1985 (10) TMI 132 - AT - Income Tax

Summary

Issues Involved:

1. Computation of capital gains under Section 48 of the Income-tax Act, 1961.
2. Deductibility of amounts realized by the State Excise Department under a mortgage or charge.
3. Deductibility of interest paid to a third party in computing capital gains.

Detailed Analysis:

1. Computation of Capital Gains under Section 48 of the Income-tax Act, 1961:

The primary issue revolves around the interpretation of the phrase "full value of the consideration received or accruing as a result of transfer of the capital asset" in Section 48. The assessee argued that this phrase should be distinguished from "fair market value of the capital asset" in Section 52. It was contended that the amount realized by the State Government from the sale of the mortgaged property should not be included in the assessee's capital gains since it was diverted by overriding title before reaching the assessee. The Tribunal agreed with the assessee's interpretation, holding that capital gains should be computed only with reference to the consideration attributable to the assessee's interest in the property, not the full sale price.

2. Deductibility of Amounts Realized by the State Excise Department under a Mortgage or Charge:

The assessee contended that the amount of Rs. 1,29,020 realized by the State Excise Department should not be included in the computation of capital gains as it was received by the Government by overriding title. The Tribunal agreed, citing the Supreme Court decision in CIT v. Sitaldas Tirathdas, which distinguished between income diverted by overriding title and income applied to discharge an obligation after it reaches the assessee. The Tribunal held that the amount realized by the Government under the mortgage or charge never reached the assessee as his income and should be excluded from the computation of capital gains. Thus, the capital gains should be computed on Rs. 4,33,960 (Rs. 5,62,980 - Rs. 1,29,020).

3. Deductibility of Interest Paid to a Third Party in Computing Capital Gains:

The assessee also claimed the deductibility of interest paid to Smt. A. Polamma as an expenditure in realizing the sale price. The Commissioner (Appeals) and the Tribunal both rejected this claim, holding that the interest paid was neither an expenditure incurred in connection with the transfer nor a cost of improvement to the capital asset. The Tribunal found no reason to interfere with the lower authorities' decision on this point, as no substantial argument was advanced by the assessee's counsel.

Conclusion:

The Tribunal concluded that the amount of Rs. 1,29,020 realized by the State Excise Department under the mortgage or charge should be excluded from the computation of capital gains. The appeal was partly allowed, and the ITO was directed to recompute the capital gains accordingly. The claim for deductibility of interest paid to Smt. A. Polamma was rejected.