2015 (8) TMI 270 - HC - Income Tax

Computation of capital gain - claim of expenses u/s 48(1) - whether Tribunal was right in holding that the amount paid by the appellant to the Bank for discharge of the mortgage has to be taken as expenses relating to transfer and it is wholly and exclusively incurred for the transfer u/s 50? - Held that - Section 48 provides that income chargeable under capital gains shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset such amounts, viz., expenses, incurred wholly and exclusively in connection with such transfer. The object behind such a provision is mainly for excluding those expenses incurred wholly or exclusively in connection with the transfer of the property. The facts in the present case reveal that for further development of the property, loan had been obtained by the appellant/assessee from City Union Bank and for the purpose of clearing the mortgage loan, the appellant/assessee had sold the property and effect the one-time settlement with the bank. The Assessing Officer had held that since the mortgage loan had been long time after the acquisition of the property, the same would not stand covered under Section 48 (1) of the Act. That being the case, it does not appeal to us that the explanation relating to discharge of the mortgage to the bank, as submitted by the assessee, can be termed as expenditure, as the property had been acquired long time before taking the mortgage loan from the bank. The Tribunal, to come to the finding that the said discharge of mortgage to the bank cannot be termed as expenditure, has placed reliance on the jurisdictional Court s decision in Vajrapani Naidu s case 1998 (10) TMI 39 - MADRAS High Court wherein held the amount was paid as part of the consideration to the sale. The distinction that was sought to be made by the Tribunal between the case where the mortgage is discharged by the vendor prior to the sale and the case where the discharge of the mortgage is effected at the time of the sale by payment of the outstanding amount to the mortgagee by the vendor and the sale free from encumbrances, is untenable. The only point of relevance is whether the mortgage was created by the vendor or whether it subsisted at the time of acquisition of title thereto by the vendor and was burdened with the same at the time of such acquisition of title In the present case, mortgage has been created by the present appellant/assessee and consequent to the sale, the assessee has discharged the mortgage to City Union Bank. As the burden had been created for his own benefit by offering the property as security to City Union Bank, the amount spent for discharging that burden whether prior to sale, or at the time of sale, by way of one-time settlement to the Bank, cannot be regarded as expenditure wholly and exclusively in connection with the transfer. In the present case, the discharge was in the course of sale. We find that the payment of the outstanding amount in discharge of mortgage by the vendor, viz., appellant herein, cannot partake the character of an expenditure. It is not a case where the assessee had discharged the mortgage created at the time of acquisition of the property by the present appellant/assessee, to make a distinction otherwise. Thus Tribunal was right in law in holding that the amount of ₹ 22,51,220/- paid by the appellant to the Bank for discharge of the mortgage has to be taken as expenses relating to transfer and it is wholly and exclusively incurred for the transfer u/s 50 of the Income Tax Act, 1961 - Decided against revenue.

Summary

Issues Involved:
1. Whether the amount paid by the appellant to discharge a mortgage can be considered as expenses incurred wholly and exclusively in connection with the transfer under Section 48(1)(i) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Discharge of Mortgage as Transfer-Related Expense

The appellant/assessee filed a return for the assessment year 2005-2006, admitting a loss of Rs. 7,42,240/-. During this period, the appellant sold a property for Rs. 75 Lakhs and paid Rs. 22,51,220/- to clear a mortgage loan with City Union Bank. The appellant claimed this amount as an expense under Section 48(1)(i) of the Income Tax Act while computing capital gains.

The Assessing Officer disallowed this claim, stating that the mortgage loan was taken long after acquiring the property and thus was not covered under Section 48(1)(i). The CIT (Appeals) allowed the appellant's claim, referencing the Calcutta High Court's decision in Gopee Nath Paul & Sons vs. Dy. Commissioner of Income Tax.

The Department appealed to the Tribunal, which relied on the jurisdictional High Court's decision in CIT vs. Vajrapani Naidu, and ruled against the appellant. The Tribunal held that the discharge of the mortgage did not qualify as an expense incurred wholly and exclusively in connection with the transfer.

The appellant argued that the Tribunal should have favored the more favorable view to the assessee, especially in light of divergent views from different High Courts. The appellant emphasized that the mortgage was cleared to facilitate the sale, making it an expense related to the transfer.

The respondent/Department contended that the Tribunal correctly followed the jurisdictional High Court's decision, which should take precedence.

The High Court examined Section 48(1)(i) of the Act, which allows for the deduction of expenses incurred wholly and exclusively in connection with the transfer of a capital asset. The Court noted that the mortgage was created by the appellant after acquiring the property, and thus the discharge of the mortgage could not be considered an expense related to the transfer.

The Court referenced the Supreme Court's decision in RM. Arunachalam vs. CIT, which held that clearing a mortgage created by the owner after acquiring the property does not qualify for deduction under Section 48. The High Court found no reason to deviate from its earlier decision in Vajrapani Naidu's case, where it was held that discharging a self-created mortgage does not constitute an expense related to the transfer.

The Court distinguished the facts of the present case from the Calcutta High Court's decision in Gopee Nath Paul, noting that the latter involved a court-ordered settlement and sale of assets, which was not applicable here.

Ultimately, the High Court upheld the Tribunal's decision, confirming that the amount paid to discharge the mortgage could not be deducted as an expense under Section 48(1)(i). The appeal was dismissed, and the Tribunal's order was affirmed.

Conclusion: The High Court ruled that the discharge of a mortgage created after acquiring the property does not qualify as an expense incurred wholly and exclusively in connection with the transfer under Section 48(1)(i) of the Income Tax Act. The appeal was dismissed, and the Tribunal's decision was upheld.