9911796707
TMI Blog1991 (10) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1989 admitting the total income at Nil besides agricultural income of Rs. 36,194. Alongwith the return of income the assessee had filed a note, which reads as under: "The Palarivattom property was mortgaged to the K.F.C. and the entire consideration was paid to discharge the debts and, hence, after deducting relief under section 54E what has been sold was only the equity of redemption in as much as the property has been mortgaged to the K.F.C. and, therefore, the amount paid by the vendor direct to K.F.C. Thus, discharging this debt cannot be considered as consideration received or accruing to your petitioner. The Transfer of Property Act recognises that ownership is a bundle of rights and when a property is mortgaged some interest in property is transferred with the result that the owner of the mortgaged property becomes a limited owner. Consequently, when the property was sold subject to that mortgage, the sale was only your petitioner's limited ownership and the secured creditor was entitled to receive the payments in discharge of the mortgage from the transferee with notice. So the amount paid directly to KFC cannot be considered to be part of the consideration paid to your ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out by the ITO at Rs. 9,45,601 was without duly considering the facts of the case. The ITO noticed that the assessee had purchased 1.74 acres of land in Survey No. 113/1 of Palarivattom in 1964 and that for the assessment year 1974-75 in the Wealth-tax return the assessee had declared value of the said land at Rs. 50,000. He also noticed that the assessee stood as a guarantor for the loan given by KFC to National Tyre Rubber Co. of India Ltd. (NTRC, for short), that the property was mortgaged under a deed No. 2304 dated 22nd September, 1969 in favour of KFC for the loan obtained by NTRC, that the sale proceeds of the land were appropriated towards the loan granted by KFC to NTRC, that in consideration of the same the sale value was credited in the accounts of NTRC for the year ended 31st December, 1982 under the head 'schedule of unsecured loans'. He further noted that even though the amount had been appropriated towards the loan raised by NTRC the assessee got credit for similar amount in the accounts of NTRC and as such the assessee's claim of liability towards KFC cannot be taken as a liability by the assessee. He held that the assessee's claim cannot be accepted since she is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two cases relied upon by the appellant. The most important fact to be noted in this case is that, the appellant had no liability, direct or indirect, to be discharged. There was no personal liability on her. The National Tyre Rubber Co. India Ltd. was liable to pay some dues to the KFC. The appellant had permitted to mortgage her property to KFC for helping the National Tyre and Rubber Co. India Ltd. to take loan from KFC. No charge was created on her by the KFC. In fact, as rightly noted by the Assessing Officer, she was a creditor to the National Tyre and Rubber Co. India Ltd. In the two cases referred to by the appellant, the assessees were liable to discharge certain debts and they were duly discharged by the mortgagees out of the sale consideration. Hence, the decisions of the Tribunal, Madras Bench relied upon by the appellant are not applicable to the facts of this case. Further, the Supreme Court in the case of Commissioner v. George Henderson Co. Ltd. (1967) 66 ITR 622 (SC) has explained the meaning of the expression "full value of the consideration", which means whole price paid without any deduction whatsoever. The Kerala High Court in the case of Ambat Eclukutty Men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to KFC. The terms of redemption were provided at pages 16 and 17 of the deed. The mortgagor company and the co-mortgagor are prohibited to sell the property mortgaged during the continuance of the mortgage. Such prohibitions are contained in pages 36 to 39 of the deed. Absolute right was given to KFC to sell the properties mortgaged in the event of failure to repay the loan amount. Such right is contained at page 43 of the said deed. Power to sell the properties mortgaged without the intervention of the Court in default of payment of the mortgage money as per section 69 of the Transfer of Property Act, 1882 was also given at page 45 of the deed. The liability of the guarantor, namely, the assessee, is personal as well as in respect of her properties. This can be seen at page 68 of the deed. The Commissioner (Appeals) is incorrect in stating that the assessee had no liability direct or indirect to be discharged. At page 70 of the deed it was stated that the guarantee is enforceable against the guarantor as if the guarantors were the principal debtors for all payments and covenants guaranteed by them. Guarantee given by the assessee is irrevocable guarantee. This is evident from