Mrs.padma v. The Income Tax Officer, Corporate

THE HONOURABLE MRS. JUSTICE V.BHAVANI SUBBAROYANTAX CASE APPEAL NOS.147 & 148 OF 2018(heard through video conferencing) Mrs.Padma ...Appellant in TCA No.147 of 2018 Mrs.Kavitha ...Appellant in TCA No.148 of 2018 Vs The Income Tax Officer, Corporate Ward 3(3), Chennai-34. ...Respondent in both the appeals APPEALS under Section 260A of the Income Tax Act, 1961against the common order dated 26.9.2017 made respectively inITA. Nos.1104 & 1105/Mds/2017 on the file of the Income TaxAppellate Tribunal, Chennai ‘B’ Bench for the assessment year2013-14 and against the order of the Commissioner of Income-Tax(Appeals)-II, Chennai-34, dated 27.02.2017 made in ITA Nos.295 &301/2015-16/CIT(A)-11 and against the Income Tax Officer,Corporate Ward-3(3), Chennai-34, dated 29.02.2016, made in GIRNo.AACPP2749R and GIR No.AACPK5957A respectively. For Appellants : Mr.G.Baskar in both Cases For Respondent : Mrs.V.Pushpa, SC in both Cases COMMON JUDGMENT (Judgment was delivered by T.S.SIVAGNANAM,J) We have heard Mr.G.Baskar, learned counsel appearingfor the appellants – assessees and Mrs.V.Pushpa, learnedStanding Counsel appearing for the respondent – Revenue. 2. These appeals, filed by the assesses, who are sisters andlegal heirs of late Mr.S.Shanmugam under Section 260A of the https://hcservices.ecourts.gov.in/hcservices/ Income Tax Act, 1961 (for short, the Act), are directed againstthe common order dated 26.9.2017 made respectively inITA.Nos.1104 & 1105/Mds/ 2017 on the file of the Income TaxAppellate Tribunal, Chennai ‘B’ Bench (for brevity, theTribunal) for the assessment year 2013-14. 3. The appeals were admitted on 03.4.2018 on the followingsubstantial question of law : “Whether the sale of encumberedinherited property to discharge income taxliabilities as also loan liabilities of theoriginal owner secured by a charge on thatproperty would attract capital gains underSection 54 of the Income Tax Act, 1961?” 4. However, before making arguments in this appeal, thelearned counsel on either side submit that there is atypographical error in the question framed and pray that thisCourt may suitably re-frame the question. With their consensus,the following substantial question of law is framed by us forconsideration : “Whether, on the facts and in thecircumstances of the case, the AppellateTribunal was right in law in not holdingthat there was a diversion of the saleproceeds by overriding title in respect ofthe sale consideration directly paid by thepurchaser to the Income Tax Departmentagainst the tax liability of the deceasedfather since the said properties wereinherited by the appellant with encumbranceby way of attachment by the Income TaxDepartment ?” 5. The facts leading to filing of these appeals are asfollows : The assessees’ father late Mr.S.Shanmugam acquired twoproperties in Chennai, the details of which are not germane fortaking a decision in these appeals. The assessees’ father, forbusiness purposes, appeared to have taken loans from M/s.LakshmiVilas Bank (for short, the bank) and to secure the loantransaction, which, according to the Revenue, is a businessloan, the two properties were mortgaged with the bank by depositof title deeds. Since the assessees’ father defaulted inrepayment, the bank had initiated legal proceedings before theDebts Recovery Tribuna-3l (DRT) during the year 2007. On13.2.2009, i.e. when the assessees’ father was alive (he passedaway on 23.1.2011), a search was conducted in the premises under Section 132 of the Act and the assessments for the years 2003-04 to 2009-10 were reopened and upon completion of thoseassessments, a demand for Rs.13,39,17,742/- was raised againstthe assessees’ father. The two properties in question were alsoattached by the Tax Recovery Officer. Section 132 of the Act and the assessments for the years 2003-04 to 2009-10 were reopened and upon completion of thoseassessments, a demand for Rs.13,39,17,742/- was raised againstthe assessees’ father. The two properties in question were alsoattached by the Tax Recovery Officer. 6. The assessees’ father died leaving behind theassessees as his legal heirs and their mother one Mrs.S.Gowri.The assessees and their mother, with a view to settle the bankliability and the arrears of income tax payable by the said lateMr.S.Shanmugam, worked out one time settlement with the bank andultimately, the properties were sold (i) by a sale deed dated03.5.2012 for a sale consideration of Rs.2 Crores and (ii) by asale deed dated 11.3.2013 for a sale consideration of Rs.5Crores. A part of the sale consideration was paid directly tothe Income Tax Department in partial settlement of the duespayable by the assessees’ father. 