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TMI Blog2019 (4) TMI 817X X X X Extracts X X X X X X X X Extracts X X X X ..... of the appellant? 2. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in not holding that there was a diversion of the sale proceeds towards redeeming the interest of the mortgagor and therefore the amount so diverted was not liable to capital gains tax?" 3. The assessee Smt. D.Zeenath along with two other co-owners, namely, Smt. S.A.Kathija Nachial and Smt. Zubaida had originally purchased land measuring 43,596 sq.ft. at Saram Village, Pondicherry, by two sale deeds dated 11.07.1980 and 04.02.1981 for a total consideration of Rs. 2,01,000/-. 4. The property had been offered as collateral security in a loan obtained by M/s.M.O.Hassan Kuthoos Maricar Pvt. Ltd., from State Bank of India, Pondicherry, to an extent of Rs. 3.75 Crores, and the assessee and the other two co-owners stood as guarantors, for the said loan. Mortgage was by deposit of title deeds. No registered mortgage deed was executed. Since the loan was not repaid, the assessee and the other two co-owners consented for sale of the property by Bank to realize its dues. This was purchased by M/s. Royal Park, Tiruchirapalli, for a total consideration of Rs. 1,96,18,200/-. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hoos Maraicar Pvt. Ltd,." 7. The Assessing Officer had computed the total consideration of the land sold amounting to Rs. 1,96,18,200/- as income from capital gains and had computed the cost of acquisition adding cost inflation index at the original cost of Rs. 2,01,000/- to arrive at the sum of Rs. 5,20,590/- and the cost of improvement which was incurred for building a compound wall of Rs. 5,80,717/- and finally assessed the total capital gain at Rs. 1,85,16,893/-. He computed 1/3rd of the Assessee's share at Rs. 61,72,298/-. 8. This assessment was challenged in appeal before the Commissioner of Income Tax (Appeals) by the Assessee. The CIT(A) dismissed the appeal by order dated 30.01.2002. 9. The Assessee then filed a further appeal before the Income Tax Appellate Tribunal. Another co-owner Smt. Zubaida had also preferred a similar appeal. The Tribunal took up both the appeals and by order dated 16.12.2005, dismissed both the appeals. The relevant portions of the order of the Tribunal are quoted below for ready reference: "4.We have perused the grounds of appeal and the records available before us. We have also heard the learned counsel for the assessee and considered h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Senior Standing Counsel for the Respondent/Revenue assisted by Ms.V.Pushpa, learned counsel. 11. Mr.Subhang Nair in the course of his arguments, took the Court through the facts of the case and pointed out that the assessee along with two other co-owners had offered their property as collateral security which they had purchased by two sale deeds dated 11.07.1980 and 04.02.1981 for the loan of Rs. 3.75 Crores obtained by M/s. M/s.M.O.Hassan Kuthoos Maricar Pvt. Ltd., from State Bank of India, Pondicherry. Learned counsel stated that in view of default in repayment of the loan, the property was brought to sale and was sold to M/s.Royal Park, Tiruchirapalli, for a total consideration of Rs. 1,96,18,200/-. The entire consideration had been paid to the bank to the credit of the loan account of M/s.M.O.Hassan Kuthoos Maricar Pvt. Ltd. It was stated that the assessee did not receive even a single pie from the sale consideration. Consequently, the learned counsel stated that she cannot be taxed on the sale consideration paid by M/s.Royal Park, Tiruchirapalli, and the sale consideration cannot be treated as income taxable as capital gains. 12. Learned counsel further stated that si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the present case. 15. Learned counsel also relied on CIT Vs. Shakuntala Kantilal [1991] 190 ITR 56 (Bombay). The facts in that case were that the assessee purchased a plot of land in the year 1948. She then entered into an agreement of sale with Radia and Sons (Pvt) in 1963. Differences arose between the parties. Radia and Sons Pvt. Ltd., filed a suit seeking specific performance. There was a settlement between the parties and the assessee agreed to pay compensation of Rs. 35,504/- to Radia and Sons Pvt. Ltd. Thereafter, the assessee entered into another Agreement of Sale with respect to the same property with a Cooperative Housing Society. The property was also sold. However out of the sale consideration the sum of Rs. 35,504/- was paid directly to Radia and Sons Pvt. Ltd. It was claimed by the assessee that this amount should be allowed as deduction for the purpose of computing her income under the head "capital gain" either as expenditure incurred in connection with the transfer or as cost of improvement or under Section 48 itself. The Bombay High Court answered the issue in favour of the assessee holding that without removing