2012 (12) TMI 752 - AT - Income Tax

Sale of land Long Term Capital Gains - Whether repayment of the mortgage debt created by the assessee, is an expenditure incurred in connection with the transfer of mortgaged asset allowable under section 48(i) - Held that - As decided in Salay Mohamad Ibrahim Sait Versus Income-Tax Officer And Another 1994 (5) TMI 18 - KERALA HIGH COURT the amounts spent for discharge of the mortgage is not liable to be deducted in the computation of capital gains under section 48 of the Act. Assessee is not entitled to the deduction of the expenditure incurred to remove encumbrance created by the assessee himself - CIT(A) has fell in error in allowing the appeal of the assessee and in coming to the conclusion that transfer of property has taken place way back in the financial year 1988-89. Moreover, it was the liability of the assessee to redeem the mortgage. The assessee cannot claim the redemption amount as deduction under the unambiguous provisions of section 48 to arrive at the capital gains - Impugned order of the CIT(A) is set aside and allow the appeal of the Revenue - appeal of Revenue is allowed.

Summary

Issues:
1. Interpretation of section 2(47)(vi) of the Income Tax Act regarding transfer of capital asset.
2. Determination of capital gains arising from the sale of land and building.
3. Consideration of mortgage amount in the computation of capital gains under section 48 of the Act.

Analysis:
1. The appeal involved a dispute regarding the interpretation of section 2(47)(vi) of the Income Tax Act concerning the transfer of a capital asset. The Revenue contended that the provision did not apply as the assessee had provided the land as collateral security for a loan taken by a firm. The Revenue cited judgments from various High Courts to support its argument, highlighting that the transfer had occurred in a different assessment year. However, the Tribunal disagreed, emphasizing that the arrangement did not constitute a transfer as defined under the Act, as the assessee remained the de-facto owner of the land. The Tribunal found the CIT(A)'s interpretation to be erroneous and ruled in favor of the Revenue.

2. The case also addressed the determination of capital gains arising from the sale of land and building. The assessee had sold the property for an amount higher than the registered value, resulting in a long-term capital gain. The CIT(A) had allowed the appeal of the assessee, stating that the transfer had occurred in a previous assessment year. However, the Tribunal disagreed with this assessment, emphasizing that the assessee's arrangement with the firm did not constitute a transfer under the Act. The Tribunal set aside the CIT(A)'s decision and allowed the appeal of the Revenue.

3. Another issue in the judgment was the consideration of the mortgage amount in the computation of capital gains under section 48 of the Act. The Tribunal highlighted that the mortgage amount should not be deducted from the consideration received for the property, as per legal precedents. Citing judgments from the Kerala High Court and the Bombay High Court, the Tribunal emphasized that the amount spent on discharging the mortgage could not be considered as part of the capital gains computation. The Tribunal ruled that the redemption amount for the mortgage could not be claimed as a deduction under section 48, ultimately setting aside the CIT(A)'s decision and allowing the appeal of the Revenue.

This detailed analysis of the judgment highlights the key legal issues and the Tribunal's reasoning in resolving the disputes presented in the appeal.