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2019 (10) TMI 1198 - AT - Income TaxComputation of capital gains - deduction towards repayment to bank loan which was treated as NPA by the bank - Doctrine of overriding title - implication of SARFAESI Act on the doctrine of diversion of income by overriding title - consideration from sale of property to the extent of principal component of loan adjusted by the bank - assessee failed to make payment to the secured creditor within the period specified in the notice issued under Sub-section (2) of Section 13 of the SARFAESI Act - Deduction of full value of consideration arising from the transfer of mortgaged capital asset by the Kotak Mahindra Bank, which took over the possession of the said asset under the provisions of the SARFAESI Act, 2002 - Whether entire sale consideration, which is received by the Kotak Mahindra Bank from the transfer of mortgaged assets under the provisions of section 13 of the SARFAESI Act, will not be chargeable to Income tax in the hands of the assessee on the principle of diversion of income by overriding title ? - difference between the learned Members constituting the Division Bench HELD THAT - Borrower defaults in repayment of loan or instalment and the secured creditor issues the notice specified in Sub-section (2) of Section 13 of the SARFAESI Act, the right of the borrower with respect to the secured asset gets restricted, and he is not allowed to part with the secured asset without the prior approval of the secured creditor - On non-repayment of loan or instalment amount within the period specified in the notice issued under Sub-section (2) of Section 13 of the SARFAESI Act, all the rights in the secured asset get vested with the secured creditor and the borrower has no right in the said asset. The borrower is not free to decide even the way in which the secured asset shall be parted with. It is the sole discretion of the secured creditor as to how the secured asset shall be dealt with. This right in favour of the secured creditor is created by virtue of SARFAESI Act; and, this has been interpreted by the learned representative for the assessee to say that the mortgaged property vested with KMBL and, therefore, the property was sold by KMBL in its own right. In the present case the assessee defaulted in repayment of loan to KMBL and KMBL classified the account of the assessee as Non-Performing Asset which is the precondition before issuing notice under Sub-section (2) of Section 13 of the SARFAESI Act. The assessee was thus issued notice under Subsection (2) of Section 13 of the SARFAESI Act dated 30.11.2009. The assessee failed to make payment to the secured creditor within the period specified in the notice issued under Sub-section (2) of Section 13 of the SARFAESI Act. Thus, by virtue of Sub-section (4) of Section 13 of the SARFAESI Act, KMBL was vested with the option to sell the secured asset, which is represented by plots, in the present case. KMBL invoked the SARFAESI Act and accordingly took possession of the plots, sold them and recovered the amount of loan liability outstanding from the assessee. The situation can also be seen de hors the SARFAESI Act. The assessee in the present case availed mortgage loan from KMBL and, one of the condition was that if the assessee defaults in repayment of loan and interest, the mortgaged property will be sold by KMBL to recover the outstanding loan and interest amount from the assessee. The assessee and KMBL, both were aware of this fact at the time of advancing of loan by KMBL to the assessee; and, the assessee voluntarily chose to enter into such an arrangement wherein property owned by it was mortgaged to the bank as security; admittedly, assessee agreed to the condition of disposal of the property by KMBL in case of default in repayment of loan by it. This arrangement, even without force of any law, was clear and unambiguous. Thus, it was only a voluntary action on the part of the assessee to enter into such an obligation and assessee was not compelled by law or any other obligation beyond it s control to enter into such an arrangement. Once that is so, any action taken by KMBL to enforce it s right to recover the amount which, in the present case, is right to sell the property to recover amount cannot be said to be transaction beyond the control of the assessee. Thus, the amount recovered by KMBL can by no stretch of imagination be treated as diversion of income by overriding title . The principle of diversion of income by overriding title applies when the transaction is beyond the control of the assessee due to which assessee has to make commitment to either divert it s income or part with income earned by it in a particular manner. SARFAESI Act merely provides a recovery mechanism and nothing else. The SARFAESI Act cannot be interpreted to mean that it has created right of diversion of income by overriding title . There is only a mere application of the sale proceeds realised on sale of plots towards the discharge of outstanding loan liability of the assessee. Assessee cannot claim any part of such application as deduction for the purpose of computing Capital Gain in terms of Section 48 of the Act. Sale of property to the extent of principal component of loan adjusted by the bank cannot be treated as diversion of income by overriding title and was thus not deductible from the total consideration accrued to the assessee from sale of property. So far as the instant dispute is concerned, the legal position prevailing prior to SARFAESI Act is also germane even after the enactment of SARFAESI Act. The law laid down by the Hon'ble Courts with respect to diversion of income by overriding title and deduction to be claimed under Section 48 of the Act while computing the income from Capital Gains, which are discussed by the ld. Judicial Member and also relied upon by the ld. DR, are still good law, and is fully applicable in the instant case. In the present case there was no diversion of sale proceeds by overriding title, but on the contrary, there is only a mere application of the sale proceeds realised on sale of plots towards the discharge of outstanding loan liability of the assessee. I also hold that assessee cannot claim any part of such application as deduction for the purpose of computing Capital Gain in terms of Section 48 of the Act. Agree with the view taken by the learned Judicial Member that the consideration from sale of property to the extent of principal component of loan adjusted by the bank cannot be treated as diversion of income by overriding title and was thus not deductible from the total consideration accrued to the assessee from sale of property. The decision arrived at by learned Judicial Member is the correct view - Decided against assessee.
