Case Law Details
PCIT Vs Rinki Shashikant Gandhi (Gujarat High Court)
In a significant ruling, the Gujarat High Court recently addressed the appeal by the Principal Commissioner of Income Tax (PCIT) against Rinki Shashikant Gandhi. The case involved a dispute over the deduction of expenses related to property transactions for Assessment Year 2013-14. The court’s decision provides clarity on the applicability of Section 263 of the Income Tax Act, 1961, concerning the correctness of assessment orders.
The dispute arose when the PCIT challenged the Assessing Officer’s decision to allow a deduction of Rs. 1.5 crore paid to Titco Ltd. for clearing mortgage debts related to a property sale. The PCIT contended that this allowance was not in accordance with established legal principles, citing previous judicial precedents such as the V.S.M.R. Jagdadishchandran case. This case law stipulates that expenses for clearing mortgage debts cannot be claimed as a deduction unless certain conditions are met, particularly regarding ownership and financial arrangements related to the property.
The Tribunal’s decision, which favored the taxpayer, was based on distinguishing factors from the cited precedent. It emphasized that the property in question did not have a pre-existing mortgage by the taxpayer but was encumbered due to a personal guarantee. Therefore, the payment made to Titco Ltd. was necessary for clearing the property’s title, ensuring marketability and transferability.
In its analysis, the Tribunal also highlighted procedural aspects under Section 263, affirming that the Assessing Officer had conducted due diligence and considered the relevant facts during the assessment process. This scrutiny included inquiries into the nature of expenses claimed and their compliance with tax laws governing deductions.
Section 263 not invocable if Assessing Officer had conducted due diligence and considered the relevant facts during the assessment process.
The High Court’s decision upheld the Tribunal’s findings, dismissing the PCIT’s appeal. It concluded that the assessment order was neither erroneous nor prejudicial to the interests of revenue, given the factual and legal intricacies involved in the case. This judgment reinforces principles of fairness and procedural correctness in tax assessments, ensuring that deductions are granted appropriately under the law.
The Gujarat High Court’s judgment in PCIT Vs Rinki Shashikant Gandhi signifies a crucial interpretation of income tax deductions concerning property transactions. By allowing the deduction for expenses incurred in clearing mortgage debts, the court reaffirms the importance of factual accuracy and legal precedent in tax assessments.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. Heard learned Senior Standing Counsel Mr. Nikunt Raval for the appellant and learned advocate Mr. Manish J. Shah for the opponent on caveat.
2. By this Tax Appeal under section 260A of the Income Tax Act,1961 [hereinafter to be referred to as ‘the Act,1961’] the Revenue has proposed the following questions of law arising out of the order dated 05.07.2023 passed by the Income Tax Appellate Tribunal, “C” Bench, Ahmedabad [for short ‘the Tribunal’] ITA No. 1333/AHD/2018 for A.Y. 2013-14:
“a) Whether the Hon’ble Tribunal has erred in setting aside the order u/s 263 of the Income Tax Act,1961?
b) Whether on the facts and in the circumstances of the case and in law, Hon’ble Tribunal has erred in not applying the ratio of the Hon’ble Apex Court decision in case of [2023] 149 taxmann.com 115 (SC) Commissioner of Income Tax vs. Paville Projects (P.) Ltd.”
3. The Principal Commissioner of Income Tax, Circle-2(1)(2), Vadodara [for short ‘PCIT’] initiated proceedings under section 263 of the Act,1961 in case of the respondent-assessee.
4. The assessee filed his return of income for the Assessment Year 2013-14 declaring total income of Rs. 25,000/- which was assessed under section 143(3) of the Act,1961 by determining the total income of Rs. 3,15,05,000/-. During the year under consideration, the assessee sold an immovable property for a sale consideration of Rs. 5,50,00,000/- and out of the same, deducted expenses incurred in connection with the transfer, a sum of Rs. 3,25,00,000/- being payment made to various illegal occupants and a sum of Rs. 1,50,00,000/- being the payment made to Titco Limited for removing the charge created on the property. The Assessing Officer did not accept the claim of Rs. 3,25,00,000/- towards payment to illegal occupants. However, the Assessing Officer allowed the deduction for payment of Rs. 1,50,00,000/- made to Titco Ltd.
