Allahabad High Court
Commissioner Of Income-Tax vs Shri Sharad Sharma L/H Of Late Shri Kanti ... on 6 July, 2007
Equivalent citations: (2007)213CTR(ALL)248
Author: Vikram Nath
Bench: R.K. Agrawal, Vikram Nath
JUDGMENT Vikram Nath, J.
1. The Income Tax Appellate Tribunal, Allahabad Bench, Allahabad has referred the following question of law under Section 256(1) of the Income Tax Act, 1961 (here in after referred to as the Act) for opinion if this Court:
Whether on the facts and circumstances of case the I.T.A.T. was justified in holding that there was an over-riding charge against the sale proceeds of property and the assessee was not liable for capital gains in respect of Rs. 1,50,000/- paid to bank in discharge of loan taken by M/s Shanker Trades.
2. The reference relates to the assessment year 1984-85.
3. Briefly stated the facts giving rise to the present reference are as follows:
4. The assessee is a partner in M/s Shanker Traders. M/s Shanker Traders took loan from the Bank of India. The house property No. 89/593 Prem Nagar, Kanpur, belonging to the assessee, was mortgaged to the Bank against the loan taken by the firm. The Bank enforced the recovery of loan against M/s Shanker Traders by sale of the property mortgaged. Under an agreement with the Bank, the house was auctioned by the assessee and out of the total sale consideration of Rs. 1,95,000/- to be received by the assessee. Rs. 1,50,000/- was paid to the Bank and Rs. 45,000/-was received by the assessee. The Assessing Officer calculated the capital gain on the basis of the entire sale proceeds of Rs. 1,95,000/- and added to income an amount of Rs. 96,000/- by way of net taxable capital gains. Against the above addition, an appeal was preferred and the learned C.I.T.(A) vide his order dated 6.2.1987 confirmed the addition made by the Assessing Officer. The assessee being aggrieved came up in second appeal before the Tribunal. The Tribunal allowed the appeal holding that the Bank had an over-riding title over the property and the real value, to which the assessee was entitled, was only Rs. 45,000/- and not the balance of Rs. 1,50,000/- which was directly paid to the Bank and, therefore, no capital gain was chargeable to that extent. The Tribunal, while deciding the issue, had taken various decisions of the Benches of the Tribunal into consideration and also the decision of the Hon'ble Delhi High Court, reported in 160 ITR 840.
5. We have heard Sri A.N. Mahajan, learned Standing Counsel for the Revenue. No one has appeared on behalf of the assessee despite notice having been issued by registered post for engaging another counsel in the year, 2005 itself. Further the Office has submitted a report dated 8.9.2006 that neither undelivered cover nor the A.D. card has been received back.
6. Sri A.N. Mahajan has submitted that the view taken by the Tribunal in holding that the Bank had an over riding title over the property sold and further real value, to which the assessee was entitled, was only Rs. 45,000/- and not the balance amount of Rs. 1,50,000/- which was directly paid to the Bank is not correct in law. He further submitted that the reliance placed by the Tribunal on the decisions of the Madias Tribunal also cannot be sustained for the reason that the Apex Court in the case of RM. Arunachalam v. Commissioner of Income Tax (SC) and in the case of V.S.M.R. Jagdishchandran (decd.) v. Commissioner of Income-Tax have clearly laid down the law with regard to the expenditure incurred in getting the mortgage discharged should or should not be treated as cost of acquisition and would be deductible under Section 48 of the Act. The clear distinction drawn by the Apex Court in the aforementioned two decisions is that where the previous owner had created a mortgage on the property in question and the assessee had inherited the said property alone with mortgage, in that event the assessee would be entitled to tne deduction or the amount spent in getting mortgage discharged as cost of acquisition under Section 48 of the Act. However, where the assessee himself has created the mortgage, he would not be entitled to any deduction under Section 48 of the Act either as cost of acquisition or cost of improvement. The Apex Court in the case of RM. Arunachalam (supra) held as follows:
