TMI Blog2019 (10) TMI 1198X X X X Extracts X X X X X X X X Extracts X X X X ..... constituting the Division Bench HELD THAT:- Borrower defaults in repayment of loan or instalment and the secured creditor issues the notice specified in Sub-section (2) of Section 13 of the SARFAESI Act, the right of the borrower with respect to the secured asset gets restricted, and he is not allowed to part with the secured asset without the prior approval of the secured creditor - On non-repayment of loan or instalment amount within the period specified in the notice issued under Sub-section (2) of Section 13 of the SARFAESI Act, all the rights in the secured asset get vested with the secured creditor and the borrower has no right in the said asset. The borrower is not free to decide even the way in which the secured asset shall be parted with. It is the sole discretion of the secured creditor as to how the secured asset shall be dealt with. This right in favour of the secured creditor is created by virtue of SARFAESI Act; and, this has been interpreted by the learned representative for the assessee to say that the mortgaged property vested with KMBL and, therefore, the property was sold by KMBL in its own right. In the present case the assessee defaulted in repayment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it in a particular manner. SARFAESI Act merely provides a recovery mechanism and nothing else. The SARFAESI Act cannot be interpreted to mean that it has created right of diversion of income by overriding title . There is only a mere application of the sale proceeds realised on sale of plots towards the discharge of outstanding loan liability of the assessee. Assessee cannot claim any part of such application as deduction for the purpose of computing Capital Gain in terms of Section 48 of the Act. Sale of property to the extent of principal component of loan adjusted by the bank cannot be treated as diversion of income by overriding title and was thus not deductible from the total consideration accrued to the assessee from sale of property. So far as the instant dispute is concerned, the legal position prevailing prior to SARFAESI Act is also germane even after the enactment of SARFAESI Act. The law laid down by the Hon'ble Courts with respect to diversion of income by overriding title and deduction to be claimed under Section 48 of the Act while computing the income from Capital Gains, which are discussed by the ld. Judicial Member and also relied upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (KMBL) and out of the sales consideration received by them they had deducted the said amount towards principal amount of loans as the bank had existing overriding title on the company's assets. ( c) The Ld CIT (A) has failed to appreciate the judicial pronouncement of Hon'be Calcutta High Court in the case of Gopee Nath Paul Sons vs. Deputy CIT [2005] 278 ITR 240 where it was held that on the sale of firm's business as a going concern the amount paid to banks to have the charge lifted was treated the expenses in relation to transfer. 2. Briefly stated relevant facts of the case are that the assessee is a manufacturer of cotton / polyster sewing and industrial threads and also engaged in processing of cotton yarn. Assessee is in this business for a long time and filed the return of income for the year under consideration declaring the total loss of ₹ 64,93,9277-. After completing the scrutiny assessment u/s 143(3) of the Act, the total income is determined at ₹ 49,25,990/-. In the assessment, AO made adjustment to the claim relating to capital gains and made addition of ₹ 2,14,50,679/-. This is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .11.2012, assessee submitted the KMBL has overriding title on the mortgaged asset (the said factory land), the bank invoked the SARFAESI Act and took possession of the said land. Eventually, the bank sold the said land and transferred the same to the buyers with any participation of the assessee and received sale proceeds directly to the account of the bank. Assessee has no role to play in all these events. In principle, the bank has become the owner of the land. Therefore, it is the case of the diversion of income at source by overriding the title . Since, the assessee has lost the title as well as has never received the sale proceeds to his account, the sale proceeds are not taxable in the hands of the assessee. It is a case of diversion of income at source. Therefore, in the aforementioned computation, assessee reflected the same as an allowable deduction. Regarding ₹ 69,75,629/-, it is the case of the assessee that since the assessee claimed interest payable to the bank as deduction in past, to that extent the same is offered now as taxable portion. However, the Assessing Officer analyzed the provisions of section 48 of the Act and held that the claim is not sustainable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets. It was considered as an expenditure incurred wholly and exclusively in connection with the transfer. Assessee also relied on the view of the Andhra Pradesh High Court in such cases. Further, assessee relied on the judgment of the Apex Court in the case of R.M. Arunchalam Etc vs. CIT [1997] 227 ITR 222 (SC) to support its case. Thus, the assessee submitted that AO failed to the fact that there was a pre-existing overriding title in favour of the bank by virtue of joint equitable mortgage created on 5.2.2009 on immovable properties of the assessee. On considering the above written submissions of the assessee, CIT (A) did not go with the said submission. The arguments relating to diversion of income by overriding title was also not entertained. Relying on the judgment of the Hon'ble Supreme Court in the case of CIT vs. Attili N Rao [2001] 252 ITR 880 (SC), as well as the judgment of the Allahabad High Court in the case of CIT vs. Sharad Sharma (2008) 305 ITR 24 (All), CIT (A) opined that it a case of application of income and not diversion of income by overriding charges. Eventually, CIT (A) is of the opinion that the assessee is not entitled to deduction. CIT (A) also reje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable . 