Https://Hcservices.ecourts.gov.in/Hcservices v. The Income Tax Officer

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 21.12.2020 CORAM THE HON'BLE DR.JUSTICE VINEET KOTHARIANDTHE HON'BLE MR.JUSTICE M.S.RAMESH Tax Case No.2604 of 2006 Tmt.T.A.H.Zubaida Ummal ... Appellant/AppellantVs. The Income Tax Officer,Ward-I(1), Nagapattinam. ... Respondent/Respondent Tax Case filed under Section 260A of the Income Tax Act,1961 against the order of the Income Tax Appellate Tribunal, 'B'Bench, Chennai, dated 16.12.2005 made in ITA No/660/Mds/2002,preferred against the order of the Commissioner of Income Tax(Appeal)Trichy in ITA No.43/2000-2001/TRY dated 30/01/2002 filedagainst the Assessment order of the Income Tax Officer Ward I(1), Nagapattinam dated 15/03/2000 for the Assessment Year 1995-96. For Appellant : Mr.R.Parthasarathy For Respondent : Mr.M.Swaminathan, Senior Standing Counsel assisted by Ms.V.Pushpa, Jr.Standing CounselJUDGMENT (Delivered by DR.VINEET KOTHARI,J) Heard Mr.R.Parthasarathy, learned counsel appearing for theAppellants/Assessee and Mr.M.Swaminathan, learned SeniorStanding Counsel appearing for the Respondent/Revenue. 2. The Tax Case has been admitted on 23.6.2008 on thefollowing questions of law:- "i) Whether on the facts and in the circumstancesof the case, the Income Tax Appellate Tribunalwas right in not appreciating that no part of theconsideration for sale was received by theappellant and same was directly paid to the Bankby the purchaser in discharge of the mortgage https://hcservices.ecourts.gov.in/hcservices/ amount and therefore no capital gains arises inthe hands of the appellant?ii) Whether on the facts and in the circumstancesof the case, the Appellate Tribunal was right inlaw in not holding that there was a diversion ofthe sale proceeds towards redeeming the interestof the mortgagor and therefore the amount sodiverted was not liable to capital gains tax?" Hon'ble Supreme Court in the case ofRM.Arunachalam vs. CIT, 227 ITR 222 is directlyon the point at issue. However, the learnedcounsel for the assessee attempted to impressus that according to the aforesaid decision ofthe Hon'ble Supreme Court at page 225 thepayment for the purpose of acquiring theinterest of the mortgagee in the property bythe heir was held to be regarded as cost ofacquisition under section 48 read with section55(2) of the Act. But in this case there is noliability attached to the succession. Theassessee purchased the property without anyencumbrance and the subsequent encumbrancecreated as a guarantee to the companyM/s.M.O.H.(P) Ltd., has nothing to do and itcannot be deducted as it never comes within theallowable deduction under section 48 of theAct. Respectfully following the decisions oftheHon'bleSupremeCourtandthejurisdictional High Court we set aside theorder of the Commissioner (Appeals) and confirmthe order of the Assessing Officer." 4. Both the learned counsels submitted that the controversyinvolved in the present Tax Case is covered by the Judgementrendered by a Division Bench of this Court in Tmt.D.Zeenath v.Income-tax Officer, Ward-I(1) Nagapattinam, in which one of us(Dr.Justice Vineet Kothari) was a party, wherein the Court hasheld as under:-"29. In our opinion, the ratio in R.M.Arunachalam(supra), squarely applies to this case. As held bythe Hon'ble Supreme Court, such payment would go toreduce the cost of acquisition only where themortgage had not been created by the assessee, butwas created by the person from whom the assesseehad acquired the title and the mortgage wassubsisting at the time title was acquired by theassessee. The position is, however, different wherethe mortgage 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 claim deductionunder section 48 of the Act because in such a casehe did not acquire any interest in the propertysubsequent to his acquiring the same. 30. This position had been reiterated by theHon'ble Supreme Court in, V.S.M.R. Jagadishchandran(supra). 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 directedagainst the order dt. 25th July, 1984 passedby the Madras High Court in TC No. 145 of1983 wherein the High Court on anapplication filed under s. 256(2) of the Actdeclined to direct the Tribunal to state acase and refer the following questions oflaw to the High Court :"1. Whether the Tribunal was right inholding that the levy of the capital gainsof Rs. 68,400 is proper under the facts andcircumstances of the case ? 2. Whether the Tribunal was right in holdingthat mortgage debts does not constitutediversion at source? 