Income Tax Appellate Tribunal - Mumbai
Fancy Corporation Ltd. vs Deputy Commissioner Of Income Tax on 22 September, 1999
Equivalent citations: [2000]75ITD467(MUM)
ORDER
M.V.R. Prasad, A.M.
1. This appeal is directed against the order of the CIT(A) dt. 26th July, 1996 for the asst. yr. 1991-92.
2. The grounds taken read as follows :
"1. On the facts and in the circumstance of the case, the learned CIT(A) I, Mumbai, erred in confirming disallowance of Rs. 1,37,50,000 in respect of mortgaged debt while computing capital gain under s. 45 of IT Act, 1961.
2. On the facts and in the circumstances of the case, the said learned CIT has also erred in not setting off mortgaged debt of Rs. 1,37,50,000, while computing capital gain without observing the ratio laid down in the following decisions :
(a) CIT vs. Shakuntala Kantilal (1991) 190 ITR 56 (Bom);
(b) N. Vajrapani Naidu vs. ITO (1989) 28 ITD 459 (Mad);
(c) N. M. A. Mohammed Haneefa vs. ITO (1987) 23 ITD 409 (Mad); and
(d) CIT vs. Daksha Ramanlal (1992) 197 ITR 123 (Guj).
3. On the facts and in the circumstances of the case, the said learned CIT has also erred in not following the decision Supreme Court in CIT vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC), particularly when on this issue there are conflicting decisions of various High Courts."
3. The assessee vide its letter dt. 3rd September, 1998 has also taken the following additional grounds :
"1. On the fact and in the circumstance of the case and in law, the gain - sale proceeds arising on sale of land did not accrue to the appellant by virtue of overriding obligation and hence no gain is taxable.
2. The appellant submit that by virtue of the provision of Transfer of Property Act and Sick Industrial Companies Act income is diverted by overriding title."
4. During the year under consideration, the assessee-company, vide an article of agreement dt. 29th March, 1989, agreed to lease out a portion of its land admeasuring 50,000 sq. ft. (4,646 sq. mts.) to the Institute of Banking Personnel Selection (IBPS), a society registered under the Societies Registration Act, for a consideration of Rs. 1,37,50,000. The lease was for a period of 99 years and was further renewable for a period of 99 years at the end of the period. The leased land was under equitable mortgage by deposit of liabilities with United Bank of India, Bombay, as security for a loan of Rs. 4,60,00,000 obtained from them. The lessors had obtained an unconditional confirmation from the said bank to the effect that they had no objection to the transaction between the lessors and the lessees vide the letter of the bank dt. 18th May, 1990 addressed to the assessee-company, which reads as under :
"Dear Sirs :
Ref. : Issue of N.O.C. for the agreement dt. 29th March, 1990 entered into between yourselves and IBPS.
We refer to your letter No. HO/UBI/891/1989-90, dt. 2nd April, 1990 addressed to our Zonal Manager, requesting our bank to give the No Objection Certificate in respect of agreement dt. 29th March, 1989 entered into between yourselves and IBPS.
The matter of giving No Objection Certificate as above was referred to our head office and they have advised us to grant the No Objection Certificate on certain terms and conditions.
We, accordingly, have to inform you that we have no objection to the transaction between yourselves as lessors and IBPS as the lessees, being the agreement dt. 29th March, 1989 wherein you have proposed to lease a portion of your land at Borivali to the extent of 50,000 sq. ft. which is mortgaged to our bank. We have further to inform you that we shall continue to hold the original documents deposited by you with us by way of equitable mortgage subject to the release of the portion in respect of the said premises and will execute a proper deed of release whenever required by the lessees. However, please note that our No Objection Certificate as above is subject to the following terms and conditions :
(a) That our mortgage charge shall be released by us only in respect of the portion of the premises which is proposed to be leased out to IBPS as per the agreement dt. 29th March, 1989 entered into between yourselves and IBPS.
(b) That the No Objection Certificate to release the above mortgage charge will become operative only after the amount of Rs. 82.50 lakhs being the balance amount is paid to the bank in the lessors account and the total amount of Rs. 137.50 lakhs (Rs. 55.00 lakhs + Rs. 82.50 lakhs) is allowed to be appropriated by the bank towards partial payment of bank's past dues.
