Aggrieved By The Said Disallowance, The Assessee Preferredappeal Before The Cit (Appeals), Who, Relying Upon The Judgment Ofthe Calcutta High Court In The Case v. Dy. Commissioner Of Income Tax (2005 (278) Itr 240) Allowed Theappeal And Directed The Assessing Officer To Add The Capital Gainsin Accordance With Section 50 A

IN THE HIGH COURT OF JUDICATURE AT MADRAS Sri Kanniah Photo StudioNo.18A, Nageswaran North StreetKumbakonam... Appellant The Income Tax Officer Ward-I (1)31, Krishnaswamy RoadGandhi NagarKumbakonam... Respondent Appeal filed against the order dated 16.4.2013 passed by theIncome Tax Appellate Tribunal, Chennai 'A' Bench, made in ITANo.28/Mds/2011 against the order of the Commissioner of Income Tax(Appeals) in ITA.No.213/07-08 dated 19.10.2010. against the order of the Deputy Commissioner of Income TaxCircle 1, Kumbakonam dated 31.12.2007 in GI.NO.8324K AAAFK7401E. For Respondents: Mr.J.Narayanasamy (DELIVERED BY R.SUDHAKAR, J.) Mr.Narayanasamy, learned standing counsel for the respondent isdirected to take notice for the respondent/Department. 2. Aggrieved by the order of the Tribunal in allowing theappeal filed by the Revenue, the appellant/assessee is before thisCourt by filing the present appeal raising the following question oflaw :-"Whether on the facts and in the circumstances ofthe case, the Appellate Tribunal was right in law inholding that the amount of Rs.22,51,220/= paid bythe appellant to the Bank for discharge of themortgage has to be taken as expenses relating totransfer and it is wholly and exclusively incurred https://hcservices.ecourts.gov.in/hcservices/ for the transfer u/s 50 of the Income Tax Act,1961?" 3. The facts, in a nutshell, are as hereunder :-For the assessment year 2005-2006, the appellant/assessee filedreturn of income on 1.2.06 admitting loss of Rs.7,42,240/=. Duringthe assessment year in question, the appellant sold land along withbuilding at Nageswaran Koil Street, Kumbakonam for Rs.75 Lakhs. Theappellant had taken mortgage loan on the said property with CityUnion Bank. For clearing the mortgage, the appellant made a one-time settlement with the bank in respect of the aforesaid loan andpaid a sum of Rs.22,51,220/= to the bank. While computing thecapital gain, this amount of Rs.22,51,220/= was claimed as expensesby the appellant under Section 48 (1) (i) of the Act. The AssessingOfficer, in the course of assessment, however, held that the loan inquestion had been obtained by mortgaging the property long timeafter acquiring the same and, therefore, the same is not coveredunder Section 48 (1) (i) of the Act and, therefore, disallowed theassessee's claim for the purpose of computing the capital gains. 4. Aggrieved by the said disallowance, the assessee preferredappeal before the CIT (Appeals), who, relying upon the judgment ofthe Calcutta High Court in the case of Gopee Nath Paul & Sons - Vs -Dy. Commissioner of Income Tax (2005 (278) ITR 240) allowed theappeal and directed the assessing officer to add the capital gainsin accordance with Section 50 and deleted the amount paid by theappellant to the Bank for removal of the encumbrances. 5. Aggrieved by the abovesaid order, the Department pursuedappeal before the Tribunal and the Tribunal, relying on the decisionof the jurisdictional High Court in the case of CIT – Vs – VajrapaniNaidu (2000 (241) ITR 560), came to hold that the decision of thejurisdictional court insofar as the plea under Section 48 (1)(i)would directly cover the issue and allowed the appeal against whichthe assessee is before this Court by filing the present appeal. 5. Aggrieved by the abovesaid order, the Department pursuedappeal before the Tribunal and the Tribunal, relying on the decisionof the jurisdictional High Court in the case of CIT – Vs – VajrapaniNaidu (2000 (241) ITR 560), came to hold that the decision of thejurisdictional court insofar as the plea under Section 48 (1)(i)would directly cover the issue and allowed the appeal against whichthe assessee is before this Court by filing the present appeal. 