COMMISSIONER. OF INCOME-TAX VS ATTILI NARAYANA RAO, 2000 PTD-ANDHRA-PRADESH-HIGH-COURT-INDIA 819 (1998)

Income-tax---

----Capital gains ---Deductions---Assessee carrying on Abkari business-- Immovable property mortgaged to State Excise Department as security for amount of Kist due to Government---Government selling property in public auction and realising certain amount---Out of sale proceeds Government deducting amount due to it towards arrears and interest and only balance paid to assessee---Value of property to be reduced to the extent interest was created in favour of Government by mortgage ---Assessee got price minus value of interest of Government---Capital gains to be computed afterdeducting amount paid to Government---Indian Income Tax Act, 1961, S.45.

The assessee carried on Abkari business during the financial years 1970-71 and 1971-72. He mortgaged his immovable property (house site) to the State Excise Department as security for the amounts of Kist due to the Government. The Government under section 69(1)(b) of the Transfer of Property Act, 1882, sold the property in public auction and realised a sum of Rs.5,62,980. Out of the said amount, the Government deducted a sum of Rs.1,29,020 due to it towards arrears and interest and paid the balance to the assessee. The total value of the house site as on January 1, 1964, was taken at Rs.1,87,010 and an amount of Rs.5,000 was deducted from out of the total sale price while arriving at the gross sale price. The Revenue contended that the capital gains should be computed at Rs.3,70,970 (Rs.5,57,980 minus Rs.1,87,010). The assessee contended that the amount of Rs.1,29,020 due to the State Excise Department had also to be deducted from Rs.5,57,980 before computing the capital gains besides allowing deductions. Thus, the net income from the capital gains came to Rs.85,130. The Income-tax Officer and the Appellate Assistant Commissioner did not accept the contention of the assessee. The Tribunal, accepting the contention of the assessee, held that the assessee held the property subject to the mortgage deed or charge due to the Government, which was subsequently sold by public auction, and the amount realised under the charge or mortgage never reached the hands of the assessee but reached the Government by overriding title and that the Income-tax Officer had clearly stated in his assessment order that the Excise Department deducted Rs.1,29,020 from the sale proceeds and paid-only the balance to the assessee. On a reference:

Held, affirming the decision of the Tribunal, that the property was mortgaged to the Government and an interest in the property was created in favour of the Government. When the property was sold by public auction the value of the property had to be reduced to the extent of the interest that was created in favour of the Government by the mortgage. Therefore, what the assessee got was the price minus the value of the interest of the Government in whose favour the mortgage was created. Therefore, what the assessee got was the value after deducting the amount payable to the Government on the mortgage. Therefore, the Tribunal was right in its view that the capital gains had to be calculated after deducting the amount paid to the Government on the mortgage.

Salay Mohamad Ibrahim Sait v. ITO (1994) 210 ITR 700 (Ker.) distinguished.

CIT v. Bilquis Jahan Begum (1984) 150 ITR 508 (AP) and Idiculla (K.V.) v. CIT (1995) 214 ITR 386 (Ker.) ref.

S. R. Ashok for the Commissioner.

M. J. Swamy for the Assessee.

JUDGMENT

MS. S. V. MARUTHI, J.---At the instance of the Revenue the following questions are referred:

"(1) Whether, on the facts and in the circumstances of the case and in law, the Appellate Tribunal was correct in holding that the amount realised by the sale of the assessee's interest in the property was only Rs.4,33,960; i.e., Rs.5,62,980 minus Rs.1,29,020?

(2) Whether, on the facts and in the circumstances of the case and in law, the Appellate Tribunal was correct in holding that the amount realised under the charge or mortgage by the Government by public auction does not partake of the character of full value of consideration envisaged under section 48 of the Income-tax Act?

(3) Whether, on the facts and in the circumstances of the case and in law, the Appellate Tribunal was justified in holding that the amount payable by the assessee in discharge of the mortgage debt to the Government on the sale of property was an expenditure incurred towards the cost of acquisition of the capital asset and deductible under section 48 of the Income-tax Act.?

(4) Whether, on the facts and in the circumstances of the case and in law, the Appellate Tribunal was correct in holding that the assessee was not vested with full interest in the property sold and capital gains be computed only with reference to the price realised towards his interest with property?"

The assessee is an individual. The assessment year is 1982-83. The assessee carried on abkari business during the financial years 1970-71 and 1971-72. He mortgaged his immovable property to the State Excise Department as security for the amounts of kist due to the Government. The property so mortgaged was a house site of 5346 sq. yards situated near Waltair. The Government under section 69(l)(b) of the Transfer of Property Act, 1982, sold the property in public auction without intervention of the Court and realised a sum of Rs.5,62,980. Out of the said amount, the Government has deducted a sum of Rs.1,29,020 due to it towards arrears and interest and paid the balance to the assessee. The value of the house site as on January 1, 1964, was taken at Rs. 35 per square yard and the total value of the said site came to Rs.1,87,010 and an amount of Rp.5,000 was deducted from out of the total sale price while arriving at the gross total sale price. According to the Revenue, capital gains should be computed at Rs.3,70,970 (Rs.5,57,980--Rs:1,87,010), while the assessee contended that the amount of Rs.1,29,020 due to the State Excise Department is also to be deduction from Rs.5,57,980 before computing the capital gains besides allowing deductions. Thus the net income from the capital gains is Rs.85,130.

The Income-tax Officer end appellate authority have not agreed with the assessee and so the assessee went before the Tribunal. The Tribunal agreed with the assessee relying on a judgment of this Court in CIT v. Bilquis Jahan Begum (1984) 150 ITR 508. Aggrieved by the order of the Tribunal, the Revenue sought reference of the above questions.

The Tribunal held that the assessee held the property subject to the mortgage deed or a charge due to the Government. There is a clear charge or mortgage over the same property which was subsequently sold by public auction. The amount realised under the charge or mortgage is the amount which never reached the hands of the assessee but which reached the Government by overriding title. The Income-tax Officer in his assessment order clearly stated that the Excise Department deducted Rs.1,29,020 from the sale proceeds and paid the balance only to the assessee.

We agree with the view expressed by the Tribunal. The undisputed fact is that the property was mortgaged to the Government and thereby an interest property is created in favour of the Government. When the property was sold by public auction the value of the property can be reduced to the extent of interest that was created in favour of the Government by mortgage. Therefore, what the assessee got is the price minus the value of the interest of the Government in whose favour the mortgage is created. Therefore, what the assessee got is the value after deducting the amount payable to the Government on the mortgage. Therefore, the Tribunal is right in. its view that the capital gains are to be calculated after deducting the amount paid to the Government on the mortgage.

The judgment in Salay Mohamad Ibrahim Sait v. ITO (1994) 210 ITR 700 (Ken.), is ,distinguishable on the facts. In that case the property was sold free of mortgage. In other words, after the property was released from the mortgage the property was sold. Similarly, the view expressed in K. V. Idiculla v. CIT (1995) 214 ITR 386 (Ken.) does not in any way convey a different view as that was a case where no charge was created in the property and there was no obligation to pay the amount to the wife of the assessee.

It is not necessary to refer to the judgment of Bilquis Jahan Begum (1984) 150 ITR 508. (AP), as the Tribunal has relied on the said judgment.

It follows from the above that the questions referred by the Tribunal are to be answered in the affirmative and against the Revenue, except question No. 3 which does not arise for consideration.

The reference is answered accordingly.

M.B.A./3323/FCReference answered.