(c) That for any reason whatsoever if the deal is not finalised then in that event the above No Objection Certificate will be treated as cancelled."
5. The dispute in the present appeal relates to the computation of capital gains with reference to the lease consideration received of Rs. 1,37,50,000 from the IBPS. The assessee took the stand that as the leased out land was under mortgage to the United Bank of India and as the consideration of Rs. 1,37,50,000 had to be paid to the said bank towards the discharge of the loan as a pre-condition for the bank giving the above-mentioned 'No Objection Certificate' for the lease deed, the amount paid to the bank has to be reduced from the consideration received for the purpose of computation of capital gains made by the assessee in respect of the said lease. The AO, however, held that the assessee is not entitled for the deduction of the said amount paid to the United Bank of India towards the discharge of the loan and so computed the capital gains without allowing that deduction at a figure of Rs. 1,23,66,000 as per the following computation :
Rs. Rs. "II. Capital gains (as discussed) sale proceeds 1,37,50,000 Less : under s. 48(3) : Basic deduction 10,000 On 1,37,40,000 @ 10 per cent 13,74,000 13,84,000 1,23,66,000"
6. While denying the deduction for the said sum of Rs. 1,37,50,000 as claimed by the assessee, the AO observed that the assessee did not acquire the property which was under mortgage but subsequently mortgaged the property on its own for obtaining a loan and as such it is not entitled for the deduction of the amount paid to the bank towards the discharge of the loan. While denying the said deduction, he also made the following remarks :
"(iii) ....... Further what is allowable under s. 48(1) is cost of acquisition, cost of improvement and expenditure incurred wholly and exclusively in connection with the transfer of the capital asset. Repayment of mortgage debt cannot be considered to be either cost of acquisition, cost of improvement or expenditure connected with transfer. Assessee's contention that the amount in question was not received by the assessee but was paid directly to the bank is not a material factor. The fact that an assessee takes a loan against an asset and repays the loan out of sale proceeds of the asset will not entitle him to a deduction for repayment of that loan against the capital gains. If this was the intention of legislature, then no capital gains would arise on any sale of an asset for, the owner of the asset would only have to take a loan against that asset of the amount equivalent to the cost of the asset and then sell it and repay the loan out of sale proceeds and claim exemption from capital gains tax. The mortgage of the land and its sale are two different things and are not to be confounded together in the manner as claimed by the assessee."
7. The CIT(A) agreed with the reasoning of the AO that repayment of mortgage debt cannot be treated as cost of acquisition or cost of capital asset or expenditure in connection with transfer of property and so held that the disallowance of the claim for deduction of Rs. 1,37,50,000 in the computation of capital gains is justified. He, however, gave deduction for the cost of acquisition of the land at Rs. 5,00,000 and subject to this relief, he sustained the assessment order.
8. Before us, the learned counsel for the assessee pleaded at the outset that the two additional grounds raised by the assessee and set out by us hereinbefore deserve to be admitted because they do not require any additional facts to be looked into or enquiries to be made and they are only of a legal nature. It is also mentioned that both the AO and the CIT(A) have referred to the order of the Board for Industrial and Financial Reconstruction (BIFR) dt. 30th May, 1990 in the case of the assessee and so no fresh facts are required for adjudicating upon the two additional grounds. Therefore, in the light of the decision of the apex Court in the case of National Thermal Power Co. Ltd. vs. CIT (1998) 229 ITR 383 (SC), it is pleaded that the two additional grounds deserve to be admitted. It is also certified that all the papers filed before us in the form of a paper-book containing 124 pages which includes the said order of the BIFR were before the AO. This contention is not controverted before us. Accordingly, we have to admit the two additional grounds, as being only of a legal nature and not requiring any further factual enquiries.
9. The learned counsel for the assessee initially clarified that for the purposes of levy of capital gains tax, long-term renewable lease has to be treated as a sale and as such there is no dispute about the assessability of Rs. 1,37,50,000 under the provisions of s. 48 of the IT Act as long-term capital gains, if otherwise justified. In other words, the only dispute raised before us is that the amount paid to the United Bank of India towards the discharge of the mortgage debt is allowable as a deduction from the consideration received of Rs. 1,37,50,000 for the purpose of computing the capital gains tax under s. 48 of the IT Act.