the encumbrance, particularly, the encumbrance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of M/s.M.O.Hassan Kuthoos Maricar Pvt. Ltd., and consequently, no capital gain had arisen in the hands of the assessee and there was a diversion of sale profits towards remitting the interest of the mortgagor and consequently, the amount was not liable to capital gains tax. 19. Mr.M. Swaminathan, learned Senior Standing Counsel for the Revenue strongly disputed the contentions raised. According to the learned counsel, the facts of the present case indicated that the assessee and the other two coowners had voluntarily offered the property as collateral security and a mortgage by deposit of title deed was created in favour of the bank. The bank had no independent authority to sell the property. The assessee and other two coowners had consented for sale of the property. It was stated that consideration received was for the value of the property and it was immaterial whether it was paid directly to the mortgagee bank or not. The assessee was liable to be taxed for capital gains for the consideration received, and payment to Bank was only application of their income, subject to capital gains tax liability. 20. Learned senior standing counsel for the Revenue, placed reliance on R.M. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tgagee, instead of the vendor doing so, after receiving the money from the vendee, does not make any difference for the purpose of determining consideration for the sale and the extent of capital gain." 22. Learned counsel also relied on [2016] 286 CTR 538 (Madras), Sri Kanniah Photo Studio Vs. Income Tax Officer, Ward-I (1) 31, Kumbakonam, wherein, a Division Bench of this Court had also approved the reasoning given in N.Vajrapani Naidu, case (supra) and held as follows: "We find no reason to depart from this finding of this Court in N.Vajrapani Naidu's case (supra). In the present case, mortgage has been created by the present appellant/assessee and consequent to the sale, the assessee has discharged the mortgage to City Union Bank. As the burden had been created for his own benefit by offering the property as security to City Union Bank, the amount spent for discharging that burden whether prior to sale, or at the time of sale, by way of one-time settlement to the Bank, cannot be regarded as expenditure wholly and exclusively in connection with the transfer. In the present case, the discharge was in the course of sale. We find that the payment of the outstanding amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer and also the cost of acquisition of the assets and the cost of any improvement. 26. In the instant case, the cost of acquisition of the assets in the year 1981 had been suitably computed by the Assessing Officer and similarly, the cost of improvement which was stated to be construction of compound wall had also been computed by the Assessing Officer and both the costs had been deducted. However, the assessee seeks to take advantage of Clause (i) of the Section 48 and seeks deduction of the entire sale consideration claiming that, since the entire sale consideration has been paid directly to the mortgagee/bank, it should be considered as expenditure incurred wholly and exclusively in connection with such transfer. The assessee claimed that the amount had been paid, since by creation of mortgage, the bank had acquired overriding title to the property and therefore, when the property was brought for sale, the amount paid towards clearing the cloud over the title should be deducted as provided under Section 48 of the Act. 27. In the present case, to reiterate the facts, the assessee Smt.D.Zeenath along with two other co-owners, namely, Smt.S.A.Kathija Nachial and Smt.Zubaida ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquired by the assessee. The position is, however, different where the mortgage is created by the owner after he has acquired the property. The clearing off of the mortgage debt by him prior to transfer of the property would not entitle him to claim deduction under section 48 of the Act because in such a case he did not acquire any interest in the property subsequent to his acquiring the same. 30. This position had been reiterated by the Hon'ble Supreme Court in [1997] 227 ITR 420 (SC), V.S.M.R. Jagadishchandran (Decd.) Vs. Commissioner of Income-Tax. The facts in that case were as follows. The facts and the judgment of the Hon'ble Supreme Court are extracted below: "This appeal by the assessee is directed against the order dt. 25th July, 1984 passed by the Madras High Court in TC No. 145 of 1983 wherein the High Court on an application filed under s. 256(2) of the Act declined to direct the Tribunal to state a case and refer the following questions of law to the High Court : "1. Whether the Tribunal was right in holding that the levy of the capital gains of Rs. 68,400 is proper under the facts and circumstances of the case ? 