M/s C.K. Sunder v. The Income-tax Officer, Ward-3(1), Nagpur
[Citation -2016-LL-1004-9]

Citation 2016-LL-1004-9
Appellant Name M/s C.K. Sunder
Respondent Name The Income-tax Officer, Ward-3(1), Nagpur
Court ITAT-Nagpur
Relevant Act Income-tax
Date of Order 04/10/2016
Assessment Year 2007-08
Judgment View Judgment
Keyword Tags full value of consideration • long-term capital gain • allowable deduction • sale consideration • immovable property • business interest • valuation report • overriding title • payment of loan • create a charge • finance company • issue of notice • capital asset • mortgage debt • term loan
Bot Summary: The Apex Court, when the property belonging to the assessee is sold in discharge of the mortgage created by the assessee himself irrespective of the amount actually received by the assessee, the capital gain has to be computed on the full price realised on transfer of the asset. Thereafter, if the assessee transfers the said capital asset with the consent of the bank for Rs. 1 lakh and pays the entire amount of Rs. 1 lakh to the bank to discharge the mortgage created by the assessee, then it is not open to the assessee to contend that the capital gains tax is not leviable on transfer of the property because the assessee has not received a pie on transfer of that capital asset. Now in these circumstances, in my considered opinion, the assessee s action of sale of the property and receipt by the bank of the entire sale consideration is only an application of income by the assessee. Where the property acquired by the assessee is subject to the mortgage created by the previous owner, the assessee acquires absolute interest in that property only after the interest created in the property in favour of the mortgagee is transferred to the assessee, that is after the discharge of mortgage debt. In such a case, the expenditure incurred by the assessee to discharge the mortgage debt created by the previous owner to acquire absolute interest in the property is treated as 'cost of acquisition' and is deductible from the full value of consideration received by the assessee on transfer of that property. Where the assessee acquires a property which is unencumbered the assessee gets absolute interest in that property on acquisition. In my considered opinion, as held by the Hon ble jurisdictional High Court in the above case, the assessee was fully responsible for capital gains on the portion of sale proceed which were paid directly to the bank and not to the assessee.


ITA No. 473/Nag/2016. IN INCOME TAX APPELLATE TRIBUNAL, NAGPUR BENCH, NAGPUR BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER. (S.M.C.) I.T.A. No. 473/Nag/2016 Assessment Year : 2007-08. M/s C.K. Sunder, Income-tax Officer, Nagpur. Vs. Ward-3(1), Nagpur. PAN AETPS5932A. Appellant. Respondent. Appellant by : Shri Mukesh Agrawal. Respondent by : Smt. Agnes P. Thomas. Date of Hearing : 03-10-2016 Date of Pronouncement : 4th Oct., 2016 ORDER. This appeal by assessee is directed against order of learned CIT(Appeals)-II, Nagpur dated 23-06-2016 and pertains to assessment year 2007-08. grounds of appeal read as under : 1. learned CIT(A)-II erred in confirming addition of Rs.39,21,351/- as Long Term Capital Gain when entire receipts was diverted by overriding title in favour of Shikshak Sahakari Bank Ltd. 2. learned CIT(A)-II erred in confirming addition of Rs.39,21,351/- to assessees total income on basis of valuation report which is incomplete. 3. learned CIT(A)-II erred in holding that facts of assessee s case is covered by judgement of Hon. Bombay High Court in case of Roshanbabu Mohammad Hussain, whereas 2 ITA No. 473/Nag/2016. facts and circumstances sof assessee s case is clearly distinguishable. 2. Brief facts of case are as under : return of income declaring total income of Rs.1,71,590/- was filed on 30-08-2007. assessment in this case was completed u/s 143(3) vide order dated 19-11-2009 accepting returned income. Subsequently it was found that appellant had sold his immovable property situated at plot No. 30, Mauza, Khamla, Dist. Nagpur vide sale deed dated 30-10-2006 for consideration of Rs.51,00,000/- and that appellant had not offered corresponding income of capital gain. Consequently AO reopened assessment order by issue of notice u/s 148 of I.T. Act. 3. During course of re-opened proceedings, it was noted by AO that partnership firm by name of M/s Annapurna Engineering Corporation (AEC) had availed term loan from Shikshan Sahakari Bank Ltd. (SSBL), Nagpur and said property of appellant was mortgaged as security for said loan. It was further noted by AO that M/s Annapurna Engineering Corporation failed to repay loan amount and in order to recover loan, SSBL sold property mortgaged by appellant wherein appellant was vendor and SSBL was consenting party. appellant received amount of Rs.51,00,000/- as sale consideration. AO required appellant to explain as to why said sale consideration should not be brought to tax as Long Term