Commissioner of Income Tax vs N. Vajrapani Naidu

R. Jayasimha Babu, J.—The question referred to us at the instance of the Revenue is as follows :

Whether, on the facts and in the circumstances of the case, the amount paid for discharging the debts due on mortgage of the property in

connection with the transfer of the property should be deducted in computing the capital gains arising from the transfer of the property ?

The assessee who is an individual sold the immovable properties belonging to him under 13 sale deeds in the previous year ended March 31,

1982, for a total consideration of Rs. 6,64,000. Rs. 3,79,500 out of that sum was paid by the vendee to the creditors of the vendor including the

mortgagees of the properties which was the subject-matter of the sale, The assessee claimed that the amount so paid directly to his creditors

including the mortgagee was deductible for the purpose of computing capital gains. His claim was rejected by the Income Tax Officer as also by

the Commissioner.

The Tribunal on further appeal took the view that the amount so paid by the vendee to the creditors of the vendor including the mortgagee, was

deductible in the computation of capital gains, as in its view that amount which was the expenditure incurred wholly and exclusively in connection

with the transfer u/s 48 of the Act was deductible. The Tribunal held that what has to be kept in view was the concept of real income and if the

assessee had lost part of the income because of the burden on the property, it is only the benefit that was actually received by the assessee that

would go into the computation of capital gains.

That view of the Tribunal is wholly unsustainable. The burden had been created by the vendor on the property sold by him. As the burden had

been created for his own benefit by offering the property as security to his lenders, the amounts spent for discharging that burden of the vendor

whether prior to sale, or at the time of sale, by payment to such creditors including the mortgagees, directly by the vendee cannot be regarded as

expenditure wholly and exclusively in connection with the transfer.

When the mortgaged property is sold, if the consideration for the sale comprises the consideration for the sale of equity of redemption, and the

amount required for the discharge of mortgage, it is the aggregate of both these sums that constitutes the consideration for the sale. The fact that the

vendee makes the payment directly to the mortgagee, instead of the vendor doing so, after receiving the money from the vendee, does not make

any difference for the purpose of determining consideration for the sale and the extent of capital gain.

The Supreme Court in the case of Rm. Arunachalam Vs. Commissioner of Income Tax, , had an occasion to consider the question as to

whether the sum paid by the assessee for discharging the mortgage by the assessee is a sum which would go to reduce the cost of acquisition. The

court held that such payment 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. The court further observed in that case as under (page 239) :

The position is, however, different where the mortgage is created by the owner after he has acquired the property, the clearing off of the mortgage

debt by him prior to transfer of the property would not entitle him to claim deduction u/s 48 of the Act because in such a case he did not acquire

any interest in the property subsequent to his acquiring the same.

It is undisputed that in this case, a mortgage had been created by the vendor-assessee and the amounts paid to the other creditors by the vendee

was for the discharge of the debts which had been incurred by the assessee. The amount was paid as part of the consideration to the sale. The

distinction that was sought to be made by the Tribunal between the case where the mortgage is discharged by the vendor prior to the sale and the

case where the discharge of the mortgage is effected at the time of the sale by payment of the outstanding amount to the mortgagee by the vendor

and the sale free from encumbrances, is untenable. The only point of relevance is whether the mortgage was created by the vendor or whether it

subsisted at the time of acquisition of title thereto by the vendor and was burdened with the same at the time of such acquisition of title.

The question referred to us is, therefore, answered in favour of the Revenue and against the assessee.