2001 (10) TMI 5 - SC - Income Tax

Computation of Capital Gains - sale of the assessee s interest in the property - Tribunal and the High Court were in error. What was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised therefor belonged to the assessee. From out of that price the State deducted its dues towards kist and interest due from the assessee and paid over the balance to him - capital gains should be computed on the full price realised

Summary

Issues:
1. Computation of capital gains on the sale of immovable property.
2. Treatment of amount realised under charge or mortgage by the Government.
3. Deductibility of mortgage debt payment towards cost of acquisition.
4. Computation of capital gains based on the interest in the property sold.

Analysis:
The case involved the computation of capital gains on the sale of immovable property mortgaged by the assessee to the State for security purposes. The Revenue contended that the assessee was liable for capital gains tax based on the full sale price realized at auction, whereas the assessee argued that the mortgage debt amount should be deducted before computing the capital gain. The Income-tax Officer and appellate authority did not agree with the assessee, leading to an appeal before the Income-tax Appellate Tribunal.

The Tribunal upheld the assessee's claim, stating that the sale price had two components: one representing the assessee's interest in the property and the other representing the debt and interest due to the State. The Tribunal considered the amount realized under the charge or mortgage as not reaching the assessee but going to the Government. The High Court concurred, emphasizing the reduction in property value due to the interest created in favor of the State by the mortgage.

However, the Supreme Court disagreed with the Tribunal and High Court, stating that what was sold at auction was the immovable property belonging to the assessee, and the full price realized belonged to the assessee. The Court clarified that the capital gain should be computed on the entire sale price less admitted deductions. Consequently, the first question was answered in favor of the Revenue, and the other questions were deemed irrelevant.

In conclusion, the civil appeal was allowed, setting aside the judgment and order under appeal, with no specific order as to costs.