1985 (2) TMI 99 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of mortgage loan from sale consideration for capital gains computation.
2. Definition and scope of 'expenditure' under Section 48 of the Income-tax Act.
3. Consideration of mortgage loan as part of the cost of acquisition or improvement under Section 48.
4. Applicability of Section 54E regarding the investment of sale consideration in specified securities.

Issue-wise Detailed Analysis:

1. Deduction of Mortgage Loan from Sale Consideration for Capital Gains Computation:
The primary issue was whether the mortgage loan of Rs. 42,000 paid directly by the purchaser to the Life Insurance Corporation (LIC) should be deducted from the sale consideration for computing capital gains. The Income-tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) both rejected the assessee's claim, stating that the mortgage loan was not an allowable deduction under capital gains computation. The AAC emphasized that only expenditures incurred wholly and exclusively in connection with the transfer could be deducted, and the mortgage loan did not qualify as such.

2. Definition and Scope of 'Expenditure' under Section 48 of the Income-tax Act:
The assessee argued that the term 'expenditure' should be interpreted broadly to include all outgoings and payments made on behalf of the assessee. The counsel cited several judgments, including Indian Molasses Co. (P.) Ltd. v. CIT and CIT v. Nainital Bank Ltd., to support the argument that the payment to discharge the mortgage should be considered an expenditure. However, the Tribunal noted that in common parlance, capital gains are computed as the difference between the sale price and the purchase cost, as elaborated in Section 48 of the Act.

3. Consideration of Mortgage Loan as Part of the Cost of Acquisition or Improvement under Section 48:
The assessee also raised an additional ground, arguing that the mortgage loan should be considered part of the cost of acquisition or improvement since it was obtained for the purpose of construction. The Tribunal reviewed various judgments, including CIT v. Mithileshkumari and CIT v. V. Indira, to determine whether the mortgage loan could be categorized as an improvement cost. The Tribunal concluded that since the mortgage loan was utilized for construction, it should be considered as an improvement cost deductible under Section 49(1), read with Section 55(1)(b) of the Act.

4. Applicability of Section 54E Regarding the Investment of Sale Consideration in Specified Securities:
The assessee contended that under Section 54E, only the net sale consideration received should be considered for capital gains tax, as the assessee could not invest the entire sale consideration in specified securities. The Tribunal noted that Section 54E provides exemption from income-tax on capital gains if the full value of the consideration received is invested in specific assets within six months. However, since the Tribunal had already decided that the mortgage loan could be considered as part of the cost of improvement, resulting in a larger relief for the assessee, there was no need to address this argument further.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, concluding that the mortgage loan obtained for construction should be considered as an improvement cost deductible under Section 49(1), read with Section 55(1)(b) of the Income-tax Act, thereby modifying the assessment accordingly.