3.10 The honourable Calcutta High Court held in the case of Gopinath Paul and Sons vs. D.C.I.T. (278ITR 24O) 5. Section 48(1), as it stood in 1992-93, while providing for computation of capital gains permitted in clause (i) deduction of the expenditure incurred wholly and exclusively in connection with such transfer . The expression 'in connection with such transfer' is wider than the expression '[or the transfer'. Any amount the payment of which is absolutely necessary to effect the transfer will be an expenditure covered by clause (i) of section 48(1). In other words, if without removing any encumbrance, sale or transfer could not be effected, the amount paid for removing that encumbrance will fall under clause (i). 5.1 From the facts as disclosed above, it appears that the amount was received out of the sale of assets of both the firms under orders of this Court subject to meeting of the liability of the Allahabad Bank since confirmed only upon prior payment. Inasmuch as, unless this liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.5, it is quite manifest that once Kotak Mahindra Bank Ltd. invoked powers u/s.l3(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), the title over Plot No.P/1, P/2f P/3A, P/3B and P/4 was automatically divested from the assessee company and vested in Kotak Mahindra Bank Ltd. on 07.01.2010. Further, when the plots were sold by the bank in March, 2010, the sale deeds were executed between the buyer and the bank and the entire consideration received from buyer was appropriated towards the outstanding liability of the bank. The assessee was not at all involved in either the sale of plots or the execution of sale deeds. Therefore, the sale proceeds to the extent of amount appropriated towards loan never reached the assessee as its income and was diverted towards discharge of bank's obligation. 3.12 As regards reliance placed by the Cl. T.{A). while rejecting the assessee's claim upon the judgements of the honourable Supreme Court in the case of Cl. T. vs. Attili N. Rao (252 ITR 880) and the honourable Allahabad High Court in the case of CL T. vs. Sharad Sharma (305 ITR 24), it is submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's case, Kotak Mahindra Bank Ltd. took possession of 6 plots under SARFAESI Act, 2002. The land was divested from the assessee and vested with Kotak Mahindra Bank Ltd. After taking possession, the bank converted these plots into 7 plots. Further, when the plots were sold by the bank in March, 2010, the sale deeds were executed between the buyer and the bank and the entire consideration received from buyer was appropriated towards the outstanding liability of the bank. The assessee was not at all involved in either the sale of plots or the execution of sale deeds. 3.16 In view of the above, we request your honour to allow the assessee's claim and exclude the principal amount of ₹ 1,48,24,633/- appropriated by Kotak Mahindra Bank Ltd. towards its dues while computing Logn-term Capital Gains. 7. Further, Ld Counsel for the assessee also submitted that the SARFAESI Act, 2002 takes away all the rights of the possession including right to sale the secured property of the assessee. In this regard, Ld Counsel for the assessee brought our attention to the provisions of section 13 relating to Enforcement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... voked the provisions of the SARFAESI Act, 2002 on the assets mortgaged to the bank; (d) Thus, there is no dispute on the fact that the said land in question is not free from encumbrance. The ownership title of the land is not perfect; (e) Under the SARFAESI Act, when the bank takes possession of the secured land, the bank gets the right to transfer' by way of sale for the purpose of realizing the secured asset vide section 13(4)(a) of the Act. Thus, the assessee lost the right on the said property secured to the bank as the assessee is declared as 'defaulter' under the said Act. The Bank acted as a transferor in the said transfer transaction in matters of executing the transfer deeds and registration deeds. The Bank got the superior rights on the property and assessee had no say in the matter in view of its undisputed default and the provisions of SARFAESI ACT. Further, it is also an undisputed fact that the transferee of the impugned property made the payment to the bank directly no amount was received by the assessee on account of the impugned sale transactions. Thus, we shall now under take to discuss various facets of the doctrines of (i) Over rid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor; ( d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt. (5) Any payment made by any person referred to in clause (d) of sub-section (4) to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower. 10.2 Interpretation of the above provisions: The provisions of