7. The assessees filed their return of income on30.3.2015 admitting a total income of Rs.4,72,420/- and thereturns were processed under Section 143(1) of the Act. The casewas selected for scrutiny under Section 143(2) of the Act and anotice was issued to the assessees calling for particularsregarding the sale transactions. The Assessing Officer did notaccept the stand taken by the assessees that since theproperties were under attachment by the bank and the Income TaxDepartment, the sale/sale proceeds received resulted indiversion of entire consideration by overriding the title andthat nothing had come to the hands of the assessees or theirmother giving rise to any income by way of capital gains. Thissubmission found favour with the Assessing Officer, whocompleted the assessments by two separate orders dated 29.2.2016and added a sum of Rs.1,96,76,486/- as capital gains from thesale of the aforementioned two properties. 8. Aggrieved by such orders, the assessees preferredappeals before the Commissioner of Income Tax (Appeals)-11,Chennai-34 [for brevity, the CIT(A)]. Before the CIT(A), it wascontended that the Assessing Officer failed to appreciate thatthe two properties in question were already attached by both (i)the bank during the life time of the father of the assessees forrecovery of the loans availed by him as well as (ii) the TaxRecovery Officer to recover tax arrears due from him and thatwhen the entire sale consideration on those two properties werepaid by the vendees to the bank and to the Income TaxDepartment, there was diversion of the entire consideration byoverriding the title resulting in no accrual or receipt ofcapital gains in the hands of the assessees. 9. Ultimately, the CIT(A), by a common order dated27.2.2017, dismissed the appeals filed by the assessees in toto.The view taken by the CIT(A) was that the assessees were liableto pay long term capital gains tax, which the said lateMr.S.Shanmugam would have been liable to pay had he not passedaway. Therefore, it was held that the assessees could not seekexemption from the same with an explanation that they did nothave money after transfer of both the properties. 10. As against the common order dated 27.2.2017 passed bythe CIT(A), the assessees preferred appeals before the Tribunalreiterating that no part of the sale consideration was actuallyreceived by the assessees. Before the Tribunal, the assesseesplaced reliance on the decision of the Hon’ble Supreme Court inthe case of R.M. Arunachalam Vs. CIT [reported in (1997) 227 ITR0222] in support of their contention that the payment made forthe purpose of clearing the mortgage debt created by theassessees’ father on the said properties should be considered ascost of improvement in respect of the said properties so as toprove the title of the properties inherited by the assessees. 10. As against the common order dated 27.2.2017 passed bythe CIT(A), the assessees preferred appeals before the Tribunalreiterating that no part of the sale consideration was actuallyreceived by the assessees. Before the Tribunal, the assesseesplaced reliance on the decision of the Hon’ble Supreme Court inthe case of R.M. Arunachalam Vs. CIT [reported in (1997) 227 ITR0222] in support of their contention that the payment made forthe purpose of clearing the mortgage debt created by theassessees’ father on the said properties should be considered ascost of improvement in respect of the said properties so as toprove the title of the properties inherited by the assessees. 11. With regard to the income tax liability, it wascontended before the Tribunal that because of the charge createdtowards income tax liability, which was created during the lifetime of their father, the assessees having inherited theproperties along with the charge, the settlement of income taxliability would, in effect, be an improvement to the cost ofacquisition of the properties and that the same was liable to beconsidered when computing the capital gains in respect of thesaid properties. 12. So far as mortgage debt is concerned, the Tribunal heldin favour of the assessees by concluding that the charge,admittedly, is a property specific and that the discharge of thesaid charge raised by the bank and the settlement thereof wouldbe cost of improvement in respect of the said properties in thehands of the assessees, who inherited the properties. 13. Per contra, Mrs.V.Pushpa, learned Standing Counselappearing for the respondent – Revenue submits that though thisfinding may not be fully right, yet the Revenue did not pursuethe matter further by challenging that portion of the order ofthe Tribunal due to low tax effect. 14. Be that as it may, since there is no challenge to thatportion of the order of the Tribunal, the Revenue cannot nowseek to argue contrary to the said finding without a separateappeal or cross objection filed by them in these appeals. Withregard to the second issue, namely the income tax liability, theTribunal held against the assessees by concluding that theincome tax liability is a personal liability of the father ofthe assessees – the said late Mr.S.Shanmugam and that no chargehad been created by the said late Mr.S. Shanmugam on the saidproperties in respect of the income tax liability. Therefore,the Tribunal held that the payment made by the assessees to theIncome Tax Department for settlement of tax liability of thesaid late Mr.S.Shanmugam from the sale consideration of the twoproperties inherited by them could not be considered as cost ofimprovement for the purpose of computing capital gains.Aggrieved by the common order passed by the Tribunal, theassessees are before us by way of these appeals. 