page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection with the transfer under section 48(1)(a)(i) of the Income-tax Act, 1961. It should be deducted from the full value of the consideration. In the present assessee's case the entire amount of sale consideration was paid to KFC for the discharge of the debt owed by NTRC and so nothing was left to be considered as consideration or for that matter, to compute the capital gains in the hands of the assessee. Reliance is placed on the decisions of the Madras Benches of the Tribunal in the cases of N.M.A. Mohammed Haneefa v. ITO and N. Vajrapani Naidu v. ITO. These decisions have to be followed and applied to the facts and circumstances of the present case. A different view cannot be taken as laid down by the Madras High Court in the case of Commissioner v. L.G. Ramamurthi (1977) 110 ITR 453 (Mad). In addition, the concept of real income also should be considered in the facts and circumstances of the assessee's case. No amount was received by the assessee. The entire sale consideration was paid directly to KFC by the purchasers. Then only the mortgaged property was released as can be seen from the letters of KFC dated 15th December 1981 and 22nd January, 1982 referred to earlier. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rbuthnot Co. (1973) 87 ITR 407 (SC) at page 419 the Supreme Court held as under: "What exactly is the meaning of the expression 'full value of the consideration for which the sale is made"? Is it the consideration agreed to be paid or is it the market value of the consideration?" Finally, the Supreme Court adopted the ratio of its own decision in the case of George Henderson Co. Ltd. In the light of the above Supreme Court decisions, it is quite obvious that the full value of the consideration to be adopted for the computation of capital gains in the assessee's case is the consideration agreed upon by the assessee and the purchasers. The consideration agreed upon is that indicated in the sale deed. It is equally wrong to suggest that no consideration has arisen or accrued to the assessee as the entire consideration has been diverted by overriding title. In the instant case the charge on the property has been created by the assessee voluntarily. In such case, there is no diversion of overriding title. The principle of diversion by overriding title will operate only in a situation where there has been pre-existing charge or encumbrance upon a property before or at the time o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d reads as under : "In pursuance of the said agreement and in consideration of total sale price of Rs. 48,000 (Rupees forty eight thousand) paid to KFC for and on behalf of the vendor and at the request of the vendor by the purchaser the receipt of which the vendor hereby admit and acknowledge the entire sale consideration thus FULLY SATISFIED the vendor hereby transfer, convey and assign unto the purchaser by way of absolute sale all estate, right, title and interest of the vendor in the aforesaid property......." The above shows that the vendor, i.e., the assessee is the recipient of the entire consideration and the same has also accrued to the assessee. The payment of the purchase consideration directly by the vendees to the KFC is only a mode of satisfying the consideration by the purchasers. Alternatively, the loan amount received from the KFC in 1969 in consideration of the creation of the mortgage has to be treated as part of sale consideration. Such a view has been accepted by the Tribunal, Bombay Bench 'E' in the case of Navin R. Kamani. Though under general law a limited transfer takes place on the event of creation of a mortgage, under the Income-tax Law transfer ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re faced with a situation where the sale consideration equals the expenditure in connection with transfer. In the case of Vashisht Bhargava v. ITO (1975) 99 ITR 148 (Del) the interest paid on GPF advance that became refundable for non- obtaining of permission to sell the house property acquired utilising the advance was not allowed as expenditure in connection with transfer. The sums paid by the purchasers cannot also constitute cost of improvement for the very same reason that these constitute part of the sale consideration. Under section 48 r/w section 55(1)(b) what is allowable as 'cost of improvement' is all expenditure of capital nature incurred by the assessee in making any addition or alteration to the capital asset. In other words, the expenditure envisaged in the section should result in some tangible physical addition or alteration to the capital asset. In the cases of Ambat Echukutty Menon, Commissioner v. Indira (1979) 119 ITR 837 (Mad) and Smt. S. Valliamma v. Commissioner (1981) 127 ITR 713 (Mad) (FB) it was held that expenditure incurred did not constitute cost of improvement. Coming to the alternative contention that the cost as on 1st January, 1964 would be about R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nothing to