10. The learned counsel for the assessee conceded that the amount paid to the United Bank of India by the assessee-company towards the discharge of the mortgage debt cannot be regarded as cost of acquisition of the asset or cost of improvement of the leased out land for the purpose of computation of the capital gains tax in view of the decision of the apex Court in the case of VSMR Jagadishchandran (Decd) vs. CIT (1997) 227 ITR 240 but it is urged that there are other aspects of the matter on which the said decision of the apex Court is silent and those aspects are open for argument and decision. In the light of this concession and plea, he has made a two-pronged attack. Firstly, it is pleaded that the amount of Rs. 1,37,50,000 is diverted by overriding title to the bank by virtue of the provisions of the Transfer of Property Act and The Sick Industrial Companies (Special Provisions) Act, 1985, and so it cannot constitute a part of the "full value of the consideration received" for the purpose of computation of capital gains under s. 48 of the Act. In this context, the learned counsel has relied on the following decisions :
(1) CIT vs. Attili Narayana Rao (1998) 233 ITR 10 (AP);
(2) CIT vs. Smt. Thiressiamma Abraham (1997) 227 ITR 802 (Ker);
(3) ITO vs. Sonodyne Television Co. (P) Ltd. (1987) 23 ITD 406 (Cal);
(4) CIT vs. Shakuntala Kantilal (1991) 190 ITR 56 (Bom);
(5) Addl. CIT vs. Rani Pritam Kunwar (1980) 125 ITR 102 (All);
(6) CIT vs. Surat Jilla Kamdar Sahakari Sangh Ltd. (1993) 200 ITR 157 (Guj); and (7) CIT vs. C. N. Patuck (1969) 71 ITR 713 (Bom).
11. We have perused these decisions and we are of the view that the decisions at (1) to (3) above support the stand of the assessee. However, the rest of the decisions cited by the learned counsel for the assessee are distinguishable on facts. The decision of the Hon'ble Bombay High Court in the case of Shakuntala Kantilal (supra) is, to our mind, distinguishable as in that case what is involved is encumbrance created by a prior agreement and the Hon'ble High Court held that the amount paid to discharge such an encumbrance for which the assessee is otherwise liable by way of specific performance has to be deducted for the purpose of computing capital gains. In the present case, we are confronted with a mortgage debt created by the assessee and not an encumbrance for which the assessee is liable by way of specific performance. We are of the view that there is subtle but a material difference between the facts of the two cases. The decision of the Hon'ble Gujarat High Court in the case of Surat Jilla Kamdar Sahakari Sangh Ltd. (supra) is also distinguishable, as in that case what is involved is an agreement for providing a payment to the Government at 25 per cent of the gross profits in return for obtaining a loan from the Government at concessional rates. The agreement is an integral part of the loan charges and so was held to be a deductible expenditure from Revenue. That is not the issue in the present case. In the case of C. N. Patuck (supra), the Hon'ble Bombay High Court had to consider the deductibility of certain payments made to daughters towards maintenance charges in terms of a Court decree and such is not the issue in the present case. The liability incurred by the assessee for the discharge of the mortgage debt is not because of any pre-existing right against the assessee in the mortgage. The liability is the result of simply a commercial debt incurred by the assessee. Similarly, the decision of the Hon'ble Allahabad High Court in the case of Rani Pritam Kunwar (supra) is also distinguishable, because in that case, what is involved is an amount paid to discharge statutory or customary liability by way of maintenance charges. The nature of the liability in the present case is totally different as it is a self-created liability and not a liability imposed by custom or statute.
12. Even though the decisions at (1) to (3) above support the stand of the assessee, we have to reject the contention of the assessee that the amount of Rs. 1,37,50,000 is diverted by an overriding title to the United Bank of India because of the decision of the apex Court in the case of V. S. M. R. Jagadishchandran (Decd) vs. CIT (supra) and also the decision of the apex Court in the case of R. M. Arunachalam vs. CIT (1997) 227 ITR 222 (SC), on which the learned Departmental Representative relied before us. In the case of V. S. M. R. Jagadishchandran (Decd) vs. CIT (supra) it has been clearly held that where a mortgage was created by the assessee himself and not by the previous owner, the assessee is not entitled for the deduction of the mortgage debt in the computation of capital gains.
