CIT Vs Attili N. Rao (Supreme Court of India)
The Supreme Court allowed the Revenue’s civil appeal against the judgment of the High Court, which had answered the Revenue’s questions against it concerning computation of capital gains on the sale of mortgaged immovable property. The matter related to assessment year 1982-83. The assessee, who carried on abkari business, had mortgaged his immovable property at Waltair to the Excise Department of the State of Andhra Pradesh during financial year 1970-71 as security for amounts of “kits” due to the State. During the relevant assessment year, the State sold the property by public auction, without intervention of the court, to realise its dues. The property fetched Rs. 5,62,980 at the auction. The State deducted Rs. 1,29,020 towards “kits” and interest and paid the balance to the assessee.
The Revenue contended that the assessee was liable to capital gains tax on capital gains of Rs. 3,70,970, having regard to the cost of acquisition of the immovable property. The assessee contended that the amount of Rs. 1,29,020 payable to the State towards “kits” was required to be deducted from the auction amount before computing the capital gain, resulting in capital gain of Rs. 85,130. The Income-tax Officer and the appellate authority rejected the assessee’s position, following which the assessee appealed to the Income-tax Appellate Tribunal.
The Tribunal accepted the assessee’s claim. It considered that the full sale price had two components: the amount attributable to the assessee’s interest in the property and the amount representing arrears of debt and interest due to the State. According to the Tribunal, because the property was subject to a charge or mortgage, the amount realised under that charge or mortgage did not reach the assessee but went to the Government by overriding title.
The High Court, while considering the questions referred to it, noted that the property was undisputedly mortgaged to the State and that the mortgage created an interest in favour of the State. It therefore held that the value of the property had to be reduced to the extent of the interest created in favour of the State by the mortgage. The High Court answered the Revenue’s questions against it, except question No. 3, which it held did not arise for consideration.
The Supreme Court disagreed with both the Tribunal and the High Court. It held that what was sold by the State at the auction was the immovable property belonging to the assessee and, therefore, the price realised from the sale belonged to the assessee. From that price, the State deducted its dues towards “kits” and interest and paid the balance to the assessee. The Court held that the capital gain arose from the immovable property belonging to the assessee and, accordingly, the capital gain and tax had to be computed on the full price realised, less admitted deductions.
Consequently, the Supreme Court answered the first question in the negative and in favour of the Revenue, held that the remaining questions did not arise for consideration, allowed the civil appeal, and set aside the judgment and order under appeal. No order as to costs was made.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
1. The High Court ([1998] 233 ITR 10) answered against the Revenue all the following questions, except question No. 3 which, in the High Court’s view, did not arise for consideration (page 11) :
“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 ?”
2. The Revenue is in appeal by certificate.
3. The assessee has been served but has not chosen to put in an appearance.
4. The assessment year with which we are concerned is the assessment year 1982-83. The assessee carried on abkari business. In the course of the financial year 1970-71 he mortgaged to the Excise Department of the State of Andhra Pradesh immovable property belonging to him at Waltair. He did so to provide security for the amounts of “kits” which were due by him to the State. The State, in the assessment year with which we are concerned, sold the immovable property by public auction, without the intervention of the court, to realise its dues. A sum of Rs. 5,62,980 was realised at the auction. Thereout, the State deducted the amount of Rs. 1,29,020 due to it towards “kits” and interest and paid over the balance to the assessee.
5. The Revenue contended that the assessee was liable to capital gains tax on capital gain in the sum of Rs. 3,70,970, having regard to the cost at which the said immovable property had been acquired by the assessee. According to the assessee, the sum of Rs. 1,29,020 due by him to the State on account of “kits” was required to be deducted from the amount of Rs. 5,57,980 realised at the auction before computing the capital gain. According to him, the capital gain was only Rs. 85,130. Neither the Income-tax Officer nor the appellate authority agreed with the assessee and the assessee went up in further appeal to the Income-tax Appellate Tribunal.
6. The Tribunal upheld the assessee’s claim. According to it, the full sale price realised by the sale of the immovable property had two components; the first represented the price which could be ascribed to the interest of the assessee in the immovable property and the rest represented the arrears of debt and interest due to the State. In its opinion, as there was a clear charge or mortgage over the immovable property, the amount realised under the charge or mortgage was an amount which never reached the hands of the assessee but which reached the Government by overriding title.
7. From out of the judgment and order of the Tribunal, the questions aforestated were placed before the High Court for its consideration. The High Court observed that the undisputed fact was that the immovable property was mortgaged to the State. Thereby, an interest in the property was created in favour of the State. When the immovable property was sold by public auction, its value had to be reduced to the extent of the interest that was created in favour of the State by reason of the mortgage.
8. We are of the view that the Tribunal and the High Court were in error. What was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised therefore belonged to the assessee. From out of that price, the State deducted its dues towards “kits” and interest due from the assessee and paid over the balance to him. The capital gain that the assessee made was on the immovable property that belonged to him. Therefore, it is on the full price realised (less admitted deductions) that the capital gain and the tax thereon has to be computed.
9. In these premises, the first question is answered in the negative and in favour of the Revenue. The other questions do not arise for consideration.
10. The civil appeal is allowed. The judgment and order under appeal is set aside.
11. No order as to costs.
