2019 (4) TMI 817 - HC - Income Tax

Taxability of capital gain - Diversion of income - non receipt of sales consideration in hand of assessee - Directly paid to bank as property was mortgage - mortgage deed was never registered and Bank did not have a right to bring the property to sale - whether on creation of mortgage the bank had acquired overriding title to the property? - claim that amount paid to bank towards clearing the cloud over the title should be deducted as provided u/s 48 as expenditure incurred wholly and exclusively in connection with such transfer? HELD THAT - Mortgage was by deposit of title deeds. In a mortgage by deposit of title deeds the mortgagee in this case the State Bank of India Pondicherry does not acquire title much less overriding title to the property. The charge created over the property was to the extent of the mortgage amount or not to the extent of value of the property. Since the mortgage had been created voluntarily the balance sale consideration paid to discharge the mortgage would also be the total value of the property and capital gains is to be computed on the full value of consideration received or agreed as a result of transfer of the capital assets. The entire sale consideration which was the full value of the capital assets was paid directly to the bank. This was not paid to clear a cloud over the title. This was paid to clear the interest or charge over the property which had been offered as collateral security. In the present case mortgage deed was never registered and State Bank of India Pondicherry did not have a right to bring the property to sale. The assessee in the present case continued to have title over the property along with her co-owners. They brought the property to sale through Bank. In Thressiamma Abraham s 1996 (9) TMI 60 - KERALA HIGH COURT case the mortgagee/financier namely Kerala Financial Corporation sold the property in auction and realized the sale consideration. Thressiamma Abraham (supra) did not voluntarily sell the property. In view of the above reasonings we hold that in the present case there was no diversion of sale proceeds by virtue of overriding title but on the contrary there was only a mere application by the owners themselves of the profits realized on the sale of land towards the discharge of loan obligations of same firm. We also hold that the assessee cannot claim any part of such application as cost of acquisition for the purpose of computing capital gains as per the provisions of Section 48. We hold that the ratio laid down in the Hon ble Supreme Court in the case of V.S.M.R. Jagadishchandran (Decd.) 1997 (7) TMI 6 - SUPREME COURT and of the Madras High Court in N.Vajrapani Naidu 1998 (10) TMI 39 - MADRAS HIGH COURT and in Sri Kanniah Photo Studio 2015 (8) TMI 270 - MADRAS HIGH COURT which followed the ratio in the judgment of R.M.Arunachalam 1997 (7) TMI 5 - SUPREME COURT laid down the correct position of law. - decided in favour of the Revenue

Summary

Issues Involved:
1. Whether the Income Tax Appellate Tribunal was correct in not recognizing that no part of the consideration for the sale was received by the appellant and was directly paid to the bank by the purchaser, thus no capital gains arise in the hands of the appellant.
2. Whether the Appellate Tribunal was right in not holding that there was a diversion of the sale proceeds towards redeeming the interest of the mortgagor, and therefore, the amount so diverted was not liable to capital gains tax.

Issue-wise Detailed Analysis:

1. Non-receipt of Sale Consideration by the Appellant:
The appellant, along with two co-owners, had purchased land and later offered it as collateral for a loan. Due to default in repayment, the property was sold, and the entire sale consideration was paid directly to the bank by the purchaser. The appellant argued that since no part of the consideration was received by her, no capital gains should arise in her hands. The Assessing Officer, however, computed the total consideration of the land sold as income from capital gains, deducting only the cost of acquisition and improvement, and assessed the appellant's share accordingly.

2. Diversion of Sale Proceeds:
The appellant contended that the sale proceeds were diverted towards redeeming the interest of the mortgagor, thus not liable to capital gains tax. The Tribunal, however, held that the payment made to the bank was an application of income and not a diversion of income. They referenced Section 48 of the Income Tax Act, which specifies that capital gains should be computed by deducting only the expenditure incurred wholly and exclusively in connection with the transfer and the cost of acquisition and improvement. The Tribunal rejected the appellant's claim, stating that the payment to the bank did not qualify as an allowable deduction under Section 48.

Analysis of Legal Precedents:
The appellant relied on several judgments to support her claim, such as CIT Vs. Thressiamma Abraham, CIT Vs. Attili N.Rao, and CIT Vs. Shakuntala Kantilal. However, the court distinguished these cases based on their facts. The court emphasized that in the present case, the mortgage was created by the appellant after acquiring the property, and the clearing of the mortgage debt by her did not entitle her to claim deduction under Section 48 of the Act. The court referenced the Supreme Court's decision in R.M.Arunachalam Vs. CIT, which held that such payments reduce the cost of acquisition only if the mortgage was created by the person from whom the assessee acquired the title.

Final Judgment:
The court concluded that there was no diversion of sale proceeds by virtue of overriding title, but rather an application of profits realized on the sale of land towards discharge of loan obligations. The court held that the appellant could not claim any part of such application as the cost of acquisition for computing capital gains. The court upheld the decisions of the lower authorities and dismissed the appeal, answering the substantial questions of law against the appellant and in favor of the Revenue.