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TMI Blog1994 (11) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances of the case, the Tribunal was right in holding that there was no diversion at source by overriding title to the extent of Rs. 78,156 which was adjusted from out of the sale consideration against the liabilities charged on the property inherited by the assessee?" The dispute between the parties centres on the assessment of an amount of Rs. 32,700 as the capital gains arising out of the transfer of a land with building, having an extent of 47.5 cents, to the assessee's wife. The assessment year concerned is 1980-81 corresponding to the accounting period ending March 31, 1980. This property belonged to the assessee's father, one K. I. Varkey, who had purchased it on June 16, 1964. He was an authorised dealer in rationed articles. The assessee's wife had received sthreedhanam which was invested in her father-in-law Varkey's business, in which she had a credit balance of Rs. 73,570 as on December 31, 1978.Varkey executed a will on August 23, 1979, bequeathing this property to his son, the assessee, directing that the amount due to the assessee's wife should be paid out of this property. After Varkey's death on September 30, 1979, the assessee transferred the property to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Where by virtue of the obligation, income is diverted before it reaches the assessee, it is deductible. But where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence does not follow. It is only the first kind of payment which can truly be excused and not the second. It was accordingly held that the case was only one of application of a portion of the income to discharge an obligation and not one in which by an overriding charge, the assessee became only a collector of another's income. These principles were reiterated by the Supreme Court in Moti Lal Chhadami Lal Jain v. CIT [1991] 190 ITR 1, where the arrangement between a lessor and lessee was that the lessee should pay part of the total rent to a college run by a trust, with a right given to the college to recover the amount directly from the lessee. This right of the college was made a charge on the property by agreement between the parties, and the question was whether the amount paid over to the college could be treated as the income of the assessee, the pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Before we deal with this point, we may briefly advert to the provisions related to the levy of capital gains. Section 45 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, subject to certain exemptions and deductions, be chargeable to income-tax as capital gains, and shall be deemed to be the income of the previous year in which the transfer took place. Section 48 lays down the mode of computation of the capital gains, and the deductions to be made. It states that the income chargeable under the head "Capital gains" shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer, the amounts mentioned, which include the cost of acquisition of the capital asset, and the cost of any improvement thereto. We are not concerned with other items. Section 55 defines what is "cost of improvement" and what is "cost of acquisition". Cost of improvement, so far as is relevant, means expenditure of a capital nature incurred in making any additions or alterations to the capital asset by an assessee after it became his property, and in the case of assets which became the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elying on the criticism of the decision in Ambat Echukutty Menon's case [1978] 111 ITR 880 (Ker) by Kanga and Palkhiwala at page 781 of the Eighth edition of the Law and Practice of Income-tax. The Gujarat High Court dissented from Ambat Echukutty Menon's case [1978] 111 ITR 880 (Ker) as also the decisions of the Madras High Court in CIT v. V Indira [1979] 119 ITR 837 and Smt. S. Valliammai v. CIT [1981] 127 ITR 713 [FB]. The view taken by the Gujarat High Court is that when the previous owner gifted the mortgaged property to the assessee, what he had transferred was the right, title or interest which he had in that property. When the assessee discharged the mortgage, what he did was to purchase that right or interest which the mortgagor did not then possess, and which the mortgagee had in that property. The word "property" does not mean merely physical property, but also any right, title or interest in it. In the case of a mortgage or lease, different persons will have different rights in the same property. If the property is mortgaged or leased, then the owner of the property would possess only those rights which are not transferred to the mortgagee or the lessee, as the case may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be given its full effect. The lives of the assessee and the previous owner are combined for this purpose and the cost is related back to that at which the previous owner acquired the asset. The only addition to be made is the cost of any improvement effected to the asset by either the previous owner or the assessee, with which we shall deal later. But so far as the cost of acquisition, pure and simple, is concerned, it is only that at which the previous owner acquired it and not anything more. It must be noted that the asset which is dealt with in section 49 is the entire bundle of rights constituting the asset as acquired by the previous owner, and not merely that bundle less the rights of the mortgagee, under the mortgage created by him. This, in our opinion, is clear from the section, because it speaks of the cost of the asset to the previous owner, which implies that the asset referred to is the entire bundle of rights acquired by the previous owner. We are, therefore, unable to agree with the Gujarat High Court, or to uphold the assessee's contention that the cost of acquisition is the cost of acquisition of the previous owner plus the amount spent on the discharge of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terior right of residence. That right of residence was got discharged by payment of Rs. 60,000, and accordingly it was held that the amount was deductible in the computation of the capital gains. That certainly is not the position so far as discharge of a mortgage created by the previous owner, in a case covered by section 49(1), is concerned. We are in agreement with the view expressed in Ambat Echukutty Menon's case [1978] 111 ITR 880 (Ker) on both the aspects of cost of acquisition and cost of improvement and do not find any ground for reconsideration of the decision. The amount due to the assessee's wife is not therefore liable to be taken note of in computing the capital gains arising on sale of the property. Sri G. Sivarajan for the assessee contended that the assessee is put to hardship by being called upon to pay tax on the capital gains. Assuming it is so, that is not a ground for reading the section in a different way. We are, therefore, in agreement with the Tribunal on the questions raised. The questions referred are accordingly answered against the assessee and in favour of the Revenue. There will be no order as to costs. Communicate a copy of this judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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