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2005 (1) TMI 53 - HC - Income TaxWhether 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? - we answer the question in the negative i.e. in favour of the Revenue and against the assessee - Appeal filed by the Revenue is allowed
Issues Involved
1. Deduction of the amount paid to discharge the mortgage debt as income diverted at source by overriding title. 2. Whether the repayment of the mortgage debt created by the assessee is an expenditure incurred in connection with the transfer of the mortgaged asset allowable under section 48(i) of the Income-tax Act. Detailed Analysis 1. Deduction of the amount paid to discharge the mortgage debt as income diverted at source by overriding title - Not Pressed by Assessee: The assessee, represented by Mr. Patil, did not press this issue in light of the Supreme Court's decision in CIT v. Attili N. Rao [2001] 252 ITR 880. 2. Whether the repayment of the mortgage debt created by the assessee is an expenditure incurred in connection with the transfer of the mortgaged asset allowable under section 48(i) of the Income-tax Act - Facts of the Case: - The assessee, a shareholder of Merchant Steel Industries Private Limited, offered a plot of land as security for a loan taken by the company from the State Bank of Saurashtra. - The company failed to repay the loan, leading to a suit and consent terms where the bank had a negative lien on the land. - The assessee sold part of the land for Rs. 3,92,000 and deposited the entire amount with the bank to discharge the debt, claiming exemption from capital gains tax. - The Assessing Officer rejected the claim, but the Commissioner of Income-tax (Appeals) upheld it. The Income-tax Appellate Tribunal supported the Commissioner's decision, leading to the Revenue's appeal. - Tribunal's View: - The Tribunal held that the sale proceeds were diverted by an overriding title in favor of the bank and did not reach the assessee. - The amount paid to discharge the debt was considered an expenditure incurred to remove the encumbrance, deductible under section 48 of the Income-tax Act. - Revenue's Argument: - Citing Supreme Court decisions (Rm. Arunachalam v. CIT [1997] 227 ITR 222, V.S.M.R. Jagadishchandran v. CIT [1997] 227 ITR 240, CIT v. Attili N. Rao [2001] 252 ITR 880), the Revenue argued that repayment of the mortgage debt is not an expenditure incurred in connection with the transfer of the capital asset under section 48(i). - Assessee's Argument: - Mr. Patil argued that the property was transferred with the bank's permission and the sale proceeds were used to discharge the debt, making it an expenditure incurred in connection with the transfer. - He cited CIT v. Shakuntala Kantilal [1991] 190 ITR 56 and CIT v. Abrar Alvi [2001] 247 ITR 312, where removing encumbrance was considered an expenditure incurred in connection with the transfer. - Court's Analysis: - The Supreme Court in Rm. Arunachalam [1997] 227 ITR 222 distinguished between discharging a mortgage created by the previous owner and one created by the assessee. - If the mortgage was created by the previous owner, the repayment is considered part of the "cost of acquisition." However, if created by the assessee, it is not deductible. - In CIT v. Attili N. Rao [2001] 252 ITR 880, the Supreme Court held that capital gains tax is computed on the full price realized, regardless of the mortgage debt repayment. - Conclusion: - The court concluded that the expenditure incurred to remove an encumbrance created by the assessee is not deductible under section 48 of the Income-tax Act. - The decisions in Shakuntala Kantilal and Abrar Alvi were deemed not applicable in light of the Supreme Court's rulings. Final Judgment - Appeal No. 755 of 2000 (Revenue's Appeal): Allowed. - Appeal No. 603 of 2000 (Assessee's Appeal): Dismissed. - Costs: No order as to costs.
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