Income‑tax‑‑‑

‑‑‑‑Capital gains‑‑‑Computation of capital gains ‑‑‑Assessee‑company under liquidation‑‑‑Sale of property which had been mortgaged to a financial corporation by assessee‑‑‑Repayment of loan is not an expenditure incurred wholly and exclusively in connection with transfer‑‑‑Not deductible while computing capital gains‑‑‑Indian Income Tax Act, 1961, S.48.

The assessee was a private limited company in liquidation. The liquidator sold a property of land alongwith a building for a sum of Rs.10 lakhs. The assessee had taken a loan from the Kerala Financial Corporation on the security of this property and had not repaid it. The liquidator discharged the liability to the extent of Rs.5.,37,940. The assessee claimed this amount as an expenditure incurred wholly and exclusively in connection with the transfer. The Assessing Officer and the Commissioner of Income‑tax (Appeals) rejected the assessee's claim. On second appeal, the Tribunal observed that there is nothing in section 48 of the Income Tax Act, 1961, to exclude expenditure of a capital nature from the expenditure laid out wholly and exclusively in connection with the transfer, that an amount payable for repayment of secured loans was, therefore, deductible under section 48 and that the repayment of loan was in connection with the transfer of property and was covered under section 48 of the Act as an expenditure incurred wholly and exclusively in connection with the transfer. On a reference at the instance of the Revenue:

Held, that the repayment of the loan was not on expenditure incurred wholly and exclusively in connection with the transfer and was not deductible under section 48 while computing capital gains.

Rm. Arunchalam v. CIT (1997) 227 ITR 222 (SC) and V.S.M.R. Jagadishchandran v. CIT (1997) 227 ITR 240 (SC) applied.

Ambat Echukutty Menon v. CIT (1978) 111 ITR 890 (Ker.); CIT v. Attili Narayana Rao (1998) 233 1TR 10 (AP); CIT v. Daksha Ramanlal (1992) 197 ITR 123 (Guj.); CIT v. Thressiamma Abraham (Sint.) (No. 1.) (1997) 227 ITR 802 (Ker.); Idiculla (K.V.) v. CIT (1995) 214 ITR 386 ~Ker.) and Salay Mohamad Ibrahim Sait v. ITO (1994) 210 ITR 700 (Ker.) and Valliammai (S.) (Sint.) v. CIT (1981) 127 ITR 713 (Mad.) ref.

P. K. R. Menon and N. R. K. Nair for the Commissioner.

C. Kochunni Nair and M.C. Madhavan for the Assessee.

JUDGMENT

ARIJIT PASAYAT, C.J.‑‑‑At the instance of the Revenue, the following question has been referred by the Income‑tax Appellate Tribunal, Cochin Bench (in short, "the Tribunal"), to this Court for opinion in terms of section 256(1) of the Income Tax Act, 1961 (in short, "the Act"):

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and fact in holding that the repayment of the loan was in connection with the transfer of the property and hence it will fall under section 45(2) as an expenditure incurred wholly and exclusively in connection with the transfer?"

The factual position, as reflected in the statement of case, is as follows:

The assessee is a private limited company, which was in liquidation. The liquidator sold a property of 17 cents of land alongwith the building thereon situated on M.G. Road, Trivandrum, for a sum of Rs.10 lakhs. The assessee had taken a loan of Rs.8,58,000 ' from the Kerala Financial Corporation (in short, the "Corporation") on the security of this property. The assessee had not repaid the said loan. The liquidator discharged the liability to the extent of Rs.5,37,940. The assessee wanted this amount to be treated as an expenditure while computing the capital gains. The claim was not accepted by the Assessing Officer as well as the first appellate authority, i.e., the Commissioner of Income‑tax (Appeals) (in short, "the CIT(A)"). In the second appeal before the Tribunal, it was contended that the amount was paid in full and final satisfaction of a decree obtained by the Corporation in O.P.. No.54 of 1971, before the District Court, Quilon. The Tribunal observed that a part of the sale consideration payable directly by the transferee to the secured creditors of the assessee has to be deducted from the net consideration for arriving at the exemption under section 54E of the Act. Additionally, under the Transfer of Property Act, 1882 (in short the "T.P. Act"), a mortgagee has an interest in property and he is entitled to the payment of sale proceeds for the discharge of debts and the amount payable directly to a mortgagee can be said to have accrued to him and not to the owner and, therefore, cannot be treated as part or full consideration paid for the transfer of property. It was further observed that there is nothing in section 48 of the Act to exclude 'expenditure of a capital nature from the expenditure laid out wholly and exclusively in connection with the transfer. The amount payable for repayment of secured loans are, therefore, deductible 48. Additionally, it was held that the repayment of the loan was in connection with the transfer of property and was covered under section 45(2) of the Act as an expenditure incurred wholly and exclusively in connection with the transfer. Being aggrieved, the Revenue filed an application for reference of three questions to this Court under section 256(1) of the Act. As indicated supra, one question has been referred.

Learned counsel for the Revenue submitted that the view expressed by the Tribunal is contrary to what has been observed by the Supreme Court in RM. Arunachalam v. CIT (1997) 227 ITR 222 and V.S.M.R. Jagadishchandran (Decd.) v. CIT (1997) 227 ITR 240. Learned counsel for the assessee, on the other hand, referred to the decision of this Court in CIT v. Thressiamma Abraham (Smt.) (No. 1) (1997) 227 ITR 802 and that of the Andhra Pradesh High Court in CIT v. Attili Narayana Rao (1998) 233 ITR 10 to contend that matter is not closed against the assessee as urged. It is fairly conceded by him that section 48 of the Act has no application to the facts in the case and, therefore, to that extent, the Tribunal was not justified in its view. But an alternative argument was advanced by the assessee before the Tribunal to the effect that the Corporation had overriding title over the property and the amount paid to it is clearly relatable to such title. That being the position, the amount was to be excluded.

