2014 (12) TMI 468 - AT - Income Tax

Taxability of capital gains on the asset mortgage in discharge of dues, where assessee being a guarantor - Computation of LTCG on sale of shop Transfer u/s 2(47)(i) Held that - A firm and a company in which the Assessee was a partner and director respectively had obtained financial assistance from banks and as a security for lending to the firm and company, Assessee had mortgaged the shop - on failure of the borrowers to repay the loans, the bank sold of the mortgaged shop and appropriated the dues - when any right in respect of any capital asset is extinguished and that right is transferred to someone, it would amount to transfer of a capital asset following the decision in Commissioner of Income Tax Versus Attili N. Rao 2001 (10) TMI 5 - SUPREME Court in a case where the property is mortgaged for securing the debt and subsequently, if the mortgagee sells the property and recovers the amount due to him and pays the balance of the sale price, if any, to the owner of the property, then, the gross amount should be taken as the consideration for computing capital gain in the hands of the owner of the property - thus, CIT(A) rightly held that asseessee being the legal owner has to be taxed for the capital gains arising from the sale of mortgaged shop the order of the CIT(A) is upheld Decided against assessee.

Summary

Issues Involved:
1. Taxability of capital gains on the sale of a mortgaged property.
2. Determination of the appropriate sale consideration for computing capital gains.
3. Timing of the transfer for capital gains computation.

Issue-wise Detailed Analysis:

1. Taxability of Capital Gains on the Sale of a Mortgaged Property:
The primary issue was whether the sale of a mortgaged property by a bank, due to the default of loan repayment, results in capital gains taxable in the hands of the original owner. The assessee argued that since the property was seized and auctioned by the bank to recover the loan, and no proceeds were received by the assessee, no capital gains should be recognized. However, the Tribunal upheld the view that the sale of the property, even under mortgage, constitutes a transfer under Section 2(47) of the Income-tax Act. The Tribunal referred to the Supreme Court's decision in CIT vs. Attili N. Rao, which clarified that the gross amount realized from the sale should be considered for capital gains computation, irrespective of the loan repayment.

2. Determination of the Appropriate Sale Consideration for Computing Capital Gains:
The assessee contended that since the bank appropriated the sale proceeds towards the outstanding loan, the transfer price should be considered nil, resulting in no capital gains. The Tribunal, however, supported the Assessing Officer's stance that the gross sale consideration, i.e., the entire amount realized from the auction, should be taken as the sale consideration for computing capital gains. This was based on the principle established by the Supreme Court in the Attili N. Rao case, where it was held that the entire auction price, less any admitted deductions, should be considered for capital gains computation.

3. Timing of the Transfer for Capital Gains Computation:
The assessee argued that the transfer should be considered in the year when the bank took possession of the property, i.e., on 05.01.2009, and not in the year of the auction, i.e., 03.06.2010. The Tribunal rejected this argument, stating that the legal transfer of the property occurred on the auction date, and thus, the capital gains should be recognized in the assessment year corresponding to the auction date. The Tribunal emphasized that prior to the auction, the property was merely mortgaged and not legally transferred.

Conclusion:
The Tribunal dismissed the appeal of the assessee, holding that the sale of the mortgaged property by the bank constituted a transfer under Section 2(47) of the Income-tax Act, and the gross sale consideration from the auction should be used for computing capital gains. The timing of the transfer was determined to be the date of the auction, and not the date of possession by the bank. The decision was based on the principles established by the Supreme Court in the Attili N. Rao case, ensuring that the full auction price, less any permissible deductions, is considered for capital gains calculation.