1 IN HIGH COURT OF JUDICATURE AT MADRAS DATE : 15.06.2015 CORAM HONOURABLE MR. JUSTICE R.SUDHAKAR AND HONOURABLE MS. JUSTICE K.B.K.VASUKI T.C.A. NO. 9 OF 2015 Sri Kanniah Photo Studio No.18A, Nageswaran North Street Kumbakonam. .. Appellant - Vs - Income Tax Officer Ward-I (1) 31, Krishnaswamy Road Gandhi Nagar Kumbakonam. .. Respondent Appeal filed against order dated 16.4.2013 passed by Income Tax Appellate Tribunal, Chennai 'A' Bench, made in ITA No.28/Mds/2011. For Appellant : Mr.R.Sivaraman For Respondents : Mr.J.Narayanasamy JUDGMENT (DELIVERED BY R.SUDHAKAR, J.) Mr.Narayanasamy, learned standing counsel for respondent is directed to take notice for respondent/Department. 2. Aggrieved by order of Tribunal in allowing appeal filed by Revenue, appellant/assessee is before this Court by filing 2 present appeal raising following question of law :- "Whether on facts and in circumstances of case, Appellate Tribunal was right in law in holding that amount of Rs.22,51,220/- paid by appellant to Bank for discharge of mortgage has to be taken as expenses relating to transfer and it is wholly and exclusively incurred for transfer u/s 50 of Income Tax Act, 1961?" 3. facts, in nutshell, are as hereunder :- For assessment year 2005-2006, appellant/assessee filed return of income on 1.2.06 admitting loss of Rs.7,42,240/-. During assessment year in question, appellant sold land along with building at Nageswaran Koil Street, Kumbakonam for Rs.75 Lakhs. appellant had taken mortgage loan on said property with City Union Bank. For clearing mortgage, appellant made one-time settlement with bank in respect of aforesaid loan and paid sum of Rs.22,51,220/- to bank. While computing capital gain, this amount of Rs.22,51,220/- was claimed as expenses by appellant under Section 48(1)(i) of Act. Assessing Officer, in course of assessment, however, held that loan in question had been obtained by mortgaging property long time after acquiring same and, therefore, same is not covered under Section 48(1)(i) of Act and, therefore, disallowed assessee's claim for purpose of computing capital gains. 3 4. Aggrieved by said disallowance, assessee preferred appeal before CIT (Appeals), who, relying upon judgment of Calcutta High Court in case of Gopee Nath Paul & Sons - Vs - Dy. Commissioner of Income Tax (2005 (278) ITR 240) allowed appeal and directed assessing officer to add capital gains in accordance with Section 50 and deleted amount paid by appellant to Bank for removal of encumbrances. 5. Aggrieved by abovesaid order, Department pursued appeal before Tribunal and Tribunal, relying on decision of jurisdictional High Court in case of CIT Vs Vajrapani Naidu (2000 (241) ITR 560), came to hold that decision of jurisdictional court insofar as plea under Section 48(1)(i) would directly cover issue and allowed appeal against which assessee is before this Court by filing present appeal. 6. Mr. Sivaraman, learned counsel appearing for appellant/assessee heavily relied on judgment of Calcutta High Court in Gopee Nath Paul's case (supra) to drive home point that Tribunal erred in disallowing claim in computing capital gains with regard to sum paid by appellant to Bank for discharging mortgage under Section 48(1)(i) r/w Section 50 of Income Tax Act. fact that appellant firm constructed superstructure with help of 4 bank loan and due to its inability to repay loan, on basis of one time settlement arrived at with bank, sale of property had taken place and, therefore, entire amount paid towards discharge of loan should be construed as expenditure incurred wholly and exclusively in connection with said transfer, which fact has not been appreciated by Tribunal in proper perspective. It is further submitted that Tribunal erred in not appreciating fact that entire amount in question was used for purpose of removing encumbrances of mortgage and, therefore, said amount has to be deducted while computing capital gains. It is further submitted by learned counsel for appellant/assessee that in case of divergent views by two different High Courts on similar issue, as in this case, Tribunal should have taken view that is more favourable to assessee, which has not been done in this case. For reasons aforesaid, learned counsel for assessee/appellant sought for setting aside order passed by Tribunal. 7. Per contra, Mr.Narayanasamy, learned standing counsel appearing for respondent/Department vehemently contended that inspite of divergent views of two different High Courts, Tribunal having considered facts of case in depth, by normal rule of precedence, followed decision of jurisdictional High Court in Vajrapani Naidu's case (supra), and allowed appeal and, therefore, no interference is 5 warranted with well considered findings recorded by Tribunal. 8. Heard learned counsel for appellant/assessee and learned standing counsel appearing for respondent/Department and perused materials available on record as also judgments relied on by different authorities to arrive at their respective conclusions. 