section 13 of the SARFAESl ACT, 2002 provides for enforcement of security interest. According to the said provisions, in case the borrower (of loan) fails to discharge his liabilities in full' to the secured creditor/Bank, the same may take to following recourses to recover the dues, namely, rt take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset; or (b) take over the management of the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to take possession, right to transfer, right to sale for realising the secured asset on establishing the borrower's failure to discharge his liability'. Of course, there are administrative and legal procedures to be followed by the Bank involving the principles of natural justice such as issuing the notices, declaring in books the said unrealised liabilities as NPAs and consequent write-off etc. Of course, the assessee-borrower has certain rights and can question the initiatives of the Bank to take possession of the secured asset. 10.5 However, in the instant case, the borrower gave in the said rights and has not questioned the bank's initiatives to sell the secured property in any legal forums. In other words, on the facts of the borrower's failure to discharge the liability to the lender-bank, the assessee's title of ownership is subjected to the rights of the Bank, conferred by the said SARFAESI ACT. Thus, the provisions of the said Act provides to the lender-bank the 'over riding title' on the secured property. This is done by the process as per the provisions of law ie the SARFAESI ACT, 2002. These are the ingredients of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip title is overridden by the Bank's power conferred by SARFAESI Act. In that sense of the mater, we find the legal provisions are very clear that the bank has got overriding title on the asset. This SARFAESI Act secures / guarantees the rights of the transferee, who purchases the assets from the banks. 13. Doctrine of Diversion of Income: We have also gone through the various decisions cited by both the parties relating to the diversion of income (DOI) versus application of income (Aol). In matters relating to claim of deduction for property are not deductible as the case of DOI by ORT. It is the case there is no process of law involved and the Government never got an absolute overriding title. There is dispute over the sale of land, and assessee never objected to the said sale in any court of law. In this case, AP Government acted on the concessions of the assessee and it never got any overriding title on the land by way of any judgment from any Court/Tribunal. Para 13 of the said High Court's judgment is relevant. 19. Therefore, the legal proposition of law is that when the sale proceeds of mortgaged property are paid to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee, who is often a signatory to the said sale transactions of the said properties and therefore, the creditors/Banks per $e, do not have the power either to sign on the transfer deeds and to register them in the names of the transferees. Thus, the creditors/Banks are never the transferors. 22. Therefore, considering the above settle legal propositions by virtue of the judgmental laws and also in view of the binding statutory provisions of section 13 of the SARFAESI ACT, 2002, and on the facts of this case (ie Bank got the overriding title and the payments are directly received by the bank from the buyer of the secured properties with they were first credited to the accounts of the assessee), we are of the opinion in principle, the doctrine of 'diversion of income by overriding title' applies to the facts of the present case. Therefore, the claim of deduction is sustainable in law. Accordingly, the grounds raised by the assessee are allowed. 23. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on September, 2015. xxxx ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 1, 48,24, 633/- ₹ 2,18,00,262/- The assessee had duly shown the sale proceeds from the mortgaged asset in its books of account and also offered the income as 'Long-term capital gain' as per the computation of income, incorporated at page 3 of the Draft order. 3. However, the main bone of contention was the claim of amount adjusted by the Bank against the principal amount of loan of ₹ 1,48,24,633/- (out of the sale proceeds) as deduction u/s 48(i) as cost by the assessee in the computation of LTCG, being 'expenditure incurred wholly and exclusively in connection with such transfer'. The assessee's claim was based on the principle that, act of the Bank taking possession of the land under SARFAESI Act, constitutes diversion of income by overriding title . This claim had been denied by the AO on the ground that it cannot be reckoned as expenditure u/s 48(i) to be allowed as cost of acquisition as it was an application of income. In the first appellate proceedings, Ld. CIT(A) too has rejected the assessee's conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 278 ITR 240 (Cal) 9 Addl. CIT vs Glad Investment vt Ltd. 22 ITD 227 (DEL) 5. Now on these facts, and background the main issue involved here in this appeal are :- Firstly, whether the principal amount of loan of ₹ 1,48,24,6733/- can be allowed as deduction u/s 48(i) while computing the LTCG from sale consideration of mortgaged asset appropriated by Kotak Mahindra Bank, after taking possession of the said secured asset under the SARFAESI Act 2002, on the ground that there was diversion of source/ income by overriding title; Secondly, whether