Commissioner of Income Tax, Visakhapatnam vs Attili Narayana Rao, Visakhapatnam

S.V. Maruthi, J.—At the instance of the Revenue the following questions are referred:

Whether on the facts and in the circumstances of the case and in law, the Appellate Tribunal was correct in holding that the amount realised by the sale of assessee''s interest in the property was only Rs.4,33,960 i.e. Rs. 5,62,980/-minus Rs. 1,29,020?

Whether on the facts and in the circumstances of the case and in law, the Appellate Tribunal was correct in holding that the amount realised under the charge or mortgage by the Government by public auction does not partake the character of full value of consideration" envisaged u/s 48 of the IT. Act ?

Whether on the facts and in the circumstances of the case and in law, the Appellate Tribunal was justified in holding that the amount payable by the assessee in discharge of the mortgage debt to the Government on the sale of property was an expenditure incurred towards the cost of acquisition of the capital asset and deductible u/s 48 of the I.T.Act.

Whether on the facts and in the circumstances of the case and in law, the Appellate Tribunal was correct in holding that the assessee was not vested with full interest in the property sold and capital gains be computed only with reference to the price realised towards his interest with property?

The assessee is an individual. The assessment year is 1982-83. The assessee carried on abkari business during the financial year 1970-71 and 1971-72. He mortgaged his immovable property to the State Excise Department as security for the amounts of kist due to the Government. The property so mortgaged was a house site of 5346 Sq.yards situated near Waltair. The Government u/s 69(1)(b) of the Transfer of Property Act sold the property in public auction without intervention of the Court and realised a sum of Rs.5,62,980/-. Out of the said amount the Government has deducted a sum of Rs.1,29,020/- due to it towards arrears and interest and paid the balance to the assessee. The value of the house site as on 1-1-64 was taken at Rs.35/- per square yard and the total value of the said site came to Rs.1,87,010/- and an amount of Rs.5,000/- was deducted from out of the total sale price while arriving at the gross-total sale price. According to the Revenue, Capital gains should be computed at Rs.3,70,970/- (Rs.5,57,980 - Rs.1,87,010). While the Assessee contended that the amount of Rs.1,29,020/- due to the State Excise Department is also be deducted from Rs. 5,57,980/- before computing the capital gains besides allowing deductions. Thus the net income from the capital gains is Rs.85,130/-.

The Income Tax Officer and the Appellate Authority has not agreed with the assessee and so the assessee went before the Tribunal. The Tribunal agreed with the assessee relying on a judgment of this Court in Commissioner of Income Tax, Andhra Pradesh, Hyderabad Vs. Bilquis Jahan Begum, . Aggrieved by the order of the Tribunal, the Revenue sought reference of the above questions.

The Tribunal held that the assessee held the property subject to mortgage deed or a charge-due to the Government. There is a clear charge or mortgage over the same property which was subsequently sold by public auction. The amount realised under the charge or mortgage is the amount which never reached the hands of the assessee but which reached the Government by over-riding tide. The Income Tax Officer in his assessment order clearly stated that the Excise Department deducted Rs. 1,29,020/- from the sale proceeds and paid the balance only to the assessee.

We agree with the view expressed by the Tribunal. The undisputed feet is that the property was mortgaged to the Government thereby and interest in property is created in favour of the Government. When the property was sold by public auction the value of the property can be reduced to the extent of interest that was created in favour of the Government by mortgage. Therefore, what the assessee got is the price minus the value of the interest of the Government in whose favour the mortgage is created. Therefore, what the assessee got is the value after deducting the amount payable to the Government on the mortgage. Therefore, the Tribunal is right in its view that the capital gains are to be calculated after deducting the amount paid to the Government on the mortgage.

The Judgment in Salay Mohammad Ibrahim Said v. Income Tax Officer, 210 ITR 300 is distinguishable on facts. In that case property was sold free of mortgage. In other words after the property was released from the mortgage the property was sold. Similarly the view expressed in K.V. Idiculla Vs. Commissioner of Income Tax, does not in any way convey different view as that was a case where no charge was created in the property and there was no obligation to pay the amount to the wife of the assessee.

It is not necessary to refer to the judgment of Commissioner of Income Tax, Andhra Pradesh, Hyderabad Vs. Bilquis Jahan Begum, as the Tribunal has relied on the said judgment.

It follows from the above that the questions referred by the Tribunal are to be answered in the affirmative and against the Revenue except question No.3 which does not arise for consideration.

The Reference is answered accordingly.