6. Mr.Sivaraman, learned counsel appearing for theappellant/assessee heavily relied on the judgment of the CalcuttaHigh Court in Gopee Nath Paul's case (supra) to drive home the pointthat the Tribunal erred in disallowing the claim in computingcapital gains with regard to the sum paid by the appellant to theBank for discharging the mortgage under Section 48 (1) (i) r/wSection 50 of the Income Tax Act. The fact that the appellant firmconstructed superstructure with the help of bank loan and due to itsinability to repay the loan, on the basis of the one time settlementarrived at with the bank, the sale of the property had taken placeand, therefore, the entire amount paid towards the discharge of theloan should be construed as expenditure incurred wholly andexclusively in connection with the said transfer, which fact has notbeen appreciated by the Tribunal in proper perspective. It isfurther submitted that the Tribunal erred in not appreciating thefact that the entire amount in question was used for the purpose ofremoving the encumbrances of mortgage and, therefore, the said https://hcservices.ecourts.gov.in/hcservices/ amount has to be deducted while computing capital gains. It isfurther submitted by the learned counsel for the appellant/assesseethat in case of divergent views by two different High Courts on asimilar issue, as in this case, the Tribunal should have taken theview that is more favourable to the assessee, which has not beendone in this case. For the reasons aforesaid, learned counsel forthe assessee/appellant sought for setting aside the order passed bythe Tribunal. 7. Per contra, Mr.Narayanasamy, learned standing counselappearing for the respondent/Department vehemently contended thatinspite of divergent views of two different High Courts, theTribunal having considered the facts of the case in depth, by normalrule of precedence, followed the decision of the jurisdictional HighCourt in Vajrapani Naidu's case (supra), and allowed the appeal and,therefore, no interference is warranted with the well consideredfindings recorded by the Tribunal. 8. Heard the learned counsel for the appellant/assessee and thelearned standing counsel appearing for the respondent/Department andperused the materials available on record as also the judgmentsrelied on by the different authorities to arrive at their respectiveconclusions. 9. This Court has carefully considered the facts in the presentcase as also the judgment of this Court as well as the Calcutta HighCourt. We find, on facts, there is a sale by the presentappellant/assessee of land and building for Rs.75 Lakhs, which isnot in dispute. Insofar as the one time settlement ofRs.22,51,220/= paid to City Union Bank to satisfy the mortgage overthe property, the assessee claimed the same as expenses incurred inconnection with the transfer for the purpose of computing capitalgains under Section 48 (1) (i) of the Act, which was rejected by theDepartment and upheld by the Tribunal. In the above backdrop, thecore issue before this Court is “whether such a discharge of claimto the bank could be considered as expenses in terms of Section 48(1) (i) of the Act?” 9. This Court has carefully considered the facts in the presentcase as also the judgment of this Court as well as the Calcutta HighCourt. We find, on facts, there is a sale by the presentappellant/assessee of land and building for Rs.75 Lakhs, which isnot in dispute. Insofar as the one time settlement ofRs.22,51,220/= paid to City Union Bank to satisfy the mortgage overthe property, the assessee claimed the same as expenses incurred inconnection with the transfer for the purpose of computing capitalgains under Section 48 (1) (i) of the Act, which was rejected by theDepartment and upheld by the Tribunal. In the above backdrop, thecore issue before this Court is “whether such a discharge of claimto the bank could be considered as expenses in terms of Section 48(1) (i) of the Act?” 10. For better clarity, Rule 48 (1) (i) of the Act, on whichreliance is placed for claiming the disallowance, is quotedhereinbelow :-"Mode of computation.48. The income chargeable under the head “Capitalgains” shall be computed, by deducting from thefull value of the consideration received oraccruing as a result of the transfer of the capitalasset the following amounts, namely :—(i) expenditure incurred wholly and exclusively inconnection with such transfer;(ii) the cost of acquisition of the asset and thecost of any improvement thereto.*********" 11. On a careful reading of the above provision, it is evidentthat Section 48 provides that income chargeable under capital gainsshall be computed by deducting from the full value of theconsideration received or accruing as a result of the transfer ofthe capital asset such amounts, viz., expenses, incurred wholly andexclusively in connection with such transfer. The object behind sucha provision is mainly for excluding those expenses incurred whollyor exclusively in connection with the transfer of the property. The facts in the present case reveal that for furtherdevelopment of the property, loan had been obtained by theappellant/assessee from City Union Bank and for the purpose ofclearing the mortgage loan, the appellant/assessee had sold theproperty and effect the one-time settlement with the bank. TheAssessing Officer had held that since the mortgage loan had beenlong time after the acquisition of the property, the