the entire sums recovered from sale proceeds of the mortgaged assets and appropriated by the Bank towards 'Security interest' under section 13 of the SARFAESI Act will not fall within the charging provisions of Income Tax Act in the hands of the assessee on the principle of Diversion of income by overriding title ; Lastly, whether by virtue of SARFAESI Act, the judicial pronouncements and the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rits the mortgagor's interest in the property. By discharging the mortgage debt his heir who has inherited the property acquires the interest of the mortgagee in the property. As a result of such payment made for the purpose of clearing off the mortgage the interest of the mortgagee in the property has been acquired by the heir. The said payment has, therefore, to be regarded as 'cost of acquisition' under section 48 read with section 55(2) of the Act. The position is, however, different where the mortgage is created by the owner after he has acquired the property. The clearing off of the mortgage is created by the owner 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 property subsequent to his acquiring the same. In CIT u. Daksha Ramanlal [1992] 197 ITR 123, the Gujarat High Court has rightly held that the payment made by a person for the purpose of clearing off the mortgage created by the previous owner is to be treated as cost of acquisition of the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow, ft is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable , (emphasis added) 9. Thus, the true tests in deciding the diversion of income by overriding title lies in the nature of the 'obligation' which is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and it would not be shifted to the bank merely because the bank took possession of the land to enforce and realise its secured interest. 11. At the time of hearing catena of judicial decisions were cited from the side of both the parties in this regard (as cited above) and some of them were also filed before us in a separate compilation. Other than the case laws discussed above, the most relevant decisions on the issue involved and cited before us are being discussed here under :- ( i) CIT vs Attili N. Rao [2001] 252 ITR 880 (SC) :- Here in this case question of law referred to before the Hon*ble Apex Court were as under :- Whether on the facts and in the circumstances of the case and in law, the Appellate Tribunal was correct in holding that the amount realised by the sale of the assessee's interest in the property was only ₹ 4,33,960 i.e., ₹ 5,62,980 minus ₹ 1,29,020 ? Whether on the facts and in the circumstances of the case and in law, the Appellate Tribunal was correct in holding that the amount realised under the charge or mortgage by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances. ( ii) Decision of Bombay High Court in CIT vs Roshanbabu Mohammed Hussein Merchant, [2005] 275 ITR 231 (Bom) In this case, the question of law admitted by the Hon'ble Jurisdictional High Court read as under :- Whether the repayment of the mortgage debt created by the assessee, is an expenditure incurred in connection with the transfer of mortgaged asset allowable under section 48(i) of the Income Tax Act . Facts of the case were as under :- During the relevant year, the assessee, after obtaining permission from the bank, sold a part of the aforesaid land for a consideration of ₹ 3,92,000 and deposited the entire amount of ₹ 3,92,000 with the State Bank of Saurashtra towards discharge of the debt. The assessee claimed that the long term capital gain arising on sale of the above land was exempt from capital gains tax. The assessing officer completed the assessment under section 143(3) of the Income Tax Act by rejecting the contention of the assessee and taxed the same. On appeal, the CJT(A) upheld the contention of the assessee. On further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve that encumbrance for effectively transferring the property. In other words, the expenditure incurred by the assessee to remove the encumbrance created by the assessee himself on the property which was acquired by the assessee without any encumbrance is not allowable deduction under section 48 of the Income Tax Act. 15. It is true that in none of the aforesaid cases, the Apex Court has specifically held that repayment of the mortgage debt created by the assessee himself is not an expenditure incurred for effectively transferring the property. However, it is implicitly held by the Apex Court that the expenditure incurred to remove the encumbrance created by the assessee himself on a property on which the assessee had absolute interest is not an expenditure incurred for effectively transferring the property as contemplated under section 48 of the Income Tax Act. It is not in dispute that in both the appeals which are before us, the property on which the encumbrance was created by the assessee was acquired by the assessee free from encumbrances. Therefore, in the light of the decisions of the Apex Court referred to hereinabove, it must be held that the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised is to taxed as capital gain in the hands of the assessee. This is evident from the highlighted portion of the judgment and clinches the issue before hand. ( Hi) CIT vs Sharad Sharma, [2008] 305 ITR 24 (Allahabad) :- The question of law referred to the Hon'ble High Court for opinion was as under :- Whether on the facts and circumstances of