9. This Court has carefully considered facts in present case as also judgment of this Court as well as Calcutta High Court. We find, on facts, there is sale by present appellant/assessee of land and building for Rs.75 Lakhs, which is not in dispute. Insofar as one time settlement of Rs.22,51,220/= paid to City Union Bank to satisfy mortgage over property, assessee claimed same as expenses incurred in connection with transfer for purpose of computing capital gains under Section 48(1)(i) of Act, which was rejected by Department and upheld by Tribunal. In above backdrop, core issue before this Court is whether such discharge of claim to bank could be considered as expenses in terms of Section 48(1)(i) of Act? 10. For better clarity, Rule 48(1)(i) of Act, on which reliance is placed for claiming disallowance, is quoted hereinbelow :- "Mode of computation. 48. income chargeable under head Capital gains 6 shall be computed, by deducting from full value of consideration received or accruing as result of transfer of capital asset following amounts, namely : (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) cost of acquisition of asset and cost of any improvement thereto. * * * * * * * * *" 11. On careful reading of above provision, it is evident that Section 48 provides that income chargeable under capital gains shall be computed by deducting from full value of consideration received or accruing as result of transfer of capital asset such amounts, viz., expenses, incurred wholly and exclusively in connection with such transfer. object behind such provision is mainly for excluding those expenses incurred wholly or exclusively in connection with transfer of property. facts in present case reveal that for further development of property, loan had been obtained by appellant/assessee from City Union Bank and for purpose of clearing mortgage loan, appellant/assessee had sold property and effect one-time settlement with bank. Assessing Officer had held that since mortgage loan had been long time after acquisition of property, same would not stand covered under Section 48(1) of Act. That being case, it does not appeal to us that explanation relating to discharge 7 of mortgage to bank, as submitted by assessee, can be termed as expenditure, as property had been acquired long time before taking mortgage loan from bank. 12. Tribunal, to come to finding that said discharge of mortgage to bank cannot be termed as expenditure, has placed reliance on jurisdictional Court's decision in Vajrapani Naidu's case (supra). In that case, assessee sold immovable property under 13 sale deeds and bona fide paid certain amounts to creditors of vendor assessee, including mortgages on property, which was subject matter of sale. Income Tax Officer and Commissioner rejected claim for deduction in terms of Section 48(1). While Tribunal reversed view, this Court rejected view of Tribunal, in following manner :- That view of Tribunal is wholly unsustainable. burden had been created by vendor on property sold by him. As burden had been created for his own benefit by offering property as security to his lenders, amounts spent for discharging that burden of vendor whether prior to sale, or at time of sale, by payment to such creditors including mortgagees, directly by vendee cannot be regarded as expenditure wholly and exclusively in connection with transfer. When mortgaged property is sold, if consideration for sale comprises consideration for sale of equity of redemption, and amount required for discharge of mortgage, it is aggregate of both these sums that constitutes consideration for sale. fact that 8 vendee makes payment directly to mortgagee, instead of vendor doing so, after receiving money from vendee, does not make any difference for purpose of determining consideration for sale and extent of capital gain. Supreme Court in case of RM. Arunachalam v. CIT [1997] 227 ITR 222, had occasion to consider question as to whether sum paid by assessee for discharging mortgage by assessee is sum which would go to reduce cost of acquisition. court held that such payment would go to reduce cost of acquisition only where mortgage had not been created by assessee, but was created by person from whom assessee had acquired title and mortgage was subsisting at time title was acquired by assessee. court further observed in that case as under (page 239) : position is, however, different where mortgage is created by owner after he has acquired property, clearing off of mortgage debt by him prior to transfer of property would not entitle him to claim deduction under section 48 of Act because in such case he did not acquire any interest in property subsequent to his acquiring same. It is undisputed that in this case, mortgage had been created by vendor-assessee and amounts paid to other creditors by vendee was for discharge of debts which had been incurred by assessee. amount was paid as part of consideration to sale. distinction that was sought to be made by Tribunal between case where mortgage is discharged by vendor prior to sale and case where discharge of mortgage is effected at time of sale by payment 9 of outstanding amount to mortgagee by vendor and sale free from encumbrances, is untenable. only point of relevance is whether mortgage was created by vendor or whether it subsisted at time of acquisition of title thereto by vendor and was burdened with same at time of such acquisition of title. 