1997 (7) TMI 6 - SC - Income Tax

Sale of house property - ITO computed the capital gains in respect of the said properties- assessee contended that the debts in respect of which mortgage had been executed were discharged by the buyer himself out of the sale proceeds that the debts should be considered as increase in the cost of acquisition of the properties and that in any event the debts may be treated as improvement to the property or as the cost of obtaining clear title to the property - no referable question arise

Summary

Issues:
1. Whether the Tribunal was correct in holding the levy of capital gains as proper under the circumstances.
2. Whether mortgage debts constitute diversion at source.
3. Whether debts discharged by the applicant on the properties enhance the cost of acquisition.

Analysis:
The case involved an appeal by the assessee against the Madras High Court's order declining to direct the Tribunal to state a case and refer specific questions of law related to capital gains computation. The assessee had sold properties and disputed the computation of capital gains, arguing that the debts discharged should be considered as an increase in the cost of acquisition or as improvements to the property. The Appellate Assistant Commissioner rejected this contention but acknowledged the overriding title of creditors, leading to diversion at source, and deleted the computed capital gains. However, the Tribunal disagreed, following precedents, and held that clearing mortgage debt did not constitute cost of acquisition or improvement. The High Court, relying on a Full Bench decision, affirmed this view, stating that discharging mortgage debt did not enhance the property or perfect title. The Supreme Court, in a related case, clarified that clearing off mortgage debt by a successor could be considered the cost of acquisition of the mortgagee's interest in the property. In the present case, as the mortgage was created by the assessee himself, the Court found no arguable question of law in the assessee's application under section 256(2) of the Act. Therefore, despite disagreement with the reasoning, the Court upheld the High Court's order dismissing the application.

In conclusion, the Supreme Court dismissed the appeal, emphasizing that the questions raised did not present any arguable legal issue. The Court's decision was based on the understanding that the assessee, having created the mortgage himself, did not acquire the mortgagee's interest by clearing the debt. The judgment highlighted the distinction between cases where the previous owner had mortgaged the property and cases where the assessee was the creator of the mortgage. Ultimately, the Court upheld the High Court's decision, despite differing on the rationale, and ruled against the assessee.