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Issues Involved: Interpretation of section 45(2) of the Income-tax Act, 1961 regarding repayment of a loan in connection with the transfer of property.
Summary: The High Court of Kerala was tasked with determining whether the repayment of a loan in connection with the transfer of property falls under section 45(2) of the Income-tax Act, 1961. The case involved a private limited company in liquidation that sold a property but had outstanding loan repayment to the Kerala Financial Corporation. The liquidator discharged part of the loan, which the assessee wanted to treat as an expenditure for computing capital gains. The Assessing Officer and the Commissioner of Income-tax (Appeals) did not accept this claim. The Tribunal held that the repayment of the loan was in connection with the property transfer and was covered under section 45(2) as an expenditure wholly and exclusively in connection with the transfer. The Revenue challenged this decision, citing Supreme Court precedents. The Tribunal's view was deemed contrary to established case law. The High Court noted that the Tribunal did not consider an alternative argument regarding the Corporation's overriding title over the property. However, in light of Supreme Court rulings, the High Court concluded that the Tribunal's decision was not supportable. The Supreme Court's judgments emphasized that where a mortgage was created by the previous owner and was subsisting at the time of transfer, the successor acquires the mortgagee's interest by discharging the mortgage debt, making it deductible as the cost of acquisition under section 48 of the Act. The High Court acknowledged that its previous decisions did not align with the Supreme Court's interpretations. Therefore, the question was answered in the negative, favoring the Revenue and against the assessee. This judgment clarifies the application of section 45(2) in cases involving loan repayment in connection with property transfers, emphasizing the significance of Supreme Court precedents in interpreting tax laws.
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