15. Mr.G.Baskar, learned counsel appearing for theassessees, after reiterating the factual situation, submits thatthe fact remains that the assessees received nothing in theirhands from and out of the sale price paid by the purchaser, thatthe amounts were directly remitted to the Income Tax Departmentfor partial settlement of the dues and that this payment has tobe construed as diversion by overriding the title as nothing hadcome to the hands of the assessees and nothing accrued to them. 15. Mr.G.Baskar, learned counsel appearing for theassessees, after reiterating the factual situation, submits thatthe fact remains that the assessees received nothing in theirhands from and out of the sale price paid by the purchaser, thatthe amounts were directly remitted to the Income Tax Departmentfor partial settlement of the dues and that this payment has tobe construed as diversion by overriding the title as nothing hadcome to the hands of the assessees and nothing accrued to them. 16. The learned counsel appearing for the assessees hasreferred to Section 48 of the Act, which deals with the mode ofcomputation of capital gains. A reference was also made toSection 159(6) of the Act with regard to the liability of legalrepresentatives. It is, therefore, submitted that unless anduntil charge was created, the properties could not have beendisposed of, that the remittance of the entire saleconsideration to the Income Tax Department was diversion byoverriding the title, that this would squarely fall within themeaning of Section 48(1) of the Act and that therefore, theTribunal erred in not granting relief to the assessees. 17. Per contra, Mrs.V.Pushpa, learned Standing Counselappearing for the Revenue submits that the crucial issue to betaken note of is as to when the liability of capital gainsarises. The answer being that the liability of capital gainsarises when the property is sold, that the assessees before thisCourt had good right and title over the properties, which theyhad sold, that the income tax liability was an individualliability of their father, that it has got nothing to do and that settlement of the same can have no impact on thecomputation of capital gains. 18. The learned Standing Counsel appearing for the Revenuehas laid emphasis on the expression “wholly and exclusively”occurring in Section 48(1) of the Act and submits that theexpenditure incurred should be wholly and exclusively inconnection with such transfer. It is pointed out that there wasno compulsion on the part of the assessees to sell theproperties and it was a voluntary decision taken by them to sellthe properties and in that process, they settled a part of theincome tax liability of their father and that the same cannot beconstrued as an expenditure incurred wholly and exclusively inconnection with sale of the properties or can it be construed ascost of improvement to the properties sold. 19. In support of her contention, the learned StandingCounsel for the Revenue has referred to 20. After elaborately hearing the learned counsel for theparties, we are of the considered view that the conclusionarrived at by the Tribunal is just and proper and legallysustainable. We support such a conclusion with the followingreasons : We need not labour much to do so, as we are guided by thedecision of the Hon’ble Supreme Court in the case of R.M.Arunachalam. The question, which fell for consideration beforethe Hon’ble Supreme Court, was with regard to clearing theliability of estate duty by the legal heirs of the originalowner and the effect thereon while computing capital gains andas to whether the same can be claimed as a deduction as ‘cost ofacquisition’ or as ‘cost of improvement’. The Hon’ble Supreme https://hcservices.ecourts.gov.in/hcservices/ Court held that the amount proportionate to estate duty paid bythe assessee on the properties that were transferred could notbe treated as ‘cost of acquisition’ under Sections 48 and 49read with Section 55(2) of the Act since the title of theassessees to the immovable properties acquired was notincomplete and imperfect in any way. 21. The operative portion of the judgment in the case ofR.M. Arunachalam is as follows : https://hcservices.ecourts.gov.in/hcservices/ Court held that the amount proportionate to estate duty paid bythe assessee on the properties that were transferred could notbe treated as ‘cost of acquisition’ under Sections 48 and 49read with Section 55(2) of the Act since the title of theassessees to the immovable properties acquired was notincomplete and imperfect in any way. 21. The operative portion of the judgment in the case ofR.M. Arunachalam is as follows : “This would show that a charge differsfrom a mortgage in the sense that in amortgage there is transfer of interest inthe property mortgaged while in a charge nointerest is created in the property chargedso as to reduce the full ownership to alimited ownership. The creation of a chargeunder section 74(1) cannot, therefore, beconstrued as creation of an interest inproperty that is the subject-matter of thecharge. The creation of the charge undersection 74(1) only means that in the matterof recovery of estate duty from the propertywhich is the subject-matter of the chargethe amount recoverable by way of estate dutywould have priority over other liabilitiesof the accountable person. In that sense theclaim in respect of estate duty would haveprecedence over the claim of the mortgageebecause a mortgage is also a charge. [SeeState Bank of Bikanerdi Jaipur v. NationalIron & Steel Rolling Corpn. 