Income‑tax‑‑‑

‑‑‑‑Capital gains‑‑‑Sale of mortgaged property‑‑‑Part of sale consideration paid for discharge of mortgage ‑‑‑Vendee paying vendor's creditors‑‑‑Amount paid for discharge of mortgage not deductible in computation of capital gains‑‑‑Indian Income Tax Act, 1961, S.48.

The assessee sold some immovable properties during the previous year ending March 31, 1982, and in the computation of capital gains claimed that the sums paid by the vendee to the creditors of the vendor including the mortgagees of the properties which were the subject‑matter of sale was deductible in the computation of capital gains. The Income‑tax Officer rejected the claim but the Tribunal upheld the claim. On a reference:

Held, the burden had been created by the vendor for his own benefit by offering the properties as securities to his lenders. The amounts spent for discharging that burden of the vendor, whether prior to sale or at the time of sale or payment to such creditors including the mortgagees directly by the vendee could not be regarded as expenditure wholly and exclusively in connection with the transfer. Accordingly, the amounts paid for discharging debts due on mortgage of the property in connection with the transfer of property were not deductible in the computation of capital gains.

RM. Arunchalam v. CIT (1997) 227 ITR 222 (SC) rel.

Mrs. Chitra Venkataraman for the Commissioner.

P.P.S. Janarthana‑Raja for the Assessee.

JUDGMENT

R. JAYASIMHA BABU, J.‑‑‑The question referred to us at the instance of the Revenue is as follows:

"Whether, on the facts and in the circumstances of the case, the amount paid for discharging the debts due on mortgage of the property in connection with the transfer of the property should be deducted in computing the capital gains arising from the transfer of the property?"

The assessee who is an individual sold the immovable properties belonging to him under 13 sale‑deeds in the previous year ended March 31, 1982, for a total consideration of Rs.6,64,000. Rs.3,79,500 out of that sum was paid by the vendee to the creditors of the vendor including the mortgagees of the properties which was the subject‑matter of the sale. The assessee claimed that the amount so paid directly to his creditors including the mortgagee was deductible for the purpose of computing capital gains. His claim was rejected by the Income‑tax Officer as also by the Commissioner.

The Tribunal on further appeal took the view that the amount so paid by the vendee to the creditors of the vendor including the mortgagee, was deductible in the computation of capital gains, as in its view that amount which was the expenditure incurred wholly and exclusively in connection with the transfer under section 48 of the Act was deductible. The Tribunal held that what has to be kept in view was the concept of real income and if the assessee had lost part of the income because of the burden on the property, it is only the benefit that was actually received by the assessee that would go into the computation of capital gains.

That view of the Tribunal is wholly unsustainable. The burden had been created by the vendor on the property sold by him. As the burden had been created for his own benefit by offering the property as security to his e lenders, the amounts spent for discharging that burden of the vendor whether prior to sale, or at the time of sale, by payment to such creditors including the mortgagees, directly by the vendee cannot be regarded as expenditure wholly and exclusively in connection with the transfer.

When the mortgaged property is old, if the consideration for the sale comprises the consideration for the sale of equity of redemption, and the amount required for the discharge of mortgage, it is the aggregate of both these sums that constitutes the consideration for the sale. The fact that the vendee makes the payment directly to the mortgagee, instead of the vendor doing so, after receiving the money from the vendee, does not make any difference for the purpose of determining consideration for the sale and the extent of capital gain.

The Supreme Court in the case of RM. Arunachalam v. CIT (1997) 227 ITR 222, had an occasion to consider the question as to whether the sum paid by the assessee for discharging the mortgage by the assessee is a sum which would go to reduce the cost of acquisition. The Court held that such payment would go to reduce the cost of acquisition only where the mortgage had not been created by the assessee, but was created by the person from whom the assessee had acquired the title and the mortgage was subsisting at the time title was acquired by the assessee. The Court further observed in that case as under (page 239):

"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. "

It is undisputed that in this case, a mortgage had been created by the vendor‑assessee and the amounts paid to the other creditors by the vendee was for the discharge of the debts which had been incurred by the assessee. The amount was paid as part of the consideration to the sale. The distinction that was sought to be made by the Tribunal between the case where the mortgage is discharged by the vendor prior to the sale and the case where the discharge of the mortgage is effected at the time of the sale by payment of the outstanding amount to the mortgagee by the vendor and the sale free from encumbrances, is untenable. The only point of relevance is whether the mortgage was created by the vendor or whether it subsisted at the time of acquisition of title thereto by the vendor and was burdened with the same at the time of such acquisition of title.

The question referred to us is, therefore, answered in favour of the Revenue and against the assessee.

M.B.A./630/FC

Reference answered.