2015 (1) TMI 1016 - AT - Income Tax

Long term capital gains assessment arising out of property sold - assessee has claimed exemption from chargeability to capital gain by contending that as the entire sale consideration was paid to the bank towards discharge of the debt of a company and firm wherein they are directors/ partners it has to be allowed as an expenditure while computing capital gain - Held that - As can be seen from the facts and materials on record the sale consideration received by the assessee was deposited into his personal bank account. It is also a fact that the assessee has made FDs out of the sale consideration and also earned interest which were offered to tax in the return of income filed by the assessee. It is also a fact on record that the sale of property took place much earlier to the sanction of OTS by the bank which advanced loan to M/s Hoe Leather Garments Pvt. Ltd. and M/s. Hansa Overseas Enterprises wherein assessee along with his brother are directors/partners. Therefore as can be seen the sale consideration received on sale of the property was not directly paid to the concerned bank towards discharge of the debt as per OTS as claimed by the assessee. Moreover it is not in dispute that the amount claimed to have been paid by the company/firm towards OTS originated from the unsecured loan claimed to have been availed through the personal accounts of the directors/partners. In these circumstances assessee s claim that the bank has appropriated the sale consideration towards discharge of debt as per the OTS in our view is not acceptable. There is no direct nexus between the receipt of the sale consideration and payment made to the bank towards discharge of the debt. Moreover it is a fact on record that the unsecured loan of the amount claimed to have been received from the directors has been disbelieved by the Department while completing assessment in case of M/s Hoe Leather Garments Pvt. Ltd. and additions were made u/s. 68 of the Act which also stand confirmed. Therefore in a sense the claim of unsecured loans from the directors of the amount utilised towards discharge of debt has also not been accepted by the Department. In these circumstances assessee s claim that since the entire sale consideration was utilised towards discharge of the debt the same cannot be chargeable to capital gain in our view is not acceptable. Even assuming for arguments sake that the property in question was mortgaged as a security towards the debt availed by the company and the firm the same cannot exempt the assessee from chargeability of capital gain on the sale of the asset. Decided against assessee.

Issues Involved:
1. Delay in filing appeals.
2. Assessment of long-term capital gains from the sale of property.
3. Claim of deduction under Section 48(1) of the Income Tax Act.
4. Treatment of sale consideration used to discharge debts of a company and partnership firm.
5. Interpretation of conflicting legal precedents.

Issue-wise Detailed Analysis:

1. Delay in Filing Appeals:
The appeals by the assessees were delayed by 136 days. The assessees filed delay condonation petitions supported by affidavits. After considering the submissions, the Tribunal found a reasonable cause for the delay and admitted the appeals for consideration on merit.

2. Assessment of Long-term Capital Gains from the Sale of Property:
The common issue in the appeals was the assessment of long-term capital gains arising from the sale of property during the assessment year 2006-07. The assessees had sold a property for Rs. 1,09,50,000 but did not declare the capital gains in their returns. The Assessing Officer (AO) reopened the assessment under Section 147 of the Income Tax Act and computed long-term capital gains at Rs. 1,00,16,340 after rejecting the assessees' claim that the sale proceeds were used to repay bank loans.

3. Claim of Deduction under Section 48(1) of the Income Tax Act:
The assessees claimed that the sale proceeds were used to repay the debts of a company and a partnership firm, and hence, no capital gains tax should be levied. The AO rejected this claim, stating that loan repayment is not a deductible expense under Section 48(1). The learned CIT(A) upheld this view, noting that the sale consideration was deposited in the assessees' bank accounts and not directly paid to the bank. The CIT(A) also observed that the repayment of the loan was not the liability of the assessees but of the company and firm in which they were directors/partners.

4. Treatment of Sale Consideration Used to Discharge Debts:
The assessees argued that the sale consideration should be allowed as a deduction under Section 48(1) as it was used to discharge the debts of the company and firm. The CIT(A) and the Tribunal found no direct nexus between the receipt of the sale consideration and the payment made to the bank. The Tribunal noted that the sale of the property occurred before the one-time settlement (OTS) with the bank and that the sale consideration was used for fixed deposits, earning interest. The Tribunal concluded that the sale consideration was not directly appropriated by the bank and thus could not be deducted under Section 48(1).

5. Interpretation of Conflicting Legal Precedents:
The assessees relied on various judicial decisions to support their claim for deduction. However, the Tribunal referred to the Supreme Court decisions in R.M. Arunachalam vs. CIT and VSNR Jagdish Chandran vs. CIT, which held that the discharge of mortgage created after acquiring the property is not deductible from capital gains. The Tribunal emphasized that in the absence of a contrary Supreme Court decision, it was bound to follow these precedents.

Conclusion:
The Tribunal dismissed the appeals, upholding the CIT(A)'s decision that the sale consideration received from the property sale was chargeable to capital gains tax. The Tribunal found that the assessees' claim for deduction under Section 48(1) was not tenable as the sale proceeds were not directly paid to the bank and were used for fixed deposits instead. The Tribunal also noted that the repayment of the loan was not the assessees' liability but that of the company and firm. The Tribunal's decision was based on the Supreme Court rulings, which held that the discharge of mortgage debt is not deductible from capital gains.

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