Mahmood Ibrahim Salt v. Income-tax Officer — 1994 DIGILAW 190 (KER)

Judgment :- The petitioners in these two writ petitions are brothers. They were the Directors of a company M/s. Indo Marine Agencies (K) P. Ltd. They jointly owned 149.604 cents of land in Sy. Nos. 72 and 1583 of Mattancherry Village, which they had mortgaged, along with others, to the Canara Bank, Mattancherry Branch, by deposit of title deeds, to secure the advances made and to be made by the Bank to the aforesaid company. More than Rs. Sixty lakhs was due to the Bank under the mortgage, at a time when the petitioners entered into an agreement to sell the property to ten persons, under different assignment deeds, for a total consideration of Rs. 10,33,966/-. The Bank agreed to release the mortgage on the property, if an amount of Rs. Nine lakhs was paid towards the outstandings. The amount was accordingly deposited by the petitioners on June 21, 1985 through the purchasers, or with funds made available by them, and the Bank released their mortgage right on the property. The deeds of assignment were thereafter executed and the property sold in accordance with the agreement to sell. 2. Petitioners filed returns for purposes of assessment under the Income Tax Act, 1961 (the act) disclosing the capital gains arising out of the transfers as on a total consideration of Rs. 10,33,966/-. The returns were accepted and the assessments completed under S.143(1) of the Act by orders dated 27-12-1988 marked Ext. P4 in each of the cases. Petitioners then had second throughts about the correctness of their returns, and they challenged the orders of assessment in revision Ext. P5 dated August 8, 1989 before the Commissioner of Income Tax, the second respondent. The ground taken was that the consideration for transfers should be taken as the amount of Rs. 10,33,986/- less Rs. Nine lakhs paid to the Bank in discharge of the mortgage, in which event, there was no capital gain liable to be assessed. At the hearing, the argument appears to have been that the amount paid to the Bank did not reach the petitioners as it had been diverted by overriding title and therefore capital gains, if any, should be computed only with reference to the balance. The Commissioner overruled this plea stating that there was no requirement in law that the seller should directly receive the consideration. The Commissioner overruled this plea stating that there was no requirement in law that the seller should directly receive the consideration. When the amount was paid to the Bank in discharge of the mortgage, it was appropriation of the sale proceeds for the petitioner's benefit. He held further that the mortgage debt was not an admissible deduction in computing capital gains as per the decision of this court in Ambal Echukutty Menon v. C.f.T. 1978 KLT 16 = (1978) 111 ITR 880. The Commissioner accordingly dismissed the revision petitions by the order Ext. P6 which is under challenge in these writ petitions. 3. The contention of counsel for the petitioners is a very ambitious one. He states that what is transferred is only the equity of redemption for which the consideration is Rs. 10,33,966/- minus Rs. Nine lakhs ie. Rs. 1,33,966/-. According to him the full value of the consideration for the purpose of section 48(1)(a) is only that which is actually received by the vendors, there being a diversion at source of the amount paid for discharging the mortgage. It is therefore contended that the consideration is only that amount that is left after the discharge of the mortgage. According to counsel, Ambat Echukutty Menon has been decided erroneously. 4. Section 45 brings to tax under the head "capital gains" any profits or gains arising from the transfer of a capital asset effected in the previous year. It is deemed to be the income of the previous year in which the transfer took place. S.48 prescribes the mode of computation of capital gains and the deductions to be made therefrom. The Income under the head "Capital gains" is computed by deducting from the full value of the consideration received, or accruing, as a result of the transfer, the cost of acquisition of the asset and the cost of any improvement thereto, among others. Cost of improvement, so far as is relevant to this case, is defined in S.55(1)(b)(2)(ii) as meaning all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property. The questions for consideration are: what is the full value of the consideration received, or accruing, to the petitioners, as to whether the mortgage liability of Rs. The questions for consideration are: what is the full value of the consideration received, or accruing, to the petitioners, as to whether the mortgage liability of Rs. Nine lakhs is not liable to be treated as part thereof, and in any event, whether it could be deducted from the consideration, as an improvement for purposes of computing the capital gains. 5. These questions need not really pose any difficulty so far as this case is concerned for the reason that the ultimate transfers were not of the equity of redemption simplicitor as contended by the petitioners, but of the full right in the property without any encumbrance thereon. This is because the mortgage was discharged by payment of Rs. Nine lakhs and it was only thereafter, that the sale deeds were executed by the petitioners. On the date of the sales, the mortgage had been extinguished and what the petitioners transferred was the full right in the property as mortgage. No doubt, the petitioners state that the payment of Rs. Nine lakhs was made through the purchasers or with their assistance. But this is irrelevant as the payment was made in discharge of the dues of the petitioners and the receipts were made out in their names. It was a payment made by them. The mortgage was not kept alive by any subrogation in favour of the purchasers. The sale was therefore of the property as such without any encumbrance, that is, not of the bare equity of redemption, but of the full right therein. The consideration received was therefore for the property as a whole and not merely for the equity of redemption. Petitioners' case has to fail on this ground itself, though I do not find any substance even otherwise in the contentions raised and argued. 6. The subject matter of the transfer was the right, title and interest of the petitioners in the property. The consideration for the transfer was Rs. 10,33,965/- which was discharged partly by payment in cash (Rs. 1,33,966) and partly by payment to the-Bank (Rs. Nine lakhs). The sale would not have taken place on payment of Rs. 1,33,966/- without payment or without arrangement for payment of another Rs. Nine lakhs to the Bank as that alone will discharge the petitioners of their liability under the mortgage. 