the case, the Tribunal was justified in holding that there was an overriding charge against the sale proceeds of property and the assessee was not liable for capital gains in respect ofKs. 1,50,000paid to bank in discharge of loan taken by M/s Shanker Traders? The Hon'ble Court again after reiterating the similar decisions of Hon'ble Supreme Court as discussed herein above, decided the question in favour of the revenue as under : - The question with regard to diversion of income on account of overriding title was not decided by the Apex Court in the case of RM. Arunachalam (supra) on the ground that the said question had not been raised either before 'he Tribunal or the High Court, However, in the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the obligation of the asses see, it will be a case of application of income by the assessee and not of diversion of income by overriding title. In view of the discussion made above we find that in the present case the assessee was not entitled to the deduction as claimed on account of discharge of mortgage debt of ₹ 95,000/- to the Bank. In fact the entire amount of sale consideration had been received by the assessee and thereafter part of it applied for discharge of the mortgage debt. It was thus a case of application of income received, (emphasis added). 12. Thus, from the proposition of law and ratios as culled out from the above decisions, it is absolutely clear that if the borrower assessee has created a mortgaged debt by itself and if for discharge of its debt liability, the mortgaged property has been taken over or taken into possession by the secured creditor/ lender to realize the loan / debt amount directly, then neither the deduction of loan amount is allowed u/s 48 nor it is a case of 'diversion of income by overriding title'. The amount appropriated by the Bank after disposing of the mortgaged property of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking over the possession of the secured assets, the secured creditor can transfer the secure assets by way of lease, assignment or sale in its own right in the capacity of a transferor and not on behalf of the borrower. Secure creditor issues sale certificate to the transferor and the borrower is not required to execute the document, relating to transfer. ( v) Lastly, earlier the Civil suit for recovery could be filed by the lender if the borrowers have defaulted any payments of dues, whereas now section 13 of the Act has given a huge powers to the lenders and if notice has been issued, the borrower cannot sale, lease or transfer the asset. 14. However, such a distinction as made by the Id. Counsel above are purely superficial and will not make any difference to the legal proposition as discussed in the foregoing paragraphs. Much emphasis has been laid on Section 13 of the SARFAESI Act by the Ld. Counsel before us, in support of his contention that now in view of this section all the earlier law propounded will not be applicable. In my humble opinion, such a proposition and argument of the Ld. Counsel cannot be appreciated at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of a securitisation company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance; ( j) default means non-payment of any principal debt or interest thereon or any other amount payable by a borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in the books of account of the secured creditor; ( I) financial asset means any loan or advance granted or any debentures or bonds subscribed or any guarantees given or letters of credit established or any other credit facility extended by any bank or financial institution; (I) financial asset means debt or receivables and includes- (i) a claim to any debt or receivables or part thereof, whether secured or unsecured; or (ii) any debt or receivables secured by, mortgage of, or charge on, immovable property; or (Hi) a mortgage, charge, hypothecation or pledge of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditor means any bank or financial institution or any consortium or group of banks or financial institutions and includes- ( i) debenture trustee appointed by any bank or financial institution; or ( ii) securitisation company or reconstruction company, whether acting as such or managing a trust set up by such securitisation company or reconstruction company for the securitisation or reconstruction, as the case may be; or ( Hi) any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created for due repayment by any borrower of any financial assistance; ( ze) Secured debt means a debt which is secured by any security interest: ( zf) Security interest means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in section 31; Now in light of these definitions let us examine Section 13 which envisages the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset; ( b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset: PROVIDED that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt: PROVIDED FURTHER that where the management of whole of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security for the debt. ( c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor; (d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 529A of the Companies Act, 1956 (I of 1956): PROVIDED FURTHER that in the case of a company being wound up on or after the commencement of this Act, the secured creditor of such company, who opts to realise his security instead of relinquishing his security and proving his debt under