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

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