2017 (4) TMI 1471 - AT - Income Tax

Diversion of income through overriding title - Computation of capital gains - property which was sold by the assessee s were offered by them as collateral security to M/s. Axis Bank for a loan raised by company as Assessee s were directors of the said company - Since the company did not make the payment possession of the property was taken by M/s. Axis Bank - HELD THAT - No doubt by virtue of SARFAESI Act once the borrower takes possession of the secured asset sale of such an asset could be effected only when the debtor agrees to pay the amount realized from the sale against the outstanding dues. However this in my opinion will not establish an overriding title to the borrower on the income arising out of the sale of the property. Offering a property as a collateral security and selling the property which was offered as a collateral security are two independent and different transactions. Just because the seller is duty bound to pay the proceeds to the borrower for the settlement of the loan would not perse create an overriding title on the income arising from the sale of the property. It is not a pre-existing title on the income arising out from the sale of the property. The proceeds of the sale are only used to satisfy a debt. When proceeds of a sale is used to satisfy the debt the debt cannot be set off against such proceeds while computing capital gains. It is only a application of income. Just because the property was offered as a collateral will not in my opinion change the complexion of the transactions. There was no transfer of ownership of the property to M/s. Axis Bank when the property was offered as collateral. Computation of capital gains was rightly done by the ld. Assessing Officer and confirmed by the ld. Commissioner of Income Tax (Appeals). - Decided against assessee.

Summary

Issues:
Appeal against addition under 'income from capital gains'.

Analysis:
The assessees, a husband and wife, filed appeals against an addition of F18,78,735 under 'income from capital gains'. They jointly owned a property, sold it for F70,00,000, and claimed a loss on the sale. The property was offered as collateral for a loan taken by a company where they were directors. The Assessing Officer denied the claim, recomputed capital gains, and added F18,78,735 to each assessee's income.

The assessees contended before the Commissioner of Income Tax (Appeals) that the sale consideration was handed over to settle the company's dues. They cited judgments but the Appeals Commissioner upheld the Assessing Officer's decision, relying on the Attili N. Rao case. The assessees then argued before the ITAT that the possession taken by the bank under SARFAESI Act extinguished their right to sell the property. They referenced judgments and the SARFAESI Act.

The ITAT analyzed the sequence of events and legal precedents. It concluded that offering property as collateral and selling it were distinct transactions. The sale proceeds used to settle a debt did not establish an overriding title on the income from the sale. The ITAT distinguished cases cited by the assessees, emphasizing the absence of ownership transfer to the bank when the property was offered as collateral.

The ITAT dismissed the assessees' appeals, upholding the lower authorities' orders. It emphasized that the sale proceeds were only used to satisfy a debt and did not alter the nature of the transactions. The ITAT found no reason to interfere with the Assessing Officer and Appeals Commissioner's decisions, citing legal principles and precedents. The appeals were thus dismissed on April 27, 2017, in Chennai.