same would notstand covered under Section 48 (1) of the Act. That being the case,it does not appeal to us that the explanation relating to dischargeof the mortgage to the bank, as submitted by the assessee, can betermed as expenditure, as the property had been acquired long timebefore taking the mortgage loan from the bank. 12. The Tribunal, to come to the finding that the saiddischarge of mortgage to the bank cannot be termed as expenditure,has placed reliance on the jurisdictional Court's decision inVajrapani Naidu's case (supra). In that case, the assessee soldimmovable property under 13 sale deeds and bona fide paid certainamounts to the creditors of the vendor assessee, including mortgageson the property, which was the subject matter of sale. The IncomeTax Officer and the Commissioner rejected the claim for deduction interms of Section 48 (1). While the Tribunal reversed the view, thisCourt rejected the view of the Tribunal, in the following manner :-“That view of the Tribunal is whollyunsustainable. The burden had been created by thevendor on the property sold by him. As the burdenhad been created for his own benefit by offering theproperty as security to his lenders, the amountsspent for discharging that burden of the vendorwhether prior to sale, or at the time of sale, bypayment to such creditors including the mortgagees,directly by the vendee cannot be regarded asexpenditure wholly and exclusively in connectionwith the transfer. When the mortgaged property is sold, if theconsideration for the sale comprises theconsideration for the sale of equity of redemption,and the amount required for the discharge ofmortgage, it is the aggregate of both these sumsthat constitutes the consideration for the sale. Thefact that the vendee makes the payment directly tothe mortgagee, instead of the vendor doing so, afterreceiving the money from the vendee, does not makeany difference for the purpose of determining https://hcservices.ecourts.gov.in/hcservices/ consideration for the sale and the extent of capitalgain. The Supreme Court in the case of RM. Arunachalamv. CIT [1997] 227 ITR 222, had an occasion toconsider the question as to whether the sum paid bythe assessee for discharging the mortgage by theassessee is a sum which would go to reduce the costof acquisition. The court held that such paymentwould go to reduce the cost of acquisition onlywhere the mortgage had not been created by theassessee, but was created by the person from whomthe assessee had acquired the title and the mortgagewas subsisting at the time title was acquired by theassessee. The court further observed in that case asunder (page 239) : “The position is, however, different where themortgage is created by the owner after he hasacquired the property, the clearing off of themortgage debt by him prior to transfer of theproperty would not entitle him to claimdeduction under section 48 of the Act because insuch a case he did not acquire any interest inthe property subsequent to his acquiring thesame.” It is undisputed that in this case, a mortgage hadbeen created by the vendor-assessee and the amountspaid to the other creditors by the vendee was forthe discharge of the debts which had been incurredby the assessee. The amount was paid as part of theconsideration to the sale. The distinction that wassought to be made by the Tribunal between the casewhere the mortgage is discharged by the vendor priorto the sale and the case where the discharge of themortgage is effected at the time of the sale bypayment of the outstanding amount to the mortgageeby the vendor and the sale free from encumbrances,is untenable. The only point of relevance is whetherthe mortgage was created by the vendor or whether itsubsisted at the time of acquisition of titlethereto by the vendor and was burdened with the sameat the time of such acquisition of title.” 13. We find no reason to depart from this finding of this Courtin Vajrapani Naidu's case (supra). In the present case, mortgagehas been created by the present appellant/assessee and consequent tothe sale, the assessee has discharged the mortgage to City UnionBank. As the burden had been created for his own benefit byoffering the property as security to City Union Bank, the amountspent for discharging that burden whether prior to sale, or at thetime of sale, by way of one-time settlement to the Bank, cannot beregarded as expenditure wholly and exclusively in connection withthe transfer. In the present case, the discharge was in the courseof sale. We find that the payment of the outstanding amount inhttps://hcservices.ecourts.gov.in/hcservices/ discharge of mortgage by the vendor, viz., appellant herein, cannotpartake the character of an expenditure. It is not a case where theassessee had discharged the mortgage created at the time ofacquisition of the property by the present appellant/assessee, tomake a distinction otherwise. discharge of mortgage by the vendor, viz., appellant herein, cannotpartake the character of an expenditure. It is not a case where theassessee had discharged the mortgage created at the time ofacquisition of the property by the present appellant/assessee, tomake a distinction otherwise. 