proviso to sub-section (1) of section 529 of the Companies Act, 1956 (1 of 1956), may retain the sale proceeds of his secured assets after depositing the workmen's dues with the liquidator in accordance with the provisions of section 529A of that Act: PROVIDED ALSO that the liquidator referred to in the second proviso shall intimate the secured creditors the workmen's dues in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956) and in case such workmen's dues cannot be ascertained, the liquidator shall intimate the estimated amount of workmen's dues under that section to the secured creditor and in such case the secured creditor may retain the sale proceeds of the secured assets after depositing the amount of such estimated dues with the liquidator: PROVIDED ALSO that in case the secured creditor deposits the estimated amount of wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the borrower who is liable or obliged under a 'Security Agreement' to make the payment to the secured creditor, makes any default in repayment of secured debt and his account has been classified as NPA, then Secured Creditor may issue notice under subsection (2) to the borrower to discharge his full liabilities, in a certain time bound manner as mentioned in the notice. The borrower can raise objections against the notice which the secured creditor has to consider and dispose off in writing setting out the reasons. ( iii) In case the borrower fails to discharge his liability in full within the period and in terms of notice, then, the secured creditor may take recourse to various measures as illustrated in the various clauses to sub-section 4 of section 13, to recover his secured debt only. The secured creditor has to take recourse u/s 14(1) of the Chief Metropolitan Magistrate or District Magistrate to take over the possession of the property. Thus, the crucial focus of sub-section (4) is that powers and measures is to recover the secured debt only and not over and above. In other words the title in some of the cases is passed for securing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 1 crore from Bank 'B' (Lender) after mortgaging a property or asset worth ₹ 2 crores. 'A' could only pay back ₹ 50 lakhs on principal amount and interest accrued thereof of ₹ 25 lakhs. Thereafter 'A' commits default in repayment of balance principal amount of ₹ 50 lakhs and some interest accrued thereon, say ₹ 10 lakhs. 'B' initiates proceedings under SARFAESI Act and issues notice u/s 13(2) of Act. 'A' is unable to comply with terms of the notice within 60 days. (B' makes a requisition in terms of section 14 for acquiring the property and sells it to the outsiders for ₹ 2 crores (on actual value) and from the sale proceeds recovers a sum of ₹ 50 lakhs plus interest of ₹ 10 lakhs, i.e. the amount of secured debt due. Then, the moot point is, whether (B' is entitled to appropriate all the money of ₹ 2 crores; or the secured interest /debt due of ₹ 60 lakhs; or the balance sum of ₹ 1.40 crores is to be paid back to the assessee as this was not part of secured interest or debt due. No where the SARFAESI Act, provides that the 'B' is en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity shown in the balance sheet and accordingly, the relevant entries are made in the books of account. This precisely the assessee has also done in its books of account, which is a correct and fair manner. Therefore, the sales of asset reflected in the books were rightly shown under the head capital gain and income was computed under 'Lone Term Caprtal Gain . Had there been a case of diversion of the Income by source or by overriding title , then the whole of the amount on sale of assets would not have entered into the charging provisions of the Income Tax Act, at all, that is, would not have been even entered the computation of total income. But here the assessee had duly disclosed the sale consideration of the mortgaged asset not only in the books of account but also shown it as its income as LTCG in the computation of income, albeit claimed a wrong deduction of principal amount as cost of acquisition. The assessee now cannot plead otherwise. Even if we go by the proposition that entries in the books of account are not relevant for deciding the taxability of income, then also the fundamental aspect that permeates in this case is that, the liability/debt was entered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee is dismissed. Sd/- ( AMIT SHUKLA) JUDICIAL MEMBER Mumbai, Date : 23rd October, 2015 REFERENCE UNDER SECTION 255(4) OF INCOME TAX ACT 2. In the backdrop of the divergent views taken by Hon ble Accountant Member and Hon ble Judicial Member, who constituted the Bench, a reference was made to the Hon ble President, vide reference dated 27-08-2015 to nominate a Third Member to answer the following questions:- ( i) Whether, on the facts and circumstances of the case, the assessee was justified in claiming the deduction of ₹ 1,48,24,633/- out of full value of consideration arising from the transfer of mortgaged capital asset by the Kotak Mahindra Bank, which took over the possession of the said asset under the provisions of the SARFAESI Act, 2002. ( ii) Whether, on the facts and circumstances of the case, the entire sale consideration, which is received by the Kotak Mahindra Bank from the transfer of mortgaged assets under the provisions of section 13 of the SARFAESI Act, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s served on 30.11.2009 as per the provisions of Section 