5. The PCIT, therefore issued a show-cause notice on the ground that the Assessing Officer had incorrectly allowed the deduction of payment to Titco Ltd amounting to Rs. 1.5 cores in view of the decision of the Apex Court in case of V.S.M.R. Jagdadishchandran vs Commissioner of Income Tax reported in 227 ITR 240 wherein it is held that where the property was not mortgaged by previous owner but by assessee himself, then the amount paid to discharge mortgage debts could not be treated as cost of acquisition so as to allow same as deduction. Accordingly, the PCIT set aside the assessment order on the ground that the order has been passed without making inquiry and verification which should have been made in terms of Explanation 2 to section section 263 of the Act,1961.
6. Being aggrieved, the assessee preferred appeal before the Tribunal on the ground that the facts of the case of V.S.M.R. Jagdadishchandran (supra) are distinguishable as the assessee did not create any mortgage on the property sold by him and the assessee had not taken any finance or loan from Titco Ltd and the land sold by the assessee was under attachment due to the personal guarantee given by the assessee and the account was settled by the purchaser by making a direct payment to Titco Ltd towards liability clearance of the land sold by the assessee.
7. The Tribunal, after considering the decision on merits cited at bar has also analyzed the scope of section 263 of the Act,1961 by relying on the decisions of the Delhi High Court in case of CIT vs Sunbeam Auto reported in 332 ITR 167 (Del.)and in case Commissioner of Income Tax vs. Gabriel India Ltd reported in [1993] 203 ITR 108 in which the Delhi High Court has held as under:
“6.5 We observe that this is not a case where there was an omission on part of the AO to examine this aspect of disallowance of the sum of Rs. 1.50 crores while computing capital gains tax. The AO had put a specific question before the assessee during the course of assessment and has taken the assessee’s reply on record. Further the assessing officer had also discussed this aspect as part of assessment order. Therefore, in our view, this is not a case where no enquiry has been made by the assessee officer during the course of assessment proceedings. It is also not the case of the Pr. CIT that the Ld. AO failed to apply his mind to the issues on hand taken a view which was not legally plausible in the instant facts. As held by various courts, Principal CIT cannot in 263 proceedings set aside an assessment order merely because he has different opinion in the matter. In our view, s 263 of the Act does not visualise a case of substitution of the judgement of the Principal CIT for that of the Assessing Officer who passed the order unless the decision is held to be wholly erroneous. As noted in various judicial precedents highlighted above the Principal CIT on perusal of the records may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income Tax Officer. That would not vest the Commissioner with power to re-visit the entire assessment and determine the income himself at a higher figure. We thus find no error in the order of Ld. AO so as to justify initiation of 263 proceedings by the Ld Pr. CIT.”
8. Learned Senior Standing Counsel Mr. Nikunt Raval for the appellant submitted that the PCIT has rightly followed the decision of the Apex Court in case of V.S.M.R. Jagdadishchandran (supra) to held that the assessee could not have claimed the deduction of Rs. 1.50 crore paid to Titco Ltd for discharge of the mortgage as the cost of improvement for computation of the capital gain under section 48 of the Act,1961. It was submitted that the Tribunal therefore has committed an error by allowing the appeal of the assessee by distinguishing the decision of the Apex Court in case of V.S.M.R. Jagdadishchandran (supra) and the Tribunal could not have interfered with the findings arrived at by the CIT (Appeals) by setting aside the assessment order on the limited ground of not following the decision of the Apex Court by the Assessing Officer resulting into assessment being erroneous and prejudicial to the interest of the Revenue.
9. On the other hand, learned advocate Mr. Manish Shah appearing for the respondent-assessee submitted that the Tribunal has taken overall view considering the aspects on merits as well as the powers of the PCIT under section 263 of the Act,1961. It was submitted that the facts of the case before the Apex Court is distinguishable which is also evident from the order passed by the Apex Court wherein the Apex Court did not interfere in the order passed by the High Court on the fact that the mortgage was created by the assessee himself in the case before the Apex Court whereas in the facts of the case, the mortgage was not created by the assessee but was created by the Titco Ltd which was discharged by the assessee and to that extent, the assessee received less sale consideration. It was also submitted that for the discharge of the mortgage, the assessee could not have sold the property as having clear and marketable title. It was therefore submitted that no interference may be made in the impugned order of the Tribunal.
