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Case Law Details

Case Name : Kanniah Photo Studio Vs ITO (Madras High Court)
Appeal Number : TCA No. 9 of 2015
Date of Judgement/Order : 15/06/2015
Related Assessment Year :

Brief of the Case

In the present facts of the Case the Hon’ble High Court while interprating section 48 held that while calculating Capital gain the expenses made will only be considered if it is made “wholly or exclusive” for that property. Also, the Hon’ble High Court held that The Hon’ble Tribunal was right in taking into consideration of the Judgement of Jurisdictional High Court.

Facts of the Case

The appellant in this case sold land along with building for Rs.75 Lakhs. The appellant had taken mortgage loan on the said property from Bank. For clearing the mortgage, the appellant in respect of the aforesaid loan paid a sum of Rs.22,51,220 to the bank. While computing the capital gain, this amount of Rs.22,51,220 was claimed as expenses by the appellant under Section 48 (1) (i) of the Act. According to the AO, the loan in question had been obtained by mortgaging the property long time after acquiring the same and, therefore, the same is not covered under Section 48 (1) (i) of the Act and, therefore, disallowed the assessee’s claim for the purpose of computing the capital gains.

Held by CIT(A)

The ld. CIT(A) relied upon the judgment of the Calcutta High Court in the case of Gopee Nath Paul & Sons – Vs – Dy. Commissioner of Income Tax (2005 (278) ITR 240) and allowed the appeal and also directed the assessing officer to add the capital gains in accordance with Section 50.

Held by the Hon’ble Tribunal

The Hon’ble Tribunal while relying on the Judgment of CIT Vs Vajrapani Naidu 2000 (241) ITR 560, held that the decision of the jurisdictional court insofar as the plea under Section 48 (1)(i) would directly cover the issue and allowed the appeal of the Revenue.

Contention of the Asseessee

The ld. Counsel for the assessee relied on the judgment of the Calcutta High Court in Gopee Nath Paul’s case (supra) and contended that the Tribunal erred in disallowing the claim in computing capital gains with regard to the sum paid by the appellant to the Bank for discharging the mortgage under Section 48 (1) (i) r/w Section 50 of the Income Tax Act. The fact that the appellant firm constructed superstructure with the help of bank loan and due to its inability to repay the loan, on the basis of the one time settlement arrived at with the bank, the sale of the property had taken place and, therefore, the entire amount paid towards the discharge of the loan should be construed as expenditure incurred wholly and exclusively in connection with the said transfer, which fact has not been appreciated by the Tribunal in proper perspective. It was further submitted by the learned counsel for the appellant that in case of divergent views by two different High Courts on a similar issue, the Tribunal should have taken the view that is more favourable to the assessee.

Contention of the Revenue

The ld. Counsel for the Revenue contended that that inspite of divergent views of two different High Courts, the Tribunal have considered the facts of the case by normal rule of precedence, following the decision of the Jurisdictional High Court in Vajrapani Naidu’s case (supra), and allowed the appeal.

Held by Hon’ble High Court

The Hon’ble High Court after taking into consideration the language of Section 48 observed that the object behind such a provision is mainly for excluding those expenses incurred wholly or exclusively in connection with the transfer of the property.

The Hon’ble High Court while discussing the Judgment of Vajrapani Naidu’s case (supra), in which the Reliance was made on RM. Arunachalam v. CIT [1997] 227 ITR 222, in which it was held that the sum paid by the assessee for discharging the mortgage is a sum which would go to reduce the cost of acquisition only where the mortgage had not been created by the assessee, but was created by the person from whom the assessee had acquired the title and the mortgage was subsisting at the time title was acquired by the assessee. Further, it was held that when the mortgage is created by the owner after he has acquired the property, the clearing off the mortgage debt by him prior to transfer of the property would not entitle him to claim deduction under section 48 of the Act because in such a case he did not acquire any interest in the property subsequent to his acquiring the same.

Therefore, by relying on the above the Hon’ble High Court in this case observed that mortgage has been created by the assessee and consequent to the sale, the assessee has discharged the mortgage to the Bank. The burden was created for his own benefit by offering the property as security to the Bank, the amount spent for discharging that burden whether prior to sale, or at the time of sale, by way of one-time settlement to the Bank, cannot be regarded as expenditure wholly and exclusively in connection with the transfer. In the present case, the discharge was in the course of sale and the payment of the outstanding amount in discharge of mortgage by the Appellant cannot be considered as an expenditure.

Accordingly, the appeals were dismissed.

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