1991 (10) TMI 88 - AT - Income Tax

Summary

Issues Involved:

1. Whether the amount paid directly to KFC for discharging the mortgage can be deducted from the sale consideration while computing capital gains.
2. Determination of the cost of the asset for the purpose of computing capital gains.
3. Whether the sale proceeds were diverted by overriding title to KFC, and thus, did not constitute consideration received by the assessee.
4. Whether there was any collusion between the parties to avoid capital gains tax.

Issue-wise Detailed Analysis:

1. Deduction of Amount Paid to KFC:

The assessee argued that the amount paid directly to KFC to discharge the mortgage should be deducted from the sale consideration under section 48(1)(a)(i) of the Income-tax Act, 1961, as it was an expenditure incurred wholly and exclusively in connection with the transfer. The Tribunal agreed with this contention, stating that the expenditure incurred for the purpose of transferring full ownership rights in the property, which stood diminished by the mortgage, qualifies as deductible expenditure. The Tribunal cited the Supreme Court judgment in the case of Attar Singh Gurumukh Singh and the Kerala High Court decision in V.A. Vasumathi to support this view.

2. Determination of the Cost of the Asset:

The ITO had taken the cost of the asset as Rs. 50,000 based on the wealth-tax return for the assessment year 1974-75. The assessee contended that this value was declared subject to the mortgage and did not reflect the true cost. The Tribunal noted that the ITO did not provide clarity on how the sale proceeds were determined at Rs. 13,12,414 and accepted the assessee's claim that the sale consideration was Rs. 11,84,000. The Tribunal left open the issue of determining the cost as on 1st January 1964 for further consideration.

3. Diversion of Sale Proceeds by Overriding Title:

The assessee claimed that the sale proceeds were diverted by overriding title to KFC and thus did not constitute consideration received by her. The Tribunal did not make a definitive ruling on this issue but noted that the payment to KFC was an expenditure incurred in connection with the transfer. The Tribunal left this issue open for further consideration.

4. Allegation of Collusion to Avoid Capital Gains Tax:

The Departmental Representative argued that the sale was structured to avoid capital gains tax by paying the sale consideration directly to KFC. The Tribunal found no evidence of collusion, noting that the High Court had sanctioned the mortgage and that KFC, a government undertaking, was involved. The Tribunal dismissed the allegation of collusion, stating that the Department had not provided any material to support this claim.

Conclusion:

The Tribunal allowed the appeal, holding that the amount paid to KFC for discharging the mortgage was deductible under section 48(1)(a)(i) as expenditure incurred wholly and exclusively in connection with the transfer. The Tribunal left open the issues of the diversion of sale proceeds by overriding title and the determination of the cost of the asset as on 1st January 1964 for further consideration.