1995 (2) SCC19]. The High Court has, therefore, rightlyheld that as a result of the charge createdunder section 74(1), it would not be saidthat title of the assessee to the immovableproperties received by him from Smt. UmayalAchi was incomplete and imperfect in anyway. In the context of the facts of thiscase, the High Court has found that theassessee had admittedly become the fullowner of the assets even before the paymentof estate duty and on payment of the same hehad not acquired a new right, tangible orintangible, in the assets. It cannot,therefore, be said that the amountproportionate to estate duty paid by theassessee on the properties that weretransferred should be treated as 'cost ofacquisition of the assets' under sections 48 and 49, read with section 55(2). Since thetitle of the assessee to the immovableproperties acquired was not incomplete andimperfect in any way, it cannot also be saidthat as a result of the payment of theestate duty by the assessee there was animprovement in the title of the assessee andthe said payment could be regarded as 'costof improvement' under section 48, read withsection 55(1)(b).” 22. The decision of the Hon’ble Supreme Court in the case ofR.M.Arunachalam was considered in the decision of this Court inthe case of N.Vajrapani Naidu where the substantial question oflaw arose was as to whether the amount paid for discharging thedebts due to mortgage of the property in connection withtransfer of property should be deducted in computing the capitalgains arising from the transfer of the property. The questionwas answered in the following terms : “6. The Supreme Court in the case of R.Arunachalam v. CIT [1997] 227 ITR 222/ 93Taxman 423 had an occasion to consider thequestion as to whether the sum paid by theassessee for discharging the mortgage by theassessee is a sum which would go to reducethe cost of acquisition. The Court held thatsuch payment would go to reduce the cost ofacquisition only where the mortgage had notbeen created by the assessee, but wascreated by the person from whom the assesseehad acquired the title and the mortgage wassubsisting at the time title was acquired bythe assessee. The Court further observed inthat case as under : “6. The Supreme Court in the case of R.Arunachalam v. CIT [1997] 227 ITR 222/ 93Taxman 423 had an occasion to consider thequestion as to whether the sum paid by theassessee for discharging the mortgage by theassessee is a sum which would go to reducethe cost of acquisition. The Court held thatsuch payment would go to reduce the cost ofacquisition only where the mortgage had notbeen created by the assessee, but wascreated by the person from whom the assesseehad acquired the title and the mortgage wassubsisting at the time title was acquired bythe assessee. The Court further observed inthat case as under : ". . . The position is, however,different where the mortgage is created bythe owner after he has acquired theproperty. The clearing off of the mortgagedebt by him prior to transfer of theproperty would not entitle him to claimdeduction under section 48 of the Actbecause in such a case he did not acquireany interest in the property subsequent tohis acquiring the same." 7. It is undisputed that in this case,a mortgage had been created by the vendor-assessee and the amount paid to the othercreditors by the vendee was for the discharge of the debts which had beenincurred by the assessee. The amount waspaid as part of the consideration to thesale. The distinction that was sought to bemade by the Tribunal between the case wherethe mortgage is discharged by the vendorprior to the sale and the case where thedischarge of the mortgage is effected at thetime of the sale by payment of theoutstanding amount to the mortgagee by thevendor and the sale is free fromencumbrances, is untenable. The only pointof relevance is whether the mortgage wascreated by the vendor or whether itsustained at the time of acquisition oftitle thereto by the vendor and was burdenedwith the same at the time of suchacquisition of title.” 