Giju Purapadathil Mathai Vs CIT (Kerala High Court)
The Kerala High Court dismissed the appellant’s challenge against a capital gains assessment arising from the sale of his property. The property had been equitably mortgaged to South Indian Bank under Section 58(f) of the Transfer of Property Act to secure loan facilities obtained by another person. Following default, the Bank sold the property and appropriated the entire sale consideration towards the loan account. The appellant contended that since he received no part of the sale proceeds, he should not be treated as having derived a capital gain or be subjected to income-tax liability.
The Income Tax Department relied on the Supreme Court’s decision in CIT v. Attili N.Rao[2022] 252 ITR 880, which had been noticed by the ITAT. The Department submitted that capital gains liability arises even where property is sold by an authority for recovery of debt.
The High Court noted that the appellant admittedly owned the property and had voluntarily created the mortgage, understanding that the property could be sold if the loan was not repaid. The Court observed that capital gains depend on whether the property was sold for a value higher than its acquisition cost. It stated that the prescribed formula involving the fair market value of the base year and the Cost Inflation Index would apply.
Relying on the principle stated in Attili N.Rao, the Court held that whether property is sold voluntarily or through a distress sale arising from a mortgage or attachment does not alter the computation of capital gains. The fact that the sale proceeds were fully adjusted against the loan did not change the position. The Court further observed that if the property had been sold for less than its cost price, there would have been no capital gain and no tax assessment. Since the property had appreciated in value, the assessment was sustained.
Finding no error in the ITAT’s order, the High Court declined to interfere and dismissed the appeal.
Cases Discussed
- CIT v. Attili N.Rao (Supreme Court), [2022] 252 ITR 880
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
The appellant is aggrieved because he has been served with Capital Gains Assessment qua the sale of his property, which has been confirmed by the officers of the Department of Taxes in hierarchy and by the learned Income Tax Appellate Tribunal, Kochi Bench (‘ITAT’ for short).
2. Sri.Muraleedharan – learned counsel for the appellant, explained that the property involved was, in fact, mortgaged by his client equitably, to secure certain loan facilities availed of by another, from the South Indian Bank, (‘Bank’ for short). He conceded that the liability to the bank had escalated and that they consequently, brought the property to sale; finally to appropriate the entire sale consideration into the loan account. He asserted that, in such circumstances, his client did not obtain a single penny out of the sale consideration; and hence cannot be construed to have been benefited by any Capital Gain, to be mulcted with liability under the Income Tax Act (‘the Act’ for short). He alleged that, however, both the Assessing Authority and the First Appellate Authority found against his client illegally, which unfortunately was confirmed by the learned ITAT; thus constraining him to approach this Court through this appeal.
3. Syriac Tom – learned Junior Standing Counsel for the Income Tax Department, submitted that the afore submissions of Sri.Muraleedharan cannot hold water because, the Honourable Supreme Court, in CIT v. Attili N.Rao[2022] 252 ITR 880 – which has been noticed by the learned ITAT also – has declared the law without doubt that, even if the property is sold by the State for recovery of debt, its owner becomes liable for the Capital Gain. He argued that, therefore, in such circumstances, this appeal is an abuse of process and experimental.
4. There is force in the afore submissions of Sri.Syriac Tom because, the property in question is unreservedly admitted to be owned by the appellant/ assessee. According to him, he had mortgaged the property equitably, under the provisions of Section 58(f) of the Transfer of Property Act, to the South Indian Bank, to secure a loan facility which had been obtained by someone else. Obviously, the appellant was aware that if the loan is to be defaulted, his property would be put to sale; and hence, by creating the mortgage, he had voluntarily agreed to have the equity of redemption at the disposal of the ‘Bank’.
5. Concededly, the loan became in default and the ‘Bank’ put the property to sale. The proceeds are stated to have been fully adjusted against the loan account.
6. The question, therefore, if the appellant would be liable to Capital Gain will solely depend upon if there was gain on the value of the property.
7. It is well settled, without requirement of expatiation, that when a property is sold for a price higher than it was acquired, it would attract Capital Gain thus to be exigible to income tax; and that for this, the formula involving the fair market value of the base year multiplied by the Cost Inflation Index (CII) stipulated in the Act would have to be applied.
8. The factum of the property having been sold in distress sale by the State or by any other authority, on the strength of legally enforceable attachments or mortgages, are no longer res integra since, as rightly argued by Sri.Syriac Tom, in Attili N.Rao, the Honourable Supreme Court has held as under;
“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 therefor belonged to the assessee. From out of that price, the State deducted its dues towards “kist” 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. The logic behind the afore declaration is rather easy to see, namely that, whether the property is sold by the owner voluntarily, or by any other Authority through distress sale on account of subsisting mortgage or attachment, the resultant consideration and Capital Gain can only be accounted against the owner alone. The difference qua a voluntary transaction, and a distress sale, would have no significance, when the computation of Capital Gain is to be made, because, either way, any gain on the value of the property, employing the afore mentioned formula, would surely fall upon the owner and no one else.
10. The factum of the appellant in this case having obtained no amount from the sale is not on account of any reason that can be attributed to any other person but to himself, since he created the mortgage knowing fully well that if there is a default in the payment in to the loan account, his property would be sold.
11. Obviously, had the property been sold for a value which is lesser than the cost price, then there would have been no Capital Gain and no tax would have been assessed. It is solely because, there is an obvious escalation in price which the property obtained through the sale, that the assessment has been made.
12. In such circumstances, we see no reason to intervene; and find no error in the order of the learned ITAT.
This appeal is consequently dismissed.