14. The decision of the Calcutta High Court in Gopee NathPaul's case (supra), on facts, is distinguishable and will not applyto the facts of the present case. In the said case, there were twofirms and there were common partners. One of the firm was sufferinga suit claim by Allahabad Bank. Simultaneously, another suit wasfiled between the partners of the two firms and based on arbitrationagreement, the suit between the partners was concluded on the basisof compromise and the firms stood dissolved. A Receiver wasappointed for the purpose of selling the two firms as a goingconcern. However, the same could not be sold as a going concern onaccount of liability of one of the firms to the bank and,thereafter, based on several orders of court, a deposit of Rs.25Lakhs was made with the Court Registry as a Fixed Deposit withAllahabad Bank free from loan and attachment until further orders ofcourt. This was done for the purpose of effecting the transfer ofthe assets of the two firms for securing the payment of theliabilities towards Allahabad Bank by one of the firms. Theproperty was sold and amount was received and the capital gains wasassessed in the hands of the other firm, which claimed theexpenditure relatable to the sum paid to Allahabad Bank underSection 48 (1) and in such circumstances, the Calcutta High Courtcame to hold that based on court orders, sale of assets of the twofirms having taken place and the liability of Allahabad Bank wassettled consequent to that, therefore, the expenditure was incurredwholly and exclusively in connection with the transfer and in orderto comply with the orders of the Court. For better clarity, therelevant portion of the decision is extracted hereunder :-“13. We are supported in our above view by thedecision in the case of CIT v. Shakuntala Kantilal[1991] 190 ITR 56 (Bom) and we are in agreement withthe view taken in the said decision. Reference wasalso made to the case of CIT v. Abrar Alvi [2001]247 ITR 312 (Bom), wherein, relying on ShakuntalaKantilal [1991] 190 ITR 56 (Bom), it was held thatan expenditure in removing encumbrance would bedeductible in the computation of capital gains.However, the discharge of mortgage created by theassessee after he acquired the property would not bedeductible.” (Emphasis supplied) The above observation squarely supports the view of this Courtthat where the discharge of mortgage created by the assessee afteracquiring the property, the same would not be deductible. Theabovesaid decision is clearly distinguishable on facts and theobservation as quoted above in said decision further strengthens the https://hcservices.ecourts.gov.in/hcservices/ view of this Court in regard to the amounts which are to bedeductible as expenditure. 15. In the light of the decisions as quoted above, this Courtis persuaded to follow the reasoning of this Court in VajrapaniNaidu's case (supra), which is squarely applicable to the facts ofthe present case and, therefore, we have no hesitation to accept theview of this Court in the case of Vajrapani Naidu's case (supra).No question of law, much less substantial questions of law arise forconsideration in this appeal. 16. Accordingly, for the reasons aforesaid, this appeal failsand the same is dismissed confirming the order passed by theTribunal. However, in the circumstances of the case, there shall beno order as to costs. Sd/- Assistant Registrar(J) //True Copy// Sub Assistant Registrar GLN To1. The Income Tax Officer Ward-I (1) 31, Krishnaswamy Road Gandhi Nagar Kumbakonam.2. The Income Tax Appellate Tribunal Chennai 'A' Bench Chennai. 16. Accordingly, for the reasons aforesaid, this appeal failsand the same is dismissed confirming the order passed by theTribunal. However, in the circumstances of the case, there shall beno order as to costs. Sd/- Assistant Registrar(J) //True Copy// Sub Assistant Registrar GLN To1. The Income Tax Officer Ward-I (1) 31, Krishnaswamy Road Gandhi Nagar Kumbakonam.2. The Income Tax Appellate Tribunal Chennai 'A' Bench Chennai. 3. The CommissionerIncome Tax (Appeals)No.44 Williams RoadCantonment Tiruchirappalli 620 001 4. The Deputy Commissioner of Income TaxCircle I, Kumbakonam 1 cc to Mr.R. Sivaraman, Advocate, Sr. 29750 MG (CO)kk7/8 https://hcservices.ecourts.gov.in/hcservices/