13. The relevant portion of the headnote reads as follows :
"Held, dismissing the appeal, that in R. M. Arunachalam vs. CIT (1997) 227 ITR 222 (SC), the correctness of the view of the Kerala High Court in Ambat Echukutty Menon vs. CIT (1978) 111 ITR 880 (Ker) had been examined by the Supreme Court, and it had been held therein that the said decision did not lay down the correct law insofar as it held that where the previous owner had mortgaged the property during his lifetime the clearing off of the mortgage debt by his successor could neither be treated as "cost of acquisition" nor as "cost of improvement" made by the assessee. It had been held that where a mortgage was created by the previous owner during his lifetime and the same was subsisting on the date of his death, the successor obtained only the mortgagor's interest in the property and by discharging the mortgage debt he acquired the mortgagee's interest in the property and, therefore, the amount paid to clear off the mortgage was the cost of acquisition of the mortgagee's interest in the property which was deductible as cost of acquisition under s. 48 of the Act. In the present case, however, the mortgage was created by the assessee himself. This was not a case where the property had been mortgaged by the previous owner and the assessee had acquired only the mortgagor's interest in the property mortgaged and by clearing the same, he had acquired the interest of the mortgagee in the said property. The questions raised by the assessee in the application submitted under s. 256(2) of the Act did not, therefore, raise an arguable question of law and the said application was rightly rejected by the High Court."
14. It may be observed that Question No. 2 referred in this case read as follows :
"2. Whether the Tribunal was right in holding that mortgage debt does not constitute diversion at source ?"
15. The apex Court while dismissing the reference, remarked towards the end of the Report that the questions raised by the assessee in the application submitted under s. 256(2) of the IT Act do not raise any arguable question of law and so it held that the application had been rightly rejected by the High Court. It may be observed that the diversion at source, which is the same as diversion by overriding title, has been held by the apex Court to be not even arguable in view of the decision that where a mortgage is created by the assessee himself and not by the previous owner, the debt is not deductible for the computation of capital gains. So, all the above decisions cited by the learned counsel for the assessee must be held not to be of any assistance to him in view of the said decision of the apex Court. Further, the decision of the apex Court in the case of R. M. Arunachalam vs. CIT (supra), on which, as mentioned by us, the learned Departmental Representative relied before us, also supports the stand of the Department. In this case it was held that the legal heir of a deceased became a full owner of the property even before the payment of estate duty and so the payment of such estate duty is not deductible for the purpose of computation of capital gains, even though estate duty is a statutory charge on the transferred property.
16. The learned counsel for the assessee also contended as an alternative plea that the assessee could not have sold the land in question to IBPS if it had not agreed to pay the amount of Rs. 1,37,50,000 to the United Bank of India, as the No Objection Certificate was given by the said bank only subject to repayment of the loan. So it is contended that the said repayment of Rs. 1,37,50,000 should be regarded as an expenditure incurred in connection with the transfer and should be allowed as a deduction in the computation of the capital gains in terms of s. 48 of the IT Act. In this context, reliance is placed upon the Hon'ble Madras High Court decision in the case of CIT vs. C. V. Soundararajan (1984) 150 ITR 80 (Mad), the jurisdictional High Court decision in the case of Shakuntala Kantilal (supra) and the decision of the Madras Bench of the Tribunal in the case of N. M. A. Mohammed Haneefa vs. ITO (supra). In the case of CIT vs. C. V. Soundararajan (supra), the Hon'ble Madras High Court had to deal with a payment made to a mother having right of residence in property for obtaining relinquishment of her right. This case is easily distinguishable because there is a quid pro quo for the payment and the assessee could not have sold the property free of the mother's right without making the payment in question for the relinquishment of her right. We have already discussed the issue in the case of Shakuntala Kantilal (supra) decided by the Hon'ble Bombay High Court herein before.