3. Whether the debts discharged by theapplicant on the properties cannot be saidto enhance the cost of acquisition." The assessee sold a house property No. 22,Chairman Muthurama Iyer Road, Madurai for asum of Rs.90,000 subject to incumbrance inthe assessment year 1975-76 and for the sameassessment year he sold plot Nos.1, 3 andhalf of plot No.4 in T.S. No.831/1 for a sumof Rs.12,600. The Income-Tax Officercomputed the capital gains in respect of thesaid properties at Rs.68,400. The assesseequestioned the computation of capital gainsbefore the Appellate Assistant Commissionerand contended that the debts in respect ofwhich mortgage had been executed weredischarged by the buyer himself out of thesale proceeds, that the debts should beconsidered as increase in cost ofacquisition of the properties and that inany event the debts may be treated asimprovement to the property or as the costof obtaining clear title to the property.TheAppellateAssistantCommissionerrejected the said contention. He, however,upheld the contention of the assessee thatthere was an overriding title of thecreditors in respect of the sale proceedsand, therefore, there was diversion atsource on the basis of such overriding titleand the assessee was not liable to chargeunder the capital gains in respect of thesale of the properties and, therefore, hedeleted the capitals gains of Rs.68,400 as computed by the ITO. The Tribunal, followingthe decision of the Kerala High Court inAmbat Echukutty Menon v. CIT (1(1978) 111ITR 880 (Ker), and the decision of theMadras High Court in CIT v. V.Indira (1979)119 ITR 837 (Mad) held that clearing of themortgage debt could neither be treated as"cost of acquisition" nor as an "cost ofimprovement" made by the assessee. TheTribunal, therefore, held that the deductionof the capital gains was not justified.Since the Tribunal declined to refer to theHigh Court the questions referred to above,the assessee filed an application unders.256(2) of the Act before the High Courtwhich has been rejected by the impugnedorder. The High Court has relied upon thedecision of the Full Bench of the High Courtin S. Valliammai & Anr. v. CIT (1981) 127ITR 713 (Mad) and has held that bydischarging the mortgage debt subsisting onthe property which was the subject-matter ofa sale, the assessee was not eitherimproving or perfecting his title orimproving the property in any manner and,therefore, the amount paid for dischargingthe mortgage debt cannot be taken to be forthe cost of acquisition as contended by theassessee.In Civil Appeals Nos.6098-6101 of 1983[since reported as R. M. Arunachalam etc. v.CIT (1997) 141 CTR (SC) 348 filed againstthe judgment of the Full Bench of the MadrasHigh Court in S. Valliammai & Anr. v. CIT(supra) we have examined the correctness ofthe view of the Kerala High Court in AmbatEchukutty Menon v. CIT (supra) and have heldthat the said decision does not lay down thecorrect law in so far as it holds that wherethe previous owner had mortgaged theproperty during his life time the clearingoff the mortgage debt by his successor canneither be treated as cost of acquisitionnor as cost of improvement made by theassessee. It has been held that where amortgage was created by the previous ownerduring his time and the same was subsistingon the date of his death, the successorobtains only the mortgagors interest in theproperty and by discharging the mortgage debt he acquires the mortgagees interest inthe property and, therefore, the amount paidto clear off the mortgage is the cost ofacquisition of the mortgagees interest inthe property which is deductible as cost ofacquisition under s. 48 of the Act. In thepresent case, we find that the mortgage wascreated by the assessee himself. It is not acase where the property had been mortgagedby the previous owner and the assessee hadacquired only the mortgagors interest in theproperty mortgaged and by clearing the samehe had acquired the interest of themortgagee in the said property. Thequestions raised by the assessee in theapplication submitted under s. 256(2) of theAct do not, therefore, raise any arguablequestion of law and the said application wasrightly rejected by the High Court. In thecircumstances, even though we are unable toagree with the reasons given in the impugnedorder, we are in agreement with the order ofthe High Court dismissing the applicationfiled by the assessee under s.256(2) of theAct.The appeal is, therefore, dismissed. Noorder as to costs.'31. It is thus seen that the Hon'ble Supreme Courthad held that where the mortgage had been createdby the owner after he had acquired the property,the clearing of the mortgage by him prior to thetransfer of the property would not entitle him toclaim deduction under Section 48 of the Actbecause, in such a case he did not acquire anyinterest in the property subsequent to hisacquiring the same." 5. The Assessee in the said case is a co-owner of thepresent Appellant/Assessee. Therefore, the present Tax Case isdisposed of in same terms and the questions of law are answeredagainst the Assessee and in favour of the Revenue. No costs. Sd/- Assistant Registrar(CCC) //True Copy// Sub Assistant Registrar ssk. 5. The Assessee in the said case is a co-owner of thepresent Appellant/Assessee. Therefore, the present Tax Case isdisposed of in same terms and the questions of law are answeredagainst the Assessee and in favour of the Revenue. No costs. Sd/- Assistant Registrar(CCC) //True Copy// Sub Assistant Registrar ssk. To1.The Registrar, Income Tax Appellate Tribunal, 'B' Bench, Chennai. 2. The Income Tax Officer, Ward-I(1), Nagapattinam.3.The Commissioner of Income Tax (Appeals), Trichy.+1cc to M/s.M.Swaminathan, Advocate Sr.42452T.C.No.2604 of 2006rsi[co]srg 08/01/2021