Capital Gain. 4. assessee responded as under : a. I stood as guarantor for loan availed by Mls Annapurna Engg. Corporation from Shikshak Sahakari Bank Ltd Nagpur & mortgaged my property to said bank. b. However, Annapurna Engg. Corporation failed in making repayment of loan amount & therefore Shikshak Sahkari Bank Ltd (the mortgagee bank) who had create charge on my property decided to dispose of my property by way of transferring title to he purchaser. c. I have no business interest in Mls Annapurna Engineering corporation who ad availed loan from Shikshak Sahakari Bank Ltd (the mortgagee bank) d. I have not received any amount of Rs. 51 lakh from purchasers e. I have not received single rupee from purchase 3 ITA No. 473/Nag/2016. f. entire amount was paid by purchaser directly to Shikshak Sahakai Bank Ltd. for buying property g. I have filed my Income Tax return for assessment year 2007-08 vide acknowledgement number 031/019926 dt. 30/08/2007. No other income tax return for assessment year 2007-08 was filed h. I have no other income other than my pension for F. Y. 2006-07. In fact have no other income from any other source other than my pension after my retirement & ti I date. i. I have no other property j. I have already submitted case law: Additional Commissioner of Income Tax vis Glad Investment (P) Ltd. 9th June 2006 Equivalent citation: 2006 1021TD 227 Delhi (2006) 105 ITJ 218 De/hi 5. However, AO was not convinced. He held that assessee was guarantor of firm M/s Annapurna Engineering Corporation which has availed term loan of Rs.1.69 crores from Shikshak Sahakari Bank Ltd. partners of said firm were family members of assessee being three sons and wife of assessee. Thus AO held that it was to provide benefit and protection of family members from legal wrangle, that assessee had agreed to sell his property. AO further placed reliance upon jurisdictional High Court decision in case of CIT vs. Roshanbabu Mohammad Hussain 144 Taxman 720. Accordingly AO held that assessee has himself voluntarily mortgaged his property and hence is liable for capital gains tax. 6. Upon assessee s appeal, learned CIT(Appeals) affirmed AO s action. He held as under : 4.5 In this regard, it is to be stated that case of appellant is more properly covered by decision of jurisdictional Bombay High Court in case of CIT Vs. Roshanbabu Mohammed Hussain (supra) which also involved disposal of property by appellant who was guarantor in respect of firm wherein family member was director. In said case appellant was shareholder of M Ltd in which her husband was director. 'M' Ltd. raised loan from bank and for repayment of which assessee stood as one of guarantors and assessee offered her plot of land as security for repayment of loan. As 'M' Ltd. failed to pay loan, bank filed -a suit against company. Subsequently, consent terms were arrived at in said suit, as 'per which, bank was to have negative lien over assessee's plot of land which was .given as collateral security for loan. said lien was to remain operative till bank's dues were fully paid. Thereafter, assessee after obtaining permission from bank, sold part of land for consideration and deposited same with bank towards discharge of debt. assessee claimed that long-term capital gain arising on sale of her land was exempt from capital gains tax. However, Assessing Officer completed assessment under section 143(3) and taxed said amount. On appeal: ".16. contention that assessee has not received pie from transfer 4 ITA No. 473/Nag/2016. and entire sale proceeds realised on transfer of mortgaged asset has been appropriated towards discharge of mortgage is also without any merit. As held by. Apex Court, when property belonging to assessee is sold in discharge of mortgage created by assessee himself, then, irrespective of amount actually received by assessee, capital gain has to be computed on full price realised (less admissible deduction) on transfer of asset. To illustrate, suppose assessee mortgages its capital asset and obtains loan of Rs. 1 lakh from Bank. Thereafter, if assessee transfers said capital asset with consent of bank for Rs. 1 lakh and pays entire amount of Rs. 1 lakh to bank to discharge mortgage created by assessee, then it is not open to assessee to contend that capital gains tax is not leviable on transfer of property because assessee has not received pie on transfer of that capital asset . .17. As regards decisions of this court in case of Shakuntala Kantilal (supra) followed in case of Abrar Alvi (supra) and decisions of Kerala High Court in case of Smt. Thressiamma Abraham (supra) which are strongly relied upon by counsel for assessee, we are of opinion that said decisions are no longer good law in light of subsequent decisions of Apex Court referred to hereinabove . .18. For all aforesaid reasons, we answer question set out at para 2 in negative i.e., in tev our of revenue and against e ss es se:" 4.6. facts as stated in above case of Cl T Vs Roshanbabu Mohammed Hussain are almost identical to case under consideration and same is judgement of Jurisdictional High Court. This is in contrast to Delhi High Court to in case of Addl. CIT Vs Glad Investment Pvt Ltd. wherein appellant was Finance Company and had pledged its shares as collateral security for loans taken by third party. As stated above in case of CIT Vs Roshanbabu Mohammed Hussain appellant was shareholder of company in which her husband was Director. Also, there is no basis to come conclusion that department has accepted decision of Delhi High Court and has not contested this matter further. 