17. As already mentioned, in this case there was a prior agreement for sale of the property to a particular party which had to be settled before the property could be transferred to a different party subsequently. This is not simply a case of a mortgage of property for obtaining a commercial loan. So we are of the view that this decision is distinguishable, as already indicated by us herein before.
18. The decision of the Madras Bench of the Tribunal in the case of N. M. A. Mohammed Haneefa (supra) is prima facie in favour of the assessee inasmuch as the amount paid to the mortgagee directly by the purchaser is held to be allowable as a deduction, both as an overriding obligation and also as an expenditure in connection with the transfer. However, it is not clear from the facts of this case whether the mortgage debt was incurred by the owner-transferor of the property or his predecessor in title. If the debt had been incurred by the predecessor in title, this decision would be of no assistance to the assessee as in the present case, the mortgage debt had been incurred by the assessee itself and not by its predecessor in title. If on the other hand, the debt had been incurred in the case of N. M. A. Mahammed Haneefa (supra) by the assessee himself, we are of the view that the decision cannot be followed in view of the subsequent decision of the apex Court in the case of V. S. M. R. Jagadischandran (decd) vs. CIT (supra).
19. We have to reject the contention of the assessee for the deduction of Rs. 1,37,50,000 as expenses incurred in connection with the transfer because of the decision of the apex Court in the case of V. S. M. R. Jagadischandran (decd) vs. CIT (supra). The apex Court has dismissed the appeal of the assessee stating that the questions raised were not arguable. To us, it appears that the apex Court has implicitly held that the repayment of the mortgage debt cannot be regarded as an expenditure in connection with transfer. Actually, even on general principles, it is difficult to contemplate repayment of a debt as an expenditure incurred.
20. For the above reasons, we agree with the contention of the learned Departmental Representative that the decision of the apex Court in the case of V. S. M. R. Jagadischandran (Decd) vs. CIT (supra) is squarely applicable to the facts of the case and that even the decision of the apex Court in the case of R. M. Arunachalam vs. CIT (supra) supports the case of the Department. The main plank of the contention of the learned counsel for the assessee is that without the repayment of the mortgage debt, the assessee could not have transferred the property to IBPS. In the entire argument, the assessee has ignored the fact that the repayment of the debt is consequential to the obtaining of loan earlier and the benefit that has accrued to the assessee because of the loan does not figure anywhere in the computation of the capital gains or in the argument of the learned counsel for the assessee. The computation of capital gains has to be worked out as per a self-contained code ss. 45 to 55A of the IT Act. The starting point of the computation is the cost of acquisition of the asset and the terminal point is the sale consideration. The fact that the asset had been mortgaged at an intermediate point does not seem to us to affect the mode of computation of capital gains in view of the said decision of the apex Court in the case of V. S. M. R. Jagadischandran (Deed) vs. CIT (supra). As the apex Court has held, it will be different if the assessee had acquired an encumbered property and made payment towards the discharge of the encumbrance and the betterment of its title. That is not the situation here. Here is a case where the assessee has, after the acquisition of the asset, obtained the benefit of a commercial loan and in the process mortgaged the property. If, in the circumstances of the present case, the deduction for the repayment of the mortgage debt is allowed, it` seems to us to defeat the very mode of computation of the capital gains laid down in ss. 48 to 55A of the IT Act. As rightly observed by the AO, any person who wants to sell a property and anticipates a big capital gain can enter into a loan transaction and mortgage the property and claim the benefit of the deduction of the repayment of the loan.
21. For the reasons indicated hereinabove, we have to reject the contention of the assessee that the provisions of the Transfer of Property Act or even the Board for Industrial and Financial Reconstruction Act come to the assistance of the assessee for the deductibility of the amount of Rs. 1,37,50,000 in the computation of capital gains. The BIFR Act, to our mind, operates in an altogether different field and it in noway enables the assessee to claim the deduction for the repayment of a mortgage debt in the computation of the capital gains. We cannot see the provisions of the BIFR Act as in anyway impeding the working out of the provisions of the IT Act in respect of the computation of capital gains. For the above reasons, we reject the contentions of the assessee and uphold the orders of the Revenue authorities.
22. The appeal is dismissed.