13(2) of the Securitisation and Reconstruction of Financial Assets of Security Interest Act, 2002 (in short SARFAESI Act ) on the assessee company and its personal guarantors, viz. Mr. H. S. Bapna and Mrs. Urmila Bapna. The total outstanding liability to KMBL at that point of time was ₹ 3,40,61,488/-. On 07.01.2010, KMBL took over possession of the factory land of the assessee admeasuring 6,883.517 sq. mtrs. which was subdivided into 7 plots and 6 of these sub-plots were sold by KMBL in March, 2010. KMBL directly received the consideration amounting to ₹ 2,18,00,262/- and adjusted the said realisation against the outstanding loan of the assessee, i.e. a sum of ₹ 1,48,24,633/- was adjusted against the principal component of the loan and ₹ 69,75,629/- was adjusted against the interest component of the loan. While computing the Capital Gain under the Act, assessee treated the entire amount of ₹ 2,18,00,262/- received by the bank on sale of plots as sale consideration; however, the amount of ₹ 1,48,24,633/- which was apportioned against the principal component of the loan was claimed as deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan liability. In view of this difference of opinion between the learned Judicial Member and learned Accountant Member, the matter has been referred to me for my opinion. 4. The questions to be answered by me in this order, as framed by the two learned Members of the Division Bench, and reproduced above, is whether assessee was justified in making deduction of ₹ 1,48,24,633/- from the full value of consideration of the property mortgaged with KMBL, which took over possession of the said property as per provisions of SARFAESI Act; and, whether the entire sale consideration received by KMBL on sale of asset will not be chargeable to tax in the hands of the assessee on the principle of diversion of income by overriding title . 5. At the outset, I make it clear that as regards the facts which are relevant to decide the dispute, there is no difference between the learned Members constituting the Division Bench, and therefore the same are not being repeated by me for the sake of brevity. 6. Before me, the learned representative attempted to support the order passed by the learned Accountant Member. At the outset, it was argue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at if KMBL is treated as the real owner, KMBL should have paid the capital gains tax, which is not the case. It was further argued that the object of SARFAESI Act is to facilitate the recovery and not to mitigate Capital Gains tax. My attention was also drawn to the provisions of Section 13(6) of the SARFAESI Act which states that on transfer of asset by the secured creditor to the transferee, the transferee will get all right, title and interest in the said property as if the transfer is made by the borrower. It was thus argued that the property at the time of sale belonged to the assessee and thus, the sale of property by KMBL was on behalf of the assessee and, therefore, the amount recovered by KMBL shall not be allowed as deduction while computing Capital Gain in the hands of the assessee. 8. The learned DR further argued that the contention of the assessee that assessee lost ownership of the property at the time of vesting of property in favour of KMBL is incorrect as at the time of second transaction of property sale by KMBL, the loan account of the assessee got settled, which was not so at the time of vesting of the property in favour of KMBL and, therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le for the purpose of computation of capital gains, the Kerala High Court has failed to note that in a mortgage there is transfer of an interest in the property by the mortgagor in favour of mortgagee and where the previous owner has mortgaged the property during his lifetime, which is subsisting at the time of his death, then after his death his heir only inherits the mortgagor's interest in the property. By discharging the mortgage debt his heir who has inherited the property acquires the interest of the mortgagee in the property. As a result of such payment made for the purpose of clearing off the mortgage the interest of the mortgagee in the property has been acquired by the heir. The said payment has, therefore, to be regarded as 'cost of acquisition' under section 48, read with section 55(2). The position is, however, different where the mortgage is created by the owner after he has acquired the property. The clearing off the mortgage debt by him prior to transfer of the property would not entitle him to claim deduction under section 48 because in such a case he did not acquire any interest in the property subsequent to his acquiring the same. In Daksha Ramanlal&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds kits and interest due from the assessee and paid over the balance to him. The capital gain that the assessee made was on the immovable property that belonged to him. Therefore, it is on the full price realised (less admitted deductions) that the capital gain and the tax thereon has to be computed. ( underlined for emphasis by me) 11. Further, the Hon'ble Supreme Court in the case of CIT vs. Sitaldas Tirathdas [1961] 41 ITR 367 has laid down following test with regard to diversion of income by overriding title . The relevant para of the said judgment is reproduced hereunder:- In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act . ( 2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under subsection (4) : [ Provided that- ( i) the requirement of classification of secured debt as nonperforming asset under this sub-section shall not apply to a borrower who has raised funds through issue of debt securities; and ( ii) in the event of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver the management of such business of the borrower which is relatable to the security for the debt;] ( c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor; ( d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt. ( 5) Any payment made by any person referred to in clause (d) of sub-section (4) to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower. [( 5A) Where the sale of an immovable property, for which a reserve price has been specified, has been postponed for want of a bid of an amount not less than such reserve price, it shall be lawful for any officer of the secured creditor, if so authorised by the secured creditor in this behalf, to bid for the immovable property on behalf of the secured ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer by way of lease or assignment or sale of the assets before tendering of such amount under this sub-section, no further step shall be taken by such secured creditor for transfer by way of lease or assignment or sale of such secured assets. ] ( 9 ) [Subject to the provisions of the Insolvency and Bankruptcy Code, 2016, in the case of] financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than [sixty per cent] in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors : Provided that in the case of a company in liquidation, the amount realised from the sale of secured assets shall be distributed in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956) : Provided further that in the case of a company being wound up on or after the comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditor under or by this section, the secured creditor shall be entitled to proceed against the guarantors or sell the pledged assets without first taking any of the measures specified in clauses (a) to (d) of sub-section (4) in relation to the secured assets under this Act. ( 12) The rights of a secured creditor under this Act may be exercised by one or more of his officers authorised in this behalf in such manner as may be prescribed. ( 13) No borrower shall, after receipt of notice referred to in sub-section (2), transfer by way of sale, lease or otherwise (other than in the ordinary course of his business) any of his secured assets referred to in the notice, without prior written consent of the secured creditor . Sub-section (2) of Section 13 of the SARFAESI Act provides that if the borrower defaults in repayment of loan or any instalment thereof and his account is classified as a Non-Performing Asset, then the secured creditor shall issue a notice requiring him to make the payment within sixty days, failing which the secured creditor shall exercise his rights conferred under Sub-section (4) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught to be understood by the assessee to mean taking possession of the secured asset by KMBL as an owner per se. So however, in my considered opinion, the reading of clause (a) of Sub-section (4) of Section 13 of the SARFAESI Act does not justify the aforesaid interpretation. Sub-section (4) of Section 13 of the SARFAESI Act says In case the borrower fails to discharge his liability ......................... the secured creditor may take recourse ........................... to recover his secured debt ............. . Furthermore, clause (a) of Sub-section (4) of Section 13 of the SARFAESI Act, inter-alia, says take possession of the secured assets ................... including the right to transfer ......................... for realising the secured asset . Quite clearly, vesting of the secured asset with the secured creditor is prescribed by SARFAESI Act to enable the secured creditor to recover his secured debt including, inter-alia, empowering the secured creditor to take possession and transfer by way of lease, assignment or sale the secured asset for realising the secured asset . Therefore, in my considered opinion, the stand of the assessee (on the strength of SARFAESI A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. Thus, the amount recovered by KMBL can by no stretch of imagination be treated as diversion of income by overriding title . The principle of diversion of income by overriding title applies when the transaction is beyond the control of the assessee due to which assessee has to make commitment to either divert it s income or part with income earned by it in a particular manner. The principle of diversion of income by overriding title has been laid down by the courts to overcome the situation wherein an assessee does not have a free hand on the amount earned by it or is in fact not received by an assessee due to circumstances beyond it s control. Such principle would not be attracted in cases wherein assessee by his own past action creates a future obligation for himself to utilize the amount in a particular manner. Thus, the claim of the assessee cannot be accepted in the facts of the present case. 19. Section 13 of the SARFAESI Act cannot come to the rescue of the assessee. I find that at the time of entering into mortgage agreement assessee was well aware of the consequences of non-payment of loan amount which, inter-alia, included procedure of re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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