.1998. The assessee in her reply initially sought to treat the return filed on 06.03.1998 as the one filed in response to the notice under Section 148 of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent was challenged in appeal before the Commissioner of Income Tax (Appeals) by the Assessee. The CIT(A) dismissed the appeal by order dated 30.01.2002. 9. The Assessee then filed a further appeal before the Income Tax Appellate Tribunal. Another co-owner Smt. Zubaida had also preferred a similar appeal. The Tribunal took up both the appeals and by order dated 16.12.2005, dismissed both the appeals. The relevant portions of the order of the Tribunal are quoted below for ready reference: 4.We have perused the grounds of appeal and the records available before us. We have also heard the learned counsel for the assessee and considered his submission. It is not disputed that the assessee never incurred the expenditure wholly and exclusively in connection with such transfer. No doubt it has wider connotation than the expression for the transfer. In the decision of the Hon'ble Jurisdictional High Court in the case of CIT Vs. N.Vajrapani Naidu, 241 ITR 560 a mortgage had been created by the vendor-assessee and the amount paid to the other creditors by the vendee was for the discharge of the debts which had been incurred by the assessee. The amount was paid as part of considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l stated that in view of default in repayment of the loan, the property was brought to sale and was sold to M/s.Royal Park, Tiruchirapalli, for a total consideration of ₹ 1,96,18,200/-. The entire consideration had been paid to the bank to the credit of the loan account of M/s.M.O.Hassan Kuthoos Maricar Pvt. Ltd. It was stated that the assessee did not receive even a single pie from the sale consideration. Consequently, the learned counsel stated that she cannot be taxed on the sale consideration paid by M/s.Royal Park, Tiruchirapalli, and the sale consideration cannot be treated as income taxable as capital gains. 12. Learned counsel further stated that since the sale consideration had been paid towards the discharge of the loan it was actually the cost of acquisition and it was not capital gains in the hands of the assessee. Learned counsel stated that there was a diversion of the sale proceeds towards redeeming the interest of the mortgagor and therefore the amount so diverted was not liable to capital gains tax. Learned counsel stated that no part of the consideration had been received by the assessee and consequently, there was no question of capital gain arising to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia and Sons Pvt. Ltd. Thereafter, the assessee entered into another Agreement of Sale with respect to the same property with a Cooperative Housing Society. The property was also sold. However out of the sale consideration the sum of ₹ 35,504/- was paid directly to Radia and Sons Pvt. Ltd. It was claimed by the assessee that this amount should be allowed as deduction for the purpose of computing her income under the head capital gain either as expenditure incurred in connection with the transfer or as cost of improvement or under Section 48 itself. The Bombay High Court answered the issue in favour of the assessee holding that without removing the encumbrance, particularly, the encumbrance of the type involved in that case, sale or transfer could not be effected. 16. Learned counsel also relied on CIT Vs. Sunil J. Kinariwala, [2003] 1 SCC 660. In that case, the assessee was a partner in the partnership firm. He created a Trust. He assigned 50% of his interest as partner in the firm in favour of the Trust. He claimed that since 50% of the income attributable to his share from the firm stood transferred to the Trust, which resulted in diversion of income at source, the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee and the other two coowners had voluntarily offered the property as collateral security and a mortgage by deposit of title deed was created in favour of the bank. The bank had no independent authority to sell the property. The assessee and other two coowners had consented for sale of the property. It was stated that consideration received was for the value of the property and it was immaterial whether it was paid directly to the mortgagee bank or not. The assessee was liable to be taxed for capital gains for the consideration received, and payment to Bank was only application of their income, subject to capital gains tax liability. 20. Learned senior standing counsel for the Revenue, placed reliance on R.M.Arunachalam Vs. CIT [1997] 227 ITR 222. In that case, the Hon'ble Supreme Court held as follows: The Supreme Court had an occasion to consider the question as to whether the sum paid by the assessee for discharging the mortgage by the assessee is a sum which would go to reduce the cost of acquisition. The court held that such payment would go to reduce the cost of acquisition only where the mortgage had not been created by the assessee, but was created ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case (supra) and held as follows: We find no reason to depart from this finding of this Court in N.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 property as security to City Union Bank, the amount spent for discharging that burden whether prior to sale, or at the time of sale, by way of one-time settlement to the Bank, cannot be regarded as expenditure wholly and exclusively in connection with the transfer. In the present 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. 23. The learned counsel also relied on [1997] 227 ITR 420 (SC), V.S.M.R. Jagadishchandran (Decd.) Vs. Commissioner of Income-Tax. