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Issues: Assessment of capital gains under the Income-tax Act, 1961 based on consideration received for property transfer and treatment of mortgage liability in computation of capital gains.
Assessment of Capital Gains: The petitioners, as directors of a company, transferred property to buyers after discharging a mortgage with funds from the sale proceeds. Initially, they disclosed the total consideration of Rs. 10,33,966 in their tax returns. However, they later contested the assessment, arguing that the consideration should be reduced by the amount paid to the bank for mortgage discharge. The Commissioner upheld the original assessment, stating that the payment to the bank was for the petitioners' benefit and not a diversion of funds. The Commissioner also ruled that the mortgage debt was not deductible in computing capital gains, citing a previous court decision. Consideration Received: The court determined that the petitioners transferred the full right in the property without any encumbrance after discharging the mortgage. The consideration received was for the entire property, not just the equity of redemption. The court emphasized that the payment made to the bank was essential for the sale to proceed, and the consideration was not reduced by the mortgage amount. Treatment of Mortgage Liability: The court clarified that the amount spent to discharge the mortgage cannot be considered as part of the cost of acquisition or improvement of the asset for computing capital gains. Citing a previous case, the court held that discharging a mortgage created by the petitioners themselves does not qualify as an improvement cost. The court rejected the argument that the mortgage discharge amount should be deducted from the consideration for the property transfer. Legal Precedents: The court referenced a previous decision to support its ruling that the mortgage discharge amount should not be deducted in computing capital gains. The court also distinguished other cases cited by the petitioners, stating that they were not applicable to the current situation. Conclusion: The court upheld the Commissioner's order, dismissing the writ petitions challenging the assessment of capital gains. The court found no merit in the petitioners' contentions and ruled that the consideration for the property sale was Rs. 10,33,966 without deduction for the mortgage discharge amount. No costs were awarded in the case.
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