Case Law Details
Perfect Thread Mills Ltd Vs. DCIT (ITAT Mumbai)
No deduction allowable when creditor gets overriding title and payments are directly paid to creditors without routing through owner’s accounts
Conclusion: Since there was no diversion of sale proceeds by overriding title, but on the contrary, there was only a mere application of the sale proceeds realised on sale of plots towards the discharge of outstanding loan liability of assessee thus, the consideration from sale of property to the extent of principal component of loan adjusted by the bank could not be treated as ‘diversion of income by overriding title’ and was thus not deductible from the total consideration accrued to assessee from sale of property.
Held: Assessee took a corporate term loan of Rs. 306 lakhs from Kotak Bank (KMBL). Assessee complied with the repayment schedule and repaid the loan till July 2009 however, he became a defaulter from August 2009 onwards. Bank classified the company’s account as NPA and a notice was served as per the provisions of section 13(2) of Securitization and Reconstruction of Financial Assets of Security Interest Act (SARFAESI) on assessee company and its personal guarantors. Bank took over possession of the factory land of assessee and received directly the consideration amounting to Rs. 2,18,00,262/-. The bank adjusted the said realisation ie a sum of Rs. 1,48,24,633/- was adjusted against the principal segment of the loan and Rs. 69,75,629/- was adjusted against the interest segment of this loan. Assessee claimed this interest liability as an allowable expenditure in the accounts of the assessee. Also claimed the net amount of Rs. 1,48,24,633/- as deductible u/s 48 along with the indexed cost of acquisition and improvements. AO contended that when the sale proceeds of mortgaged property were paid to the creditor of assessee, the same were not deductible in computing the capital gains on the said property. AO held that mere making payment by the buyer directly to the creditors without routing through the bank accounts of the land owner, did not grant any right for making claim of deduction. It was held the amount recovered by KMBL could by no stretch of imagination be treated as ‘diversion of income by overriding title’. The principle of ‘diversion of income by overriding title’ applies when the transaction is beyond the control of the assessee due to which assessee has to make commitment to either divert it’s income or part with income earned by it in a particular manner. The principle of ‘diversion of income by overriding title’ has been laid down by the courts to overcome the situation wherein an assessee does not have a free hand on the amount earned by it or is in fact not received by an assessee due to circumstances beyond it’s control. Such principle would not be attracted in cases wherein assessee by his own past action creates a future obligation for himself to utilize the amount in a particular manner. Thus, the claim of the assessee could not be accepted in the facts of the present case. Section 13 of the SARFAESI Act cannot come to the rescue of the assessee. At the time of entering into mortgage agreement assessee was well aware of the consequences of non-payment of loan amount which, inter-alia, included procedure of recovery of amount and sale of mortgage asset by the secured creditor. It was not something new or some unforeseen event which assessee was not aware of. The legal position prevailing prior to SARFAESI Act was also germane even after the enactment of SARFAESI Act. In the present case there was no diversion of sale proceeds by overriding title, but on the contrary, there was only a mere application of the sale proceeds realised on sale of plots towards the discharge of outstanding loan liability of assessee. Thus, the consideration from sale of property to the extent of principal component of loan adjusted by the bank could not be treated as ‘diversion of income by overriding title’ and was thus not deductible from the total consideration accrued to assessee from sale of property.
FULL TEXT OF THE ITAT JUDGEMENT
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