Issues Involved:
1. Whether the assessee was justified in claiming the deduction of ?1,48,24,633/- out of the full value of consideration arising from the transfer of mortgaged capital asset by Kotak Mahindra Bank under the provisions of the SARFAESI Act, 2002. 2. Whether the entire sale consideration received by Kotak Mahindra Bank from the transfer of mortgaged assets under the provisions of section 13 of the SARFAESI Act will not be chargeable to Income Tax in the hands of the assessee on the principle of "diversion of income by overriding title". Detailed Analysis: 1. Justification of Deduction Claim: The assessee claimed a deduction of ?1,48,24,633/- from the full value of consideration received from the transfer of a mortgaged capital asset by Kotak Mahindra Bank (KMBL) under the provisions of the SARFAESI Act, 2002. The assessee argued that this amount, adjusted by KMBL towards the principal component of the loan, never accrued to them and thus should be considered as a diversion of income by overriding title. The Assessing Officer disallowed this claim, holding that the amount was not deductible under Section 48 of the Income Tax Act, 1961. The CIT(A) upheld this decision, leading the assessee to appeal before the Tribunal. 2. Chargeability of Entire Sale Consideration: The Tribunal had to determine whether the entire sale consideration received by KMBL from the transfer of mortgaged assets should be chargeable to Income Tax in the hands of the assessee. The assessee contended that the sale proceeds to the extent adjusted by KMBL towards the loan principal did not constitute their income due to the doctrine of "diversion of income by overriding title." Tribunal's Decision: Majority View: The majority view, as expressed by the Judicial Member and the Third Member, held that the assessee was not justified in claiming the deduction. The key points considered were: - Doctrine of Diversion of Income by Overriding Title: The Tribunal emphasized that this doctrine applies when an obligation diverts income before it reaches the assessee. However, in this case, the mortgage was voluntarily created by the assessee, and thus, the repayment of the loan was an application of income, not a diversion. - SARFAESI Act's Implications: The SARFAESI Act provides a mechanism for secured creditors to recover debts without court intervention. However, it does not change the nature of the transaction from an income tax perspective. The Tribunal held that the sale proceeds received by KMBL were on behalf of the assessee, and thus, the entire amount was taxable as capital gains in the assessee's hands. - Relevant Case Laws: The Tribunal referred to various Supreme Court judgments, including R.M. Arunachalam vs. CIT and CIT vs. Attili N. Rao, which established that amounts paid to discharge a mortgage created by the assessee are not deductible under Section 48 of the Income Tax Act. The Tribunal also cited CIT vs. Sitaldas Tirathdas, which clarified that the nature of the obligation determines whether income is diverted or applied. Conclusion: The Tribunal concluded that the assessee's claim of deduction for the principal amount of the loan was not sustainable in law. The entire sale consideration received by KMBL was chargeable to Income Tax in the hands of the assessee, as it was considered an application of income rather than a diversion by overriding title. The appeal of the assessee was dismissed, and the decision of the CIT(A) was upheld.
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