10. Having heard learned advocates for the respective parties and considering the impugned order as well as the facts and the findings arrived at by the Tribunal, it is clear the Apex Court in the case of V.S.M.R. Jagdadishchandran (supra) has dismissed the appeal in the facts of the said case on the ground that the mortgage was created by the assessee himself. Relevant facts and the findings arrived at by the Apex Court are as under:
“3. The assessee sold a house property No. 22, Chairman Muthurama Iyer Road, Madurai for a sum of Rs. 90,000 subject to incumbrance in the asst. yr. 1975-76 and for the same assessment year he sold plot Nos. 1, 3 and half of plot No. 4 in T.S. No. 831/1 for a sum of Rs. 12,600. The ITO computed the capital gains in respect of the said properties at Rs. 68,400.
The assessee questioned the computation of capital gains before the AAC and contended that the debts in respect of which mortgage had been executed were discharged by the buyer himself out of the sale proceeds, that the debts should be considered as increase in cost of acquisition of the properties and that in any event the debts may be treated as improvement to the property or as the cost of obtaining clear title to the property. The AAC rejected the said contention. He, however, upheld the contention of the assessee that there was an overriding title of the creditors in respect of the sale proceeds and, therefore, there was diversion at source on the basis of such overriding title and the assessee was not liable to charge under the capital gains in respect of the sale of the properties and, therefore, he deleted the capitals gains of Rs. 68,400 as computed by the ITO. The Tribunal, following the decision of the Kerala High Court in Ambat Echukutty Menon vs. CIT (1 (1978) 111 ITR 880 (Ker) , and the decision of the Madras High Court in CIT vs. V. Indira (1979) 119 ITR 837 (Mad) held that clearing of the mortgage debt could neither be treated as cost of acquisition nor as an cost of improvement made by the assessee. The Tribunal, therefore, held that the deduction of the capital gains was not justified. Since the Tribunal declined to refer to the High Court the questions referred to above, the assessee filed an application under s. 256(2) of the Act before the High Court which has been rejected by the impugned order. The High Court has relied upon the decision of the Full Bench of the High Court in S. Valliammai & Anr. vs. CIT (1981) 127 ITR 713 (Mad) and has held that by discharging the mortgage debt subsisting on the property which was the subject-matter of a sale, the assessee was not either improving or perfecting his title or improving the property in any manner and, therefore, the amount paid for discharging the mortgage debt cannot be taken to be for the cost of acquisition as contended by the assessee.
4. In Civil Appeals Nos. 6098-6101 of 1983 [since reported as R. M. Arunachalam etc. vs. CIT (1997) 141 CTR (SC) 348 filed against the judgment of the Full Bench of the Madras High Court in S. Valliammai & Anr. vs. CIT (supra) we have examined the correctness of the view of the Kerala High Court in Ambat Echukutty Menon vs. CIT (supra) and have held that the said decision does not lay down the correct law in so far as it holds that where the previous owner had mortgaged the property during his life time the clearing off the mortgage debt by his successor can neither be treated as cost of acquisition nor as cost of improvement made by the assessee. It has been held that where a mortgage was created by the previous owner during his time and the same was subsisting on the date of his death, the successor obtains only the mortgagors interest in the property and by discharging the mortgage debt he acquires the mortgagees interest in the property and, therefore, the amount paid to clear off the mortgage is the cost of acquisition of the mortgagees interest in the property which is deductible as cost of acquisition under s. 48 of the Act. In the present case, we find that the mortgage was created by the assessee himself. It is not a case where the property had been mortgaged by the previous owner and the assessee had acquired only the mortgagors interest in the property mortgaged and by clearing the same he had acquired the interest of the mortgagee in the said property. The questions raised by the assessee in the application submitted under s. 256(2) of the Act do not, therefore, raise any arguable question of law and the said application was rightly rejected by the High Court. In the circumstances, even though we are unable to agree with the reasons given in the impugned order, we are in agreement with the order of the High Court dismissing the application filed by the assessee under s. 256(2) of the Act.”
11. In the facts of the present case, the findings of fact arrived by the Tribunal is to the effect that the assessee did not create any mortgage on the property but he had given a personal guarantee to Titco Ltd for discharge of the debt for which there was a charge over the property and for release of the mortgage on the personal guarantee of the assessee, the amount was paid by the buyer directly to the Titco Ltd. It is also not in dispute that the assessee did not avail any loan on mortgage of the property sold by him.
12. In view of such factual aspect, the Tribunal has rightly held that the assessment order by the Assessing Officer is neither erroneous nor prejudicial to the interest of the Revenue.
13. In view of the above, we are of the opinion that no question of law much less any substantial question of law arises from the impugned order of the Tribunal. The Appeal is accordingly dismissed.
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