23. The decision of the Hon’ble Supreme Court in the case ofR.M.Arunachalam was also relied upon in the decision of thisCourt in the case of S.A.S. Hotels Private Limited where thequestion was as to whether the payment of urban land tax andcorporation tax by the owner would form part of ‘cost ofacquisition’. It was held that payment of such tax on land bythe owner did not form part of the ‘cost of acquisition’ nor itwas part of expenditure incurred by the owner in connection withtransfer and that payment of tax also did not amount toimprovement of land. With these findings, the Hon’ble DivisionBench set aside the finding of the Tribunal and answered thesubstantial question of law in favour of the Revenue. 24. Very recently, the Hon’ble Division Bench of this Courtin the case of D.Zeenath Vs. ITO [reported in (2019) 105Taxman.com 298] considered a more or less identical substantialquestion of law namely whether the Tribunal was right in notappreciating that no part of the consideration for sale wasreceived by the appellant/assessee and the same was directlypaid to the bank by the purchaser in discharge of the mortgageamount and therefore, no capital gains arise in the hands of theassessee and as to whether the Tribunal was right in law in notholding that there was diversion of sale proceeds towardsredeeming the interest of the mortgagor and therefore, theamount so diverted was not liable to capital gains tax. TheHon’ble Division Bench of this Court applied the ratio in thedecision of the Hon’ble Supreme Court in the case ofR.M.Arunachalam, which position stood reiterated in the decisionoftheHon’bleSupremeCourtinthecaseof V.S.M.R.Jagadishchandran (decd.) Vs. CIT [(1997) 227 ITR 420].The Court also noted that the Tribunal had followed the decisionof the Kerala High Court in the case of Ambat Echukutty MenonVs. CIT [reported in (1978) 111 ITR 880] and the decision ofthis Court in the case of CIT Vs. Indira [reported in (1979) 119 ITR 837] wherein it was held that clearing off mortgage debtcould never be treated as ‘cost of acquisition’ nor as ‘cost ofimprovement’ by the assessee. A reference was also made to theFull Bench of this Court in the case of S.Valliammai Vs. CIT[reported in (1981) 127 ITR 713]. 25. In the latest decision of this Court in the case ofD.Zeenath, the Court further noted the decision of this Court inthe case of Sri Kanniah Photo Studio Vs. ITO [reported in (2016)286 CTR 538], which followed the decision of the Hon’ble SupremeCourt in the case of R.M.Arunachalam and approved the same. Inthe decision in the case of Sri Kanniah Photo Studio, it hadbeen held that as the burden had been created for his ownbenefit by offering the property as security to the bank, theamount spent for discharging that burden whether prior to sale,or at the time of sale, by way of one-time settlement to thebank, cannot be regarded as expenditure wholly and exclusivelyin connection with the transfer. 26. We find that the argument of Mrs.V.Pushpa, learnedStanding Counsel appearing for the Revenue that the finding ofthe Tribunal in so far as the mortgage debt with the bank isconcerned is erroneous and appears to stem from the decisions inthe case of V.Indira, Ambat Echukutty Menon and S.Valliammai. 27. As pointed out earlier, the Revenue did not file aseparate appeal against the said finding, which went in favourof the assessee nor there is any cross objection in theseappeals filed by the Revenue. Therefore, we cannot adjudicatethe correctness of the finding rendered by the Tribunal in thisregard. The aforementioned discussion can lead to the onlyanswer by holding that the case on hand is not a case ofdiversion of sale proceeds by overriding title in respect of thesale consideration, which was directly paid to the Income TaxDepartment. 28. The Revenue is right in contending that the liability topay capital gains tax arises on the sale of the properties andon the date when the property was sold, the assessees had right,title and interest over the properties and the sale wasvoluntary. https://hcservices.ecourts.gov.in/hcservices/ 29. Mr.G.Baskar, learned counsel appearing for theappellants – assessees has relied upon Section 159(6) of the Actwith regard to the liability of the legal representatives andsubmits that it shall be subject to the provisions of Sub-Section (4) and Sub-Section (5) of Section 159 of the Act. 30. However, we find that no such contention was advancedbefore the Tribunal and this appears to have been advancedbefore this Court for the first time. In any event, theliability has been shared proportionately among the legal heirsof the said late Mr.S.Shanmugam. Therefore, reliance on Section159(6) would not render any assistance to the case of theassessees. 31. For all the above reasons, the tax case appeals aredismissed and the substantial question of law is answeredagainst the assessees. No costs. Sd/- Assistant Registrar(CS IV) //True Copy// RS Sub Assistant Registrar To 1.The Income Tax Appellate Tribunal, Chennai ‘B’ Bench. 2.The Income Tax Officer, Corporate Ward 3(3), Chennai-34. 3.The Commissioner of Income-Tax(Appeals)-II, Chennai-34. 4.The Assistant Registrar, Income Tax Appellate Tribunal, Rajaji Bhavan, Besant Nagar, Chennai. Rajaji Bhavan, Besant Nagar, Chennai. +1cc to M/s.G.Baskar, Advocate, S.R.No.24660 TCA.Nos.147 & 148 of 2018 BR(CO)KKV/18/08/2020 https://hcservices.ecourts.gov.in/hcservices/