13. We find no reason to depart from this finding of this Court in Vajrapani Naidu's case (supra). In present case, mortgage has been created by present appellant/assessee and consequent to sale, assessee has discharged mortgage to City Union Bank. As burden had been created for his own benefit by offering property as security to City Union Bank, amount spent for discharging that burden whether prior to sale, or at time of sale, by way of one-time settlement to Bank, cannot be regarded as expenditure wholly and exclusively in connection with transfer. In present case, discharge was in course of sale. We find that payment of outstanding amount in discharge of mortgage by vendor, viz., appellant herein, cannot partake character of expenditure. It is not case where assessee had discharged mortgage created at time of acquisition of property by present appellant/assessee, to make distinction otherwise. 14. decision of Calcutta High Court in Gopee Nath Paul's case (supra), on facts, is distinguishable and will not apply to facts of present case. In said case, there were two firms and there were 10 common partners. One of firm was suffering suit claim by Allahabad Bank. Simultaneously, another suit was filed between partners of two firms and based on arbitration agreement, suit between partners was concluded on basis of compromise and firms stood dissolved. Receiver was appointed for purpose of selling two firms as going concern. However, same could not be sold as going concern on account of liability of one of firms to bank and, thereafter, based on several orders of court, deposit of Rs.25 Lakhs was made with Court Registry as Fixed Deposit with Allahabad Bank free from loan and attachment until further orders of court. This was done for purpose of effecting transfer of assets of two firms for securing payment of liabilities towards Allahabad Bank by one of firms. property was sold and amount was received and capital gains was assessed in hands of other firm, which claimed expenditure relatable to sum paid to Allahabad Bank under Section 48(1) and in such circumstances, Calcutta High Court came to hold that based on court orders, sale of assets of two firms having taken place and liability of Allahabad Bank was settled consequent to that, therefore, expenditure was incurred wholly and exclusively in connection with transfer and in order to comply with orders of Court. For better clarity, relevant portion of decision is extracted hereunder :- 13. We are supported in our above view by decision 11 in case of CIT v. Shakuntala Kantilal [1991] 190 ITR 56 (Bom) and we are in agreement with view taken in said decision. Reference was also made to case of CIT v. Abrar Alvi [2001] 247 ITR 312 (Bom), wherein, relying on Shakuntala Kantilal [1991] 190 ITR 56 (Bom), it was held that expenditure in removing encumbrance would be deductible in computation of capital gains. However, discharge of mortgage created by assessee after he acquired property would not be deductible . (Emphasis supplied) above observation squarely supports view of this Court that where discharge of mortgage created by assessee after acquiring property, same would not be deductible. abovesaid decision is clearly distinguishable on facts and observation as quoted above in said decision further strengthens view of this Court in regard to amounts which are to be deductible as expenditure. 15. In light of decisions as quoted above, this Court is persuaded to follow reasoning of this Court in Vajrapani Naidu's case (supra), which is squarely applicable to facts of present case and, therefore, we have no hesitation to accept view of this Court in case of Vajrapani Naidu's case (supra). No question of law, much less substantial questions of law arise for consideration in this appeal. 12 16. Accordingly, for reasons aforesaid, this appeal fails and same is dismissed confirming order passed by Tribunal. However, in circumstances of case, there shall be no order as to costs. (R.S.J.) (K.B.K.V.J.) 15.06.2015 Index : Yes/No Internet : Yes/No GLN To 1. Income Tax Officer Ward-I (1) 31, Krishnaswamy Road Gandhi Nagar Kumbakonam. 2. Income Tax Appellate Tribunal Chennai 'A' Bench Chennai. 13 R.SUDHAKAR, J. AND K.B.K.VASUKI, J. GLN T.C.A. NO. 9 OF 2015 15.06.2015 Sri Kanniah Photo Studio v. Income-tax Officer, Ward-I (1), Kumbakonam