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TMI Blog2005 (1) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... apex court in the case of CIT v. Attili N. Rao [2001] 252 ITR 880, he is not pressing the question relating to the deduction of the amount paid to discharge the mortgage debt as income diverted at source by overriding title. Therefore, the only substantial question to be considered in these two appeals is: "Whether the 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) of the Income-tax Act?" For the sake of convenience, we set out the relevant facts pertaining to Tax Appeal No. 755 of 2000. The said appeal relates to the assessment year 1990-91. In that case, the assessee was a shareholder of a company known as Merchant Steel Industries Private Limited in which her husband was a director. The assessee owned a plot of land at Bhavnagar admeasuring 2992.99 square yards. The said Merchant Steel Industries Private Limited had raised a loan from the State Bank of Saurashtra and for the repayment of the said loan, the assessee stood as one of the guarantors and the assessee had offered the above plot of land as security for repayment of the loan. As the said compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arged asset without complying with the conditions imposed by the bank and, therefore, the amount paid to the bank was an expenditure incurred in connection with the transfer of the charged property and, therefore, the said expenditure was deductible under section 48(i) of the Income-tax Act. Mr. Patil further submitted that section 48 of the Income-tax Act provides that from the full value of the consideration received or accrued as a result of the transfer of the capital asset, the expenditure incurred wholly and exclusively in connection with such transfer and also the cost of acquisition and the cost of improvement thereto are liable to be deducted. Mr. Patil relied upon the decision of this court in the case of CIT v. Shakuntala Kantilal [1991] 190 ITR 56 wherein it is held that the property which is encumbered and without removing that encumbrance the property cannot be transferred, then, the expenditure incurred for removing such encumbrance is an expenditure incurred in connection with the transfer of the property as contemplated under section 48(i) of the Income-tax Act. He submitted that the aforesaid decision of this court has been followed subsequently in the case of CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of income by overriding title and the issue relating to the cost of acquisition/cost of improvement and, therefore, the decision of the apex court in those cases is not applicable to the case of the assessee. He submitted that in the light of the decisions of this court in the case of Shakuntala Kantilal [1991] 190 ITR 56 followed in the case of Abrar Alvi [2001] 247 ITR 312 and the decision of the Kerala High Court in the case of Smt. Thressiama Abraham (No. 1) [1997] 227 ITR 802 which are directly applicable to the case of the assessee herein, it must be held that the expenditure incurred to remove the encumbrance being absolutely essential to effectively transfer the property, such expenditure must be held to be deductible from the computation of capital gains under section 48(i) of the Income-tax Act. We have carefully considered the rival submissions. As stated hereinabove, the only question, required to be considered in these appeals is, whether the repayment of mortgage debt is an expenditure incurred in connection with the transfer of the capital asset allowable under section 48(i) of the Income-tax Act? The apex court in the case of Rm. Arunachalam [1997] 227 ITR 22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf, then the expenditure incurred by the assessee to repay the mortgage debt cannot be held to be the cost of acquisition or cost of improvement allowable under section 48(ii) of the income-tax Act. Subsequently, the apex court in the case of CIT v. Attili N. Rao [2001] 252 ITR 880 has considered the issue relating to diversion of income by overriding title. In that case the assessee therein had mortgaged immovable property to the State Government as security for the amounts due to the State. The State Government in exercise of its power under the mortgage, sold the mortgaged property in auction and from the quantum realised, the State deducted the amount due to it and paid over the balance to the assessee. In computing the capital gains accruing on the sale of the above property, the assessee claimed deduction of the amount appropriated by the State Government towards the mortgage debt. The Tribunal held that on mortgage created by the assessee, the State Government had an interest in the mortgaged property and on the sale of the said property the amount of sale proceeds to the extent of the mortgage debt was diverted to the State Government by overriding title and the amount pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Act. It is true that in none of the aforesaid cases the apex court has specifically held that repayment of the mortgage debt created by the assessee himself is not an expenditure incurred for effectively transferring the property. However, it is implicitly held by the apex court that the expenditure incurred to remove the encumbrance created by the assessee himself on a property on which the assessee had absolute interest is not an expenditure incurred for effectively transferring the property as contemplated under section 48 of the Income-tax Act. It is not in dispute that in both the appeals which are before us, the property on which the encumbrance was created by the assessee was acquired by the assessee free from encumbrances. Therefore, in the light of the decisions of the apex court referred to hereinabove, it must be held that the assessee is not entitled to the deduction of the expenditure incurred to remove the encumbrance created by the assessee himself. The contention that the assessee has not received a pie from the transfer and the entire sale proceeds realised on transfer of the mortgaged asset has been appropriated towards discharge of mortgage is also withou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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