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, the assessee seeks to take advantage of Clause (i) of the Section 48 and seeks deduction of the entire sale consideration claiming that, since the entire sale consideration has been paid directly to the mortgagee/bank, it should be considered as expenditure incurred wholly and exclusively in connection with such transfer. The assessee claimed that the amount had been paid, since by creation of mortgage, the bank had acquired overriding title to the property and therefore, when the property was brought for sale, the amount paid towards clearing the cloud over the title should be deducted as provided under Section 48 of the Act. 27. In the present case, to reiterate the facts, the assessee Smt.D.Zeenath along with two other co-owners, namely, Smt.S.A.Kathija Nachial and Smt.Zubaida had originally purchased land measuring 43,596 sq.ft. at Saram Village, Pondicherry by two sale deeds dated 11.07.1980 and 04.02.1981 for a total consideration of ₹ 2,01,000/-. They had offered the said property as collateral security towards the loan of ₹ 3.75 Crores obtained by M/s.M.O.Hassan Kuthoos Maricar Pvt. Ltd., with State Bank of India, Pondicherry. Mortgage was by deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equent to his acquiring the same. 30. This position had been reiterated by the Hon ble Supreme Court in [1997] 227 ITR 420 (SC), V.S.M.R. Jagadishchandran (Decd.) Vs. Commissioner of Income-Tax. The facts in that case were as follows. The facts and the judgment of the Hon ble Supreme Court are extracted below: This appeal by the assessee is directed against the order dt. 25th July, 1984 passed by the Madras High Court in TC No. 145 of 1983 wherein the High Court on an application filed under s. 256(2) of the Act declined to direct the Tribunal to state a case and refer the following questions of law to the High Court : 1. Whether the Tribunal was right in holding that the levy of the capital gains of ₹ 68,400 is proper under the facts and circumstances of the case ? 2. Whether the Tribunal was right in holding that mortgage debts does not constitute diversion at source ? 3. Whether the debts discharged by the applicant on the properties cannot be said to enhance the cost of acquisition. The assessee sold a house property No. 22, Chairman Muthurama Iyer Road, Madurai for a sum of ₹ 90,000 subject to incumbrance in the assessment year 1975 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orted as R. M. Arunachalam etc. vs. CIT (1997) 141 CTR (SC) 348 filed against the judgment of the Full Bench of the Madras High Court in S. Valliammai Anr. vs. CIT (supra) we have examined the correctness of the view of the Kerala High Court in Ambat Echukutty Menon vs. CIT (supra) and have held that the said decision does not lay down the correct law in so far as it holds that where the previous owner had mortgaged the property during his life time the clearing off the mortgage debt by his successor can neither be treated as cost of acquisition nor as cost of improvement made by the assessee. It has been held that where a mortgage was created by the previous owner during his time and the same was subsisting on the date of his death, the successor obtains only the mortgagors interest in the property and by discharging the mortgage debt he acquires the mortgagees interest in the property and, therefore, the amount paid to clear off the mortgage is the cost of acquisition of the mortgagees interest in the property which is deductible as cost of acquisition under s. 48 of the Act. In the present case, we find that the mortgage was created by the assessee himself. It is not a case wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 been acquired long time before taking the mortgage loan from the bank. 12.The Tribunal, to come to the finding that the said discharge of mortgage to the bank cannot be termed as expenditure, has placed reliance on the jurisdictional Court's decision in N.Vajrapani Naidu's case (supra). In that case, the assessee sold immovable property under 13 sale deeds and bona fide paid certain amounts to the creditors of the vendor assessee, including mortgages on the property, 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e outstanding amount to the mortgagee by the vendor and the sale free from encumbrance, 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.' 13.We find no reason to depart from this finding of this Court in N.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 bruden had been created for his own benefit by offering the property as security to City Union Bank, the amount spent for discharging that burden whether prior to sale, or at the time of sale, by way of one-time settlement to the Bank, cannot be regarded as expenditure wholly and exclusively in connection with the transfer. In the present 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 wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Trust. The Hon'ble Supreme Court negatived the claim of the Assessee that the income so transferred resulted in diversion of income at source. The Hon'ble Supreme Court held that, 8. ........when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee...... This reasoning does not advance the case of the Assessee herein. 36. The facts in CIT Vs. Thressiamma Abraham, [1997] 140 CTR 540 (Ker) , are also distinguishable. In that case, a company by name National Tyre and Rubber India Limited, had raised a loan of ₹ 20 lakhs from Kerala Financial Corporation. The property of Thressiamma Abraham was offered as mortgage for the loan. A registered mortgage deed had been entered into giving right to Kerala Financial Corporation to bring the property to sale, in the event of failure of repayment of the loan. 37. In the present case, mortgage deed was never registered and State Bank of India, Pondicherry did not have a right to bring the property to sale. The assessee in the present case, continued to have title over the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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