10,33,965/- which was discharged partly by payment in cash (Rs. 1,33,966) and partly by payment to the-Bank (Rs. Nine lakhs). The sale would not have taken place on payment of Rs. 1,33,966/- without payment or without arrangement for payment of another Rs. Nine lakhs to the Bank as that alone will discharge the petitioners of their liability under the mortgage. The bargaining between the parties was for the sale deed being executed on the amount of Rs. 10,33,966/-being satisfied to the petitioners and not otherwise. The fact that part of the amount went in discharge of the mortgage is irrelevant as the sale would not have taken place without that payment. The consideration for transfer of a property subject to a mortgage has never been understood as the balance remaining after deduction of the mortgage amount, whether it be with reference to the Stamp Act, the laws relating to transfer of property, registration or otherwise. Whether the mortgage is discharged by payment before the sale, or whether the amount is reserved with the vendee for payment to the mortgagee, the fact remains that it is the money of the vendor already paid or due, that is utilised for the purpose. And it is the vendor's liability that is discharged. The amount paid for discharging the mortgage is thus part of the consideration for the vendor parting with his rights in the property. 7. The consideration for the sale by the petitioners was thus Rs. 10,33,966/- and not this amount reduced by Rs. Nine lakhs. 8. There is no diversion of any amount at source or by overriding title as contended, as the amount of Rs. Nine lakhs had actually reached the petitioners and gone in discharge of their dues. I do not think this contention requires any serious consideration. 9. The further question is whether the amount spent for discharge of the mortgage could be deducted as cost of acquisition of the asset or as cost of any improvement to it, in the computation of the capital gains, under S.48(1)(a)(ii) read with S.55 of the Act. The mortgage in question was created by the petitioners and not by any of their predecessors. The mortgage in question was created by the petitioners and not by any of their predecessors. Discharge of such a mortgage created by the petitioners themselves cannot obviously be part of the cost of acquisition, the mortgage being a post acquisition one; nor for that matter, could it be treated as cost of any improvement to the property. It is just the wiping off of a liability which the petitioners themselves had Created on the property. 10. The matter is really covered by the decision of Balakrishna Eradi & Kochu Thommen, JL in Ambat Echukutty Menon v. Commissioner of Income Tax, 1978 KLT 16 = (1978) ITR 880. In that case, one P was the owner of a property over which he created a mortgage. After his death, his heirs discharged the mortgage. The property was acquired under the Land Acquisition Act and in the computation of the capital gains arising therefrom, the assessee, an heir of P. claimed that the amount spent for discharging the mortgage liability should be deducted either as part of the cost of acquisition of the asset or as cost of improvement thereto. The Bench negatived the contention for reasons which have been succinctly summarised in the head note which I shall extract: "As the capital asset had become - the property of the assessee by succession or inheritance on the death of P, who had acquired the property in December, 1953, under S.49(1) of the Income Tax Act, 1961, the cost of acquisition of the asset is to be deemed to be the cost for which the previous owner P acquired it, as increased by the cost of any improvement of the asset incurred or borne either by the previous owner or the assessee. The original cost of the property was Rs. 49,920/-. Having regard to the definition of "cost of improvement" contained in S.55(1)(b), in order to entitle the assessee to claim a deduction in respect of the cost of any improvement, the expenditure should have been incurred in making any additions or alterations, to the capital asset that was originally acquired by the previous owner. 49,920/-. Having regard to the definition of "cost of improvement" contained in S.55(1)(b), in order to entitle the assessee to claim a deduction in respect of the cost of any improvement, the expenditure should have been incurred in making any additions or alterations, to the capital asset that was originally acquired by the previous owner. Whether the previous owner had mortgaged the property and the assessee and his co-owners cleared off the mortgage so created, it could not be said that they incurred any expenditure by way of effecting any improvement to the capital asset dial was originally purchased by the previous owner." 11. I am in agreement with this view, besides its being binding on me. I am therefore unable to follow the decision of the Gujarat High Court in Commissioner of Income Tax v. Daksha Ramanlal (1992) 197 ITR 123, pressed for acceptance by counsel for the petitioners, in which the question posed for consideration was whether the amount paid by the successors for discharge of a mortgage created by their predecessor was part of the cost of acquisition. The Gujarat High Court answered the question in the affirmative, dissenting from the view taken by this court in Ambat Achukully Menon and by a Full Bench of the Madras High Court in Valliammai v. Commissioner of Income Tax (1981) 127 ITR 713'. In Valliammai, the claim was for deduction of the estate duty paid by the assessee on the death of the original owner, in the computation of the capital gains. Since non-payment of the estate duty did not result in the assessee getting an imperfect or incomplete title, the Full Bench ruled that the estate duty paid was not deductible either as cost of acquisition or as cost of improvement to the asset. 12. Counsel for the petitioners laid great stress on a decision of the Supreme Court in Miss Dhun Dadabhoy Kapadia v. Commissioner of Income Tax (1967) 63 ITR 651, though I do not find any appliability for it to the facts of this case. The assessee in that case relinquished her right to acquire certain right shares in a company of which she was a share-holder, and made a capital gain of Rs.45,262-50 in the process. The assessee in that case relinquished her right to acquire certain right shares in a company of which she was a share-holder, and made a capital gain of Rs.45,262-50 in the process. She sought deduction from this amount, of the capital loss suffered by her by the diminition in value of her shares by reason of the enlarged share holding consequent on the new issue. This was accepted and the capital loss was directed to be deducted from the capital gains. As I stated earlier, this decision holds no analogy for the case on hand. 13.1 therefore hold in concurrence with Ambat Echukutty Menon that the amount spent for discharge of the mortgage is not liable to be deducted in the computation of the capital gains under S.48. For the above reasons the Commissioner of Income Tax was right in passing the order Ext. P6. The writ petition are bereft of any merit. They are dismissed. . There will be no order as to costs.