4.7 findings given in case of CIT Vs Roshanbabu Mohammed Hussain (supra) are unambigous and are directly relevant for case under consideration. provisions of Section 45 bring to charge of tax, "any profits or gains arising from transfer of capital asset". levy is only if profits or gains arise to assessee, not otherwise. contention that assessee has not received pie from transfer and entire sale proceeds realised on transfer of mortgaged asset has been appropriated towards discharge of mortgage is without any merit. It is only logical that when property belonging to appellant is sold in discharge of mortgage created by appellant himself, then, irrespective of amount actually received by him, capital gain has to be computed on full price realised (less admissible deduction) on transfer of asset. This view is categorically endorsed by CIT Vs Roshanbabu Mohammed Hussain (supra). 4.8 In case under consideration, since it is evident that appellant had mortgaged his property to further interest of his family members and had subsequently agreed to sale thereof, I see no reasons to interfere with findings of Ld. AO of bringing to tax capital gain on sale consideration received by appellant in lieu of sale of said property. Taking into consideration above facts additions made by Ld. AO amounting to Rs. 39,21,351/- is hereby confirmed. These grounds are therefore dismissed. 5 ITA No. 473/Nag/2016. 7. Against above order assessee is in appeal before ITAT. 8. Learned counsel of assessee reiterated submissions made before authorities below. He submitted that assessee has not received single rupee from sale. entire amount was paid by purchaser directly to bank. Learned counsel also placed reliance upon decision of ITAT, Delhi Bench in case of Addl. CIT vs. Glad Investment Pvt. Ltd. 105 TTJ 210. He further submitted that decision of Hon ble jurisdictional High Court relied upon by Revenue in case of Roshanbabu Mohammed Hussain (supra) was not applicable to facts of case. 9. Per contra learned D.R. relied upon orders of authorities below and decision of Hon ble jurisdictional High Court (supra). 10. I have carefully considered submissions and perused records. I find that assessee had mortgaged his property as guarantor for loan to firm in which his sons and wife were partners. Due to default in payment of loan assessee sold property and entire sale consideration was received by bank. Now in these circumstances, in my considered opinion, assessee s action of sale of property and receipt by bank of entire sale consideration is only application of income by assessee. By no stretch of imagination it can be considered to be diversion by overriding title. It was only upon signing of sale deed by assessee that sale was formalized. Hence it was assessee who has sold property proceeds where of were directly received by bank as payment of loan taken by firm for whom assessee had stood guarantor and whose partners were of sons and wife of assessee. he encumbrance or mortgage or charge on property was created by assessee himself. It is not case that said property when acquired by assessee contained encumbrances or charges or mortgage of property. On property which was free from all encumbrances 6 ITA No. 473/Nag/2016. assessee himself created encumbrance by mortgaging same as guarantor for loans to be received by firm in which his relatives were partners. Now when there was default in payment of loan and bank invoked assessee s guarantee and hence to discharge such encumbrance assessee signed sale deed and entire sale proceeds was applied for discharging of debt of said firm. In these circumstances assessee is clearly liable to capital gains on entire sale proceeds subject to permissible deductions. aforesaid view is perfectly in accordance with exposition of Hon ble jurisdictional High Court in case of CIT vs. Roshanbabu Mohammed Hussain 275 ITR 231. I may gainfully refer to exposition of th Hon ble jurisdictional High Court in this case as contained in para 14 to 19 as under : 14. From aforesaid decisions of apex Court, it is clear that there is distinction between obligation to discharge mortgage debt created by previous owner and obligation to discharge mortgage debt created by assessee himself. Where property acquired by assessee is subject to mortgage created by previous owner, assessee acquires absolute interest in that property only after