2. Whether the Tribunal was right in holding th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject-matter of a sale, the assessee was not either improving or perfecting his title or improving the property in any manner and, therefore, the amount paid for discharging the mortgage debt cannot be taken to be for the cost of acquisition as contended by the assessee. In Civil Appeals Nos. 6098-6101 of 1983 [since reported as R. M. Arunachalam etc. vs. CIT (1997) 141 CTR (SC) 348 filed against the judgment of the Full Bench of the Madras High Court in S. Valliammai & Anr. vs. CIT (supra) we have examined the correctness of the view of the Kerala High Court in Ambat Echukutty Menon vs. CIT (supra) and have held that the said decision does not lay down the correct law in so far as it holds that where the previous owner had mortgaged the property during his life time the clearing off the mortgage debt by his successor can neither be treated as cost of acquisition nor as cost of improvement made by the assessee. It has been held that where a mortgage was created by the previous owner during his time and the same was subsisting on the date of his death, the successor obtains only the mortgagors interest in the property and by discharging the mortgage debt he acquires the mortgagees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee from City Union Bank and for the purpose of clearing the mortgage loan, the appellant/assessee had sold the property and effect the one-time settlement with the bank. The Assessing Officer had held that since the mortgage loan had been long time after the acquisition of the property, the same would not stand covered under Section 48(1) of the Act. That being the case, it does not appeal to us that the explanation relating to discharge of the mortgage to the bank, as submitted by the assessee, can be termed as expenditure, as the property had been acquired long time before taking the mortgage loan from the bank. 12.The Tribunal, to come to the finding that the said discharge of mortgage to the bank cannot be termed as expenditure, has placed reliance on the jurisdictional Court's decision in N.Vajrapani Naidu's case (supra). In that case, the assessee sold immovable property under 13 sale deeds and bona fide paid certain amounts to the creditors of the vendor assessee, including mortgages on the property, which was the subject matter of sale. The Income Tax Officer and the Commissioner rejected the claim for deduction in terms of Section 48(1). While the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the consideration to the sale. The distinction that was sought to be made by the Tribunal between the case where the mortgage is discharged by the vendor prior to the sale and the case where the discharge of the mortgage is effected at the time of the sale by payment of the outstanding amount to the mortgagee by the vendor and the sale free from encumbrance, is untenable. The only point of relevance is whether the mortgage was created by the vendor or whether it subsisted at the time of acquisition of title thereto by the vendor and was burdened with the same at the time of such acquisition of title.' 13.We find no reason to depart from this finding of this Court in N.Vajrapani Naidu's case (supra). In the present case, mortgage has been created by the present appellant/assessee and consequent to the sale, the assessee has discharged the mortgage to City Union Bank. As the bruden had been created for his own benefit by offering the property as security to City Union Bank, the amount spent for discharging that burden whether prior to sale, or at the time of sale, by way of one-time settlement to the Bank, cannot be regarded as expenditure wholly and exclusively in connec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 35. In CIT Vs. Sunil Kinariwala, [2003] 1 SCC 660, again the facts were different. In that case, the assessee had created a Trust and transferred 50% of his right over title and interest in a partnership firm to the benefit of the Trust. The Hon'ble Supreme Court negatived the claim of the Assessee that the income so transferred resulted in diversion of income at source. The Hon'ble Supreme Court held that, "8. ........when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee......" This reasoning does not advance the case of the Assessee herein. 36. The facts in CIT Vs. Thressiamma Abraham, [1997] 140 CTR 540 (Ker), are also distinguishable. In that case, a company by name National Tyre and Rubber India Limited, had raised a loan of Rs. 20 lakhs from Kerala Financial Corporation. The property of Thressiamma Abraham was offered as mortgage for the loan. A registered mortgage deed had been entered into giving right to Kerala Financial Corporation to bring the property to sale, in the event of failure of repayment of the loan. 37. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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