do with the sale under consideration. It is the contention of the assessees representative that the credit entry only means the company has acknowledged the assessee's right to recover the amount paid by the assessee towards discharging of the company's liability to KFC. The assessee's representative would like the Tribunal to go by the form or the outward appearance as represented by the accounting entries. This approach of the assessee's counsel is not warranted in the peculiar facts of the case. The Tribunal should look at the substance of the transaction as revealed by the totality of the circumstances. What is utilised for the discharge of the liability is only the sale consideration received from the sale of the property. When the company gives credit for equivalent amount, it is acknowledging the fact that the sale consideration has been utilised for discharging of the company's liabilities and the assessee has been given the right to recover the same from the company. It is not as if the company was totally unaware of the mortgage of the property in consideration of loan granted to it and its subsequent sale for discharging the debts of the company. In the circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson Co. Ltd., and Ambat Echukutty Menon cited by the Departmental Representative were considered and distinguished by the Madras Bench of the Tribunal in paragraph 12 of its order in the case of N.M.A. Mohammed Haneefa v. ITO at page 417. The case of Navin R. Kamani (HUF) v. ITO is a decision under the Indian Stamp Act, 1899. It is not under the Income-tax Act, 1961. Hence, it cannot be called in support of the Department's case. If the alternative contention of the Departmental Representative that loan amount received from KFC in 1969 has to be treated as part of sale consideration, the year of assessment should be 1970-71 and not 1982-83. It is not the case of the ITO as to what constituted the consideration for the mortgage or the consideration for the sale. He took the sale proceeds at Rs. 13,12,414 and not the loan amount of Rs. 20 lakhs. Hence, the Departmental Representative cannot make out a new case before the Tribunal now. In the case of Vashisht Bhargava v. ITO there was no mortgage of immovable property. Hence, it is distinguishable. The argument of the Departmental Representative that the assessee's property only has been singled out for sale has no relevance. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s belonging to the partner were deposited by the firm with the creditor as security for the repayment of loan. In the assessee's case there is the mortgage of immovable property wherein the assessee was co-mortgagor as well as guarantor. Further, in that case of the Tribunal had no occasion to consider the provisions of section 48(1) (a) (i). There the Tribunal had considered the assessee's claim of diversion of income by an overriding title and that the assessee has not received any capital gains in his hands. The Departmental Representative contended that the Kerala High Court in the case of P.K. Kesavan Nair had held that transfer takes place on the date registration. But we find that the Court had not held so. It only held that "the registration of the deed having taken place on 29th March 1975, the transfer was complete " [(174) ITR 253 at page 254)]. But on the other hand the Kerala High Court in the case of Commissioner v. F.X. Periera Sons (Travancore) P. Ltd. (1990) 184 ITR 461 (Ker) held that in the case of sale of immovable properties, the sale can be said to have been taken place on the date of execution of the sale deed. The Gujarat High Court in the case of Arundhat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances the ratio of the Supreme Court's judgment in the case of McDowell Co. Ltd., applies. Here it may be mentioned that it was not the case of the Assessing Officer that there was any collusion between the parties, namely, the assessee, NTRC and KFC. In fact, the High Court by its order dated 13th March 1969 sanctioned the execution of the mortgage. The mortgage was executed on 22nd September, 1969. Further, it is too much to impute collusiveness on the part of KFC, a Government undertaking. The Departmental Representative has not brought on record any material to prove the charge of collusiveness on the part of the parties concerned herein. The contention of the Departmental Representative that the loan amount received form KFC in 1969 in consideration of the creation of the mortgage has to be treated as part of the sale consideration is preposterous, because the loan amount received by NTRC from KFC is Rs. 20 lakhs whereas the sale is only for Rs. 11,84,000. It may be stated here that the total sale proceeds were taken by the ITO at Rs. 13,12,414. It is not clear from the assessment order as to how the ITO arrived at the said figure. At the time of hearing, we asked the Depart ..... X X X X Extracts X X X X X X X X Extracts X X X X
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