2020 (12) TMI 1081 - HC - Income Tax

Computation of capital gain - Cost of acquisition - diversion of the sale proceeds towards redeeming the interest of the mortgagor - whether no part of the consideration for sale was received by the appellant and same was directly paid to the Bank by the purchaser in discharge of the mortgage amount - claim that amount paid to bank towards clearing the cloud over the title should be deducted as provided u/s 48 as expenditure incurred wholly and exclusively in connection with such transfer - HELD THAT - Issue decided in TMT. D. ZEENATH 2019 (4) TMI 817 - MADRAS HIGH COURT mortgage deed was never registered and State Bank of India, Pondicherry did not have a right to bring the property to sale. The assessee in the present case, continued to have title over the property along with her co-owners. They brought the property to sale through Bank - there was no diversion of sale proceeds by virtue of overriding title, but on the contrary, there was only a mere application by the owners themselves of the profits realized on the sale of land towards the discharge of loan obligations of same firm. We also hold that the assessee cannot claim any part of such application as cost of acquisition for the purpose of computing capital gains as per the provisions of Section 48. - Decided in favour of revenue.

Summary

Issues:
1. Whether the Income Tax Appellate Tribunal correctly assessed the capital gains in a case where the consideration for sale was directly paid to the bank by the purchaser?
2. Whether the diversion of sale proceeds towards redeeming the mortgagor's interest exempts the amount from capital gains tax?

Analysis:

Issue 1:
The case involved a property sale where the consideration was directly paid to the bank by the purchaser to discharge the mortgage amount, leading the Assessee to claim no capital gains as no consideration was received. However, the Assessing Officer computed the capital gain, considering the one-third share of the Assessee in the total gain. The Commissioner (Appeals) supported the Assessee's claim based on a Kerala High Court decision but was overturned by the High Court. The High Court emphasized that under Section 48 of the Income-tax Act, expenses incurred wholly and exclusively in connection with the transfer are deductible while computing capital gains. As the sale consideration was paid directly to the bank and not received by the Assessee, it did not qualify as an allowable deduction under Section 48. The High Court relied on the Supreme Court's decision to uphold the Assessing Officer's order, dismissing the Assessee's claim of no capital gains due to non-receipt of consideration.

Issue 2:
In a related case involving a co-owner of the present Appellant/Assessee, the High Court reiterated the Supreme Court's position that clearing a mortgage created by the owner after acquiring the property does not entitle deduction under Section 48. The High Court highlighted that the Assessee did not acquire any interest in the property after acquiring it, thus not qualifying for a deduction. The High Court relied on previous judgments to dismiss the Assessee's claim and ruled in favor of the Revenue. Therefore, the present Tax Case was disposed of similarly, answering the questions of law against the Assessee and in favor of the Revenue, with no costs awarded.

In conclusion, the High Court ruled against the Assessee in both issues, emphasizing the application of relevant legal provisions and precedents to determine the assessment of capital gains in cases involving direct payment of sale proceeds to discharge mortgages and the subsequent claims for deductions.