1997 (9) TMI 93 - HC - Income Tax

Capital Asset, Capital Gains, Charitable Trust, Immovable Property, Interest In Property, Movable Property

Issues Involved:
1. Entitlement to exemption under section 11(1A) of the Income-tax Act, 1961, for short-term capital gains.
2. Whether the transaction of sale of property coupled with the liability constituted a single transaction affecting the net consideration under section 11(1A) and Explanation (iii) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Entitlement to Exemption under Section 11(1A) of the Income-tax Act, 1961
The primary issue was whether the assessee, a charitable trust, was entitled to exemption under section 11(1A) of the Income-tax Act, 1961, concerning short-term capital gains of Rs. 1,51,040. The assessee sold its right to obtain the conveyance of certain immovable property, which was a capital asset, to a co-operative housing society for Rs. 3,62,340, resulting in a capital gain of Rs. 1,51,040. The assessee then advanced Rs. 2,10,000 to the purchaser and obtained an English mortgage of the plot of land. The claim for exemption was initially rejected by the Income-tax Officer and subsequently by the Inspecting Assistant Commissioner, who held that the mortgage loan was not a capital asset. However, the Commissioner (Appeals) reversed this decision, stating that the mortgage debt was indeed a capital asset and thus the assessee was entitled to exemption.

Upon further appeal, the Tribunal held that the English mortgage was not a capital asset within the meaning of section 2(14) of the Act, and thus, the utilisation of the sale consideration for the mortgage did not result in the acquisition of a new capital asset as required by section 11(1A)(a). The Tribunal also considered an alternative argument from the Revenue, stating that even if the mortgage debt was considered a capital asset, the exemption would only apply to the portion of the capital gains proportional to the amount used to acquire the new asset.

Issue 2: Single Transaction and Net Consideration
The second issue was whether the transaction of selling the property coupled with the liability of Rs. 1,51,040 constituted a single transaction, thereby affecting the net consideration under section 11(1A) and Explanation (iii). The Tribunal, after considering the arguments, concluded that the assessee was not entitled to full exemption because only a part of the net consideration was utilised for acquiring the new capital asset.

Judgment:
The court examined the definitions and provisions under section 2(14) and section 11(1A) of the Income-tax Act, 1961. It was established that a mortgage is a transfer of interest in specific immovable property and thus qualifies as a capital asset. The court referenced several cases, including Perumal Ammal v. Perumal Naicker, Bank of Upper India Ltd. v. Fanny Skinner, and RM. Arunachalam v. CIT, to support the argument that a mortgage interest is indeed a capital asset.

The court held that the assessee was entitled to the benefit of exemption under section 11(1A) to the extent permissible because the mortgage of the property amounted to the acquisition of a new capital asset. However, since only part of the net consideration was used for acquiring the new asset, the exemption would be partial, calculated as per section 11(1A)(a)(ii).

Conclusion:
1. Question 1: The court answered in the affirmative, in favor of the assessee, confirming that the mortgage is a capital asset and the assessee is entitled to exemption under section 11(1A).
2. Question 2: The court answered in the negative, in favor of the Revenue, holding that the assessee is entitled only to partial relief calculated as per section 11(1A)(a)(ii).

The reference was disposed of with no order as to costs.

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