Expenses to discharge mortgage debt created by previous owner allowable as cost of acquisition

Balram Shitaldas Ahuja Vs ITO (ITAT Pune)

The assessee’s sole substantive grievance contested during the course of hearing challenges correctness of both the lower authorities action disallowing its mortgage expenditure of Rs.55 lakhs as cost of acquisition with the corresponding indexation.

Distinction between the mortgage created by the previous owner which is discharged by the successor/assessee and the latter in his individual capacity – 

There is a distinction between the obligation to discharge the mortgage debt created by the previous owner and the obligation to discharge the mortgage debt created by the assessee himself. 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 mortgage 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. However, where the assessee acquires a property which is unencumbered, then, the assessee gets absolute interest in that property on acquisition. When the assessee transfers that property, the assessee is liable for capital gains tax on the full value (less admitted deductions) realised, even if an encumbrance is created by the assessee himself on that property and the assessee is under an obligation to remove that encumbrance for effectively transferring the property. In other words, the expenditure incurred by the assessee to remove the encumbrance created by the assessee himself on the property which was acquired by the assessee without any encumbrance is not allowable deduction under section 48 of the Income Tax Act.

FULL TEXT OF THE ORDER OF ITAT PUNE

This assessee’s appeal for assessment year 2011-12 arises against the CIT(A)-1 Kolhapur’s order dated 06.03.2020 passed in case no.ITBA/APL/S/250/2019-20/1026214501(1) involving proceedings u/s 143(3) r.w.s. 147 of the Income Tax Act, 1961; in short the Act.

Heard both the parties. Case file perused.

2. The assessee’s sole substantive grievance contested during the course of hearing challenges correctness of both the lower authorities action disallowing its mortgage expenditure of Rs.55 lakhs as cost of acquisition with the corresponding indexation, made in the course of assessment dated 12.12.2018 as upheld in CIT(A)’s order in issue.

A few relevant fact need to be noticed hereunder.

3. There is hardly only dispute between the parties that the assessee has sold his capital asset i.e. C.S. No.2838/8, B Ward, Subhash Road, Mahalaxmi Nagar, Kolhapur on 08.04.2010 for Rs.49 lakhs in the capacity of joint of co-owner along with his brother Shri Prem Shitaldas N. Ahuja. He thereafter sought to claim the impugned mortgage amount of Rs.55 lakhs as deduction on the ground that his father had executed the same. It is further an admitted fact that this mortgage was neither in the nature of cost of acquisition or cost of improvement, as the case may be, but claimed as a deduction in his individual capacity so as to improve the title. It is in this factual backdrop that both the learned lower authorities have disallowed the impugned claim since not falling in either of the two foregoing allowable heads.

This is what leaves the assessee aggrieved.

4. I have given my thoughtful consideration to vehement rival contentions against and in support of impugned mortgage disallowance and find no merit in revenue’s stand. Hon’ble jurisdictional high court in (2005) 144 Taxman 720 (Bom.) CIT vs. Roshanbabu Mohammed Hussein Merchant has drawn a distinction between the mortgage created by the previous owner which is discharged by the successor/assessee and the latter in his individual capacity as under :-

“14. From the aforesaid decisions of the Apex Court, it is clear that there is a distinction between the obligation to discharge the mortgage debt created by the previous owner and the obligation to discharge the mortgage debt created by the assessee himself. 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 mortgage 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. However, where the assessee acquires a property which is unencumbered, then, the assessee gets absolute interest in that property on acquisition. When the assessee transfers that property, the assessee is liable for capital gains tax on the full value (less admitted deductions) realised, even if an encumbrance is created by the assessee himself on that property and the assessee is under an obligation to remove that encumbrance for effectively transferring the property. In other words, the expenditure incurred by the assessee to remove the encumbrance created by the assessee himself on the property which was acquired by the assessee without any encumbrance is not allowable deduction under section 48 of the Income Tax Act.”

I adopt the foregoing detailed discussion mutatis mutandis to delete the impugned disallowance of Rs.55 lakhs in very terms. Ordered accordingly.

5. It further emerges before parting that the assessee in instant appeal suffers from 57 days delay which involves the CIT(A)’s order passed on 06.03.2020 followed by outbreak of Covid-19 pandemic. The assessee had admittedly filed the instant appeal during the same only. The impugned delay stands condoned therefore.

6. This assessee’s appeal is allowed in above terms.

Order pronounced on this 26^th day of May, 2022.