interest created in property in favour of mortgagee is transferred to assessee, that is after discharge of mortgage debt. In such case, expenditure incurred by assessee to discharge mortgage debt created by previous owner to acquire absolute interest in property is treated as 'cost of acquisition' and is deductible from full value of consideration received by assessee on transfer of that property. However, where assessee acquires property which is unencumbered, then, assessee gets absolute interest in that property on acquisition. When assessee transfers that property, assessee is liable for capital gains tax on full value (less admitted deductions) realised, even if encumbrance is created by assessee himself on that property and assessee is under obligation to remove that encumbrance for effectively transferring property. In other words, expenditure incurred by assessee to remove encumbrance created by assessee himself on property which was acquired by assessee without any encumbrance is not allowable deduction under s. 48 of IT Act.. 15. Further it is true that in none of aforesaid cases, apex Court has specifically held that repayment of mortgae debt created by assessee himself is not expenditure incurred for effectively transferring property. However, it is implicitly held by apex Court that expenditure incurred to remove encumbrance created by assessee himself on property on which assessee had absolute interest is not expenditure incurred for effectively transferring property as contemplated under s. 48 of IT Act. It is not in dispute that in both appeals which are before us, property on which encumbrance was created by assessee was acquired by assessee free from encumbrances. Therefore, in light of decisions of apex Court referred to hereinabove, it must be held that assessee is not entitled to deduction of expenditure incurred to above encumbrance created by assessee himself. 7 ITA No. 473/Nag/2016. 16. contention that assessee has not received pie from transfer and entire sale proceeds realised on transfer of mortgaged asset has been appropriated towards discharge of mortgage is also without any merit. As held by apex Court, when property belonging to assessee is sold in discharge of mortgage created by assessee himself, then, irrespective of amount actually received by assessee, capital gain has to be computed on full price realised (less admissible deduction) on transfer of asset. To illustrate, suppose assessee mortgages its capital asset and obtains loan of Rs. 1 lakh from bank. Thereafter, if assessee transfers said capital asset with consent of bank for Rs. 1 lakh and pays entire amount of Rs. 1 lakh to bank to discharge mortgage created by assessee, then it is not open to assessee to contend that capital gains tax is not leviable on transfer of property because assessee has not received pie on transfer of that capital asset. 17. As regards decisions of this Court in case of Shakuntala Kantilal (supra) followed in case of Abrar Alvi (supra) and decisions of Kerala High Court in case of Smt. Thressiamma Abraham (supra) which are strongly relied upon by counsel for assessee, we are of opinion that said decisions are no longer good law in light of subsequent decisions of apex Court referred to hereinabove. 18. For all aforesaid reasons, we answer question set out at para 2 in negative, i.e., in favour of Revenue and against assessee. 19. Accordingly, appeal No. 755 of 2000 filed by Revenue is allowed and appeal No. 603 of 2000 filed by assessee is dismissed. However, there will be no order as to costs. 11. In my considered opinion, as held by Hon ble jurisdictional High Court in above case, assessee was fully responsible for capital gains on portion of sale proceed which were paid directly to bank and not to assessee. Hence ratio from this decision is clearly applicable on facts of this case. Hence distinction sought by learned counsel of assessee is not correct. Further more ITAT Delhi Bench decision referred by learned counsel of assessee need not be considered in view of decision of Hon ble jurisdictional High Court mentioned herein above in view of doctrin of judicial precedents. Accordingly in background of aforesaid discussion and precedent, I do not find any infirmity in order of learned CIT(Appeals). Accordingly I uphold same. 8 ITA No. 473/Nag/2016. 12. In result, this appeal filed by assessee stands dismissed. Order pronounced in Open Court on this 4th day of Oct., 2016. Sd/- (SHAMIM YAHYA) ACCOUNTANT MEMBER. Nagpur, Dated: 4th Oct. , 2016. Copy forwarded to : 1. M/s C.K. Sunder, G-01, Mangalmurthy Apartment, Opp. Mokhare College, Lakeshwar Nagar, Jaitala, Nagpur-440 036. 2. I.T.O., Ward-3(1), Nagpur. 3. C.I.T.- Nagpur. 4. CIT(Appeals), -II, Nagpur. 5. D.R., ITAT, Nagpur. 6. Guard File True Copy By Order Assistant Registrar, Income Tax Appellate Tribunal, Nagpur Bench, Nagpur. Wakode. M/s C.K. Sunder v. Income-tax Officer, Ward-3(1), Nagpur
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