It is seen that the alternative argument was not considered by the Tribunal, in view of its conclusion that section 48 of the Act had application. In the normal course, we would have asked the Tribunal to consider the alternative argument in view of the conceded position that its conclusions are not supportable as conceded' by the assessee. But we do not think it necessary to do so in view of what has been stated by the apex Court in RM. Arunachalam's case (1997) 227 ITR 222 and V.S.M.R. Jagadischandran's case (1997) 227 ITR 240. The relevant observations in RM. Arunachalam's case (1997) 227 ITR 222 (SC) are as follows (Page 238):

?While we are affirming the impugned judgment of the High Court, we are unable to endorse the view of the Kerala High Court in Ambat Echukutty Menon v. CIT (1978) 111 ITR 880 to which reference has been made by the High Court in the impugned judgment. In that case, the assessee, as one of the heirs, had inherited property from the previous owner who had mortgaged the same during his lifetime and after his death the heirs, including the assessee, had discharged the mortgage created by the deceased. The said property was subsequently acquired under the Land Acquisition Act and. for the purpose of capital gains the assessee sought deduction of the amount spent to clear the mortgage. The High Court held that the capital asset had become the property of the assessee by succession or inheritance on the death of the previous owner under section 49(1) of the Act and the cost of acquisition of the assets is to be deemed to be the cost for which the previous owner acquired it, as increased by the cost of any improvement of the assets incurred or borne either by the previous owner or by the assessee. According to the High Court, having regard to the definition of the expression 'cost of improvement' contained in section 55(1)(b) of the Act, 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 assets that ‑was originally acquired by the previous owner and if 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 that was originally purchased by the previous owner. This decision has been followed in subsequent decisions of the High Court in Salay Mohamad Ibrahim Sait v. ITO (1994) 210 ITR 700 (Ker.) and K.V. Idiculla v. CIT (1995) 214 ITR 386 (Ker.). A contrary view has been taken by the Gujarat High Court in CIT v. Daksha Ramanlal (1992) 197 ITR 123. In taking the view that in a case where the property has been mortgaged by the previous owner during his lifetime and the assessee, after inheriting the same, has discharged the mortgage debt, the amount paid by him for the purpose of clearing off the mortgage is not deductible for the purpose of computation of capital gains, the Kerala High Court has failed to note that in a mortgage there is transfer of an interest in the property by the mortgagor in favour of the mortgagee and where the previous owner has mortgaged the property during his lifetime, which is subsisting at the time of his death, then after his death his heir only inherits the mortgagor's interest in the property. By discharging the mortgage debt his heir who has inherited the property acquires the interest of the mortgagee in the property. As a result ~of such payment made for the purpose of clearing off the mortgage the interest of the mortgagee ‑ in the property has been acquired by the heir. The said payment has, therefore, to be regarded as 'cost of acquisition' under section 48 read with section 55(2) of the Act.' The position is, however, different where the mortgage is created by the owner after he has acquired the property. The clearing off of the mortgage debt by him prior to transfer of the property would not entitle him to claim deduction under section 48 of the Act because in such a case he did not acquire any interest in the property subsequent to his acquiring the same..." (Underlining for Emphasis) '

In V.S.M.R. Jagadishchandran's case (1997) 227 ITR 240 (SC), it was observed as follows (page 243): `

"In Civil Appeals Nos.6098‑6101 of 1983 (RM. Arunachalam v. CIT (1997) 227 ITR 222) filed against the judgment of the Full Bench of the Madras High Court in Smt. S. Valliammai v. CIT (1981) 127 ITR 713 we have examined the correctness of the view of the Kerala High Court in Ambat Echukutty Menon v. CIT (1978) 111 ITR 880 and have held the said decision does not lay down the correct law in so far as it holds that where the previous owner had mortgaged the property during his lifetime the clearing off of the mortgage debt by his successor can neither be treated as cost of acquisition' nor as 'cost of improvement' made by the assessee. It has been held that where‑ a mortgage was created by the previous owner during his time and the same was subsisting on the date of his death, the successor obtains only the mortgagor's interest in the property and by discharging the mortgage debt he acquires the mortgagee's interest in the property and, therefore, the amount paid to clear off the mortgage is the cost of acquisition of the mortgagee's interest in the property which is deductible as cost of acquisition under section 48 of the Act. In the present case, we find that the mortgage was created by the assessee himself. It is not a case where the property had been mortgaged by the previous owner and the assessee had acquired only the mortgagor's interest in the property mortgaged and by clearing the same he had acquired the interest of the mortgagee in the said property ...." (Underlining for Emphasis)

The decision rendered by this Court and the Andhra Pradesh High Court have not taken note of the two decisions of the apex Court referred to above.

In view of the quoted conclusions of the apex Court, the view expressed by this Court and the Andhra Pradesh High Court cannot be held to be applicable. We accordingly answer the question referred in the negative, in favour of the Revenue and against the assessee.

M.B.A./636/FC?????????????????????????????????????????????????????????????????????????????????? Reference answered