In taking the view that in a case where the property has been mortgaged by the previous owner during his lifetime and the assessee, after inheriting the same, has discharged the mortgage debt, the amount paid by him for the purpose of clearing off the mortgage is not deductible for the purpose of computation of capital gains, the Kerala High Court has failed to note that in a mortgage there is transfer of an interest in the property by the mortgagor in favour of the mortgagee and where the previous owner has mortgaged the property during his lifetime, which is subsisting at the time of his death, then after his death his heir only inherits the mortgagor's interest in the property. By discharging the mortgage debt his heir who has inherited the property acquires the interest of the mortgagee in the property. As a result of such payment made for the purpose of clearing off the mortgage the interest of the mortgagee in the property has been acquired by the heir. The said payment has, therefore, to be regarded as "cost 0! acquisition" under Section 48 read with Section 55(2) of the Act. 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. In CIT v. Daksha Ramanlal , the Gujarat High Court has rightly held that the payment made by a person for the purpose of clearing off the mortgage created by the previous owner is to he treated as cost of acquisition of the interest of the mortgagee in the property and is deductible under Section 48 of the Act.
7. Further the Apex Court in the case of V.S.M.R. Jagdishchandran (supra) has followed the decision in the case of RM. Arunachalam (supra).
8. The question with regard to diversion of income on account of over-riding title was not decided by the Apex Court in the case of RM. Arunachalam (supra) on the ground that the said question had not been raised either before 'he Tribunal or the High Court. However, in the present case we find that this question had been raised and the Tribunal had taken a view that the Bank had an over-riding title over the property sold. The reasoning given by the Tribunal with regard to over-riding charge over the sale income, is not correct for the reason as the assessee had himself created the mortgage by taking a loan from the Bank and the said property had been secured for repayment of loan. It is not a case where the : ssessee had inherited the property or had acquired the property along with charge but in fact had himself created the charge over the property. In a case of inheritance/acquisition along with the mortgage, perfecting his title by getting mortgage discharged, the assessee would be entitled to get the deduction of the mortgage debt but where the charge is created by the assessee himself, it cannot be said that the amount of mortgage debt out of the sale proceeds be deductible while calculating the capital gains. The present one is a case of application of income by the assessee.
9. Further the Apex Court dealing with the issue of diversion of income by overriding title in the case of Commissioner of Income-Tax v. Sunil J. Kinariwala reported in 2003 (259) ITR 10 held as follows:
It may be pointed out that under the scheme of the Act, it is the total income of an assessee, computed under the provisions of the Act, that is assessable to income -tax So much of the income which an assessee is not entitled to receive by virtue of an overriding title created in favour of a third party would get diverted at source and the same cannot be added in computing the total income of the assessee. The principle is simple enough but more often than not, as in the instant case, the question arises as to what is the criteria to determine, when does the income attributable to an assessee get diverted by overriding title'? The determinative factor, in our view, is the nature and effect of the assessee's obligation in regard to the amount in question. When a third person becomes entitled to receive the amount under an obligation of an assessee even before he could lay a claim to receive it as his income, there would be a diversion of income by overriding title; but 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 and not of diversion of income by overriding title.
10. Earlier in the case of C.I.T. v. Sitaldas Tirathdas the Apex Court laid down the test with regard to diversion of income by overriding title as follows:
In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by 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, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable.
11. In view of the discussion made above we find that in the present case the assessee was not entitled to the deduction as claimed on account of discharge of mortgage debt of Rs. 95,000/- to the Bank. In fact the entire amount of sale consideration had been received by the assessee and thereafter part of it applied for discharge of the mortgage debt. It was thus a case of application of income received.
12. We, therefore, do not agree with the reasoning given by the Tribunal.
13. The question of law referred to us is accordingly answered in the negative, i.e. in favour of the Revenue and against the assessee. There shall however be no order as to costs.