2020 (12) TMI 993 - HC - Income Tax

Capital gain deduction - Allowable deduction u/s 48 - sale was received by the appellant and same was directly paid to the Bank by the purchaser in discharge of the mortgage - whether Tribunal was right in law 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? - HELD THAT - Hon'ble Supreme Court in RM. ARUNACHALAM VERSUS COMMISSIONER OF INCOME-TAX 1997 (7) TMI 5 - SUPREME COURT had held that where the mortgage had been created by the owner after he had acquired the property, the clearing of the mortgage by him prior to the transfer of the property would not entitle him to claim deduction under Section 48 of the Act because, in such a case he did not acquire any interest in the property subsequent to his acquiring the same.

Summary

Issues:
1. Whether the Income Tax Appellate Tribunal was correct in not recognizing that no capital gains arise when the consideration for sale is directly paid to the bank by the purchaser?
2. Whether the diversion of sale proceeds towards redeeming the mortgagor's interest exempts the amount from capital gains tax?

Analysis:
1. The High Court considered a Tax Case where the Tribunal's order was challenged. The Tribunal had ruled against the Assessee, stating that the sale consideration paid directly to the bank did not qualify as an allowable deduction under section 48 of the Income-tax Act. The Court referred to precedents and held that the claim of no capital gains due to non-receipt of consideration was not valid. The Court emphasized that expenses must be incurred wholly and exclusively in connection with the transfer to be considered for deduction. The decision of the Hon'ble Supreme Court in RM.Arunachalam vs. CIT was cited to support the judgment.

2. The Court also referred to a Division Bench judgment where it was held that the clearing off of mortgage debt by the owner before the property transfer does not entitle them to claim deduction under Section 48 of the Act. The Court highlighted the distinction between cases where the mortgage was created by the owner after acquiring the property and cases where the mortgage existed before the owner's acquisition. The judgment reiterated that in the former scenario, clearing the mortgage debt does not reduce the cost of acquisition, as the owner did not acquire any interest in the property after its acquisition.

3. The Court further referenced a Supreme Court case where it was clarified that discharging mortgage debt created by the owner post-acquisition does not enhance the cost of acquisition. The judgment emphasized that such payment does not entitle the owner to claim deduction under section 48 of the Act. The Court upheld the Tribunal's decision, stating that the mortgage debt clearance cannot be considered as an improvement or cost of acquisition by the owner.

4. Ultimately, the Court disposed of the present Tax Case in line with the earlier judgment involving a co-owner of the Appellant/Assessee, answering the questions of law against the Assessee and in favor of the Revenue. No costs were awarded in this judgment.