V.S.M.R.
Jagadishchandran Vs. Commissioner of Income Tax, Madras [1997] INSC 591 (9 July 1997)
S.C.
AARAWAL, D.P. WADHWA
ACT:
HEADNOTE:
S. C.
AGRAWAL, J,:
Special
leave granted.
This
appeal by the assessee is directed against the order dated July 25, 1984 passed
by the madras high Court in T.C. No. 145 of 1983 wherein the High court on an
application filed under section 256 (2) of the Act declined to direct the
Tribunal to state a case and refer the following questions of law to the High
court:- "1. Whether the Tribunal was right in holding that the levy of the
capital gains of Rs. 68,400/- is proper under the facts and circumstances of
the case ?
2.
Whether the Tribunal was right in holding that mortgage debts does not
constitute diversion at source ?
3.
Whether the debts discharged by the applicant on the properties cannot be said
to enhance the cost of acquisition ?" The assessee sold house property No.
22, Chariman Muthurma Iyer Road , Madurai for a sum of Rs. 90,000/- subject to incumbrance
in the assessment year 1975-76 and for the same assessment year he sold plot
No, 1, 3 and half of plot No. 4 in T.S. No. 831/1 for a sum of Rs. 12,600/- The
Income Tax officer computed the capital gains in respect of the said properties
at Rs. 68,400/-. The assessee questioned the computation of capital gains
before the Appellate Assistant commissioner 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
acquisition of the properties and that in any event the debts may be treated as
the cost of obtaining clear title to the property. The Appellate Assistant
Commissioner 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 end, therefore, there was diversion at source on their
basis of such overriding title and the assessee was not liable to charge under
the capital gains in respect of he sale gains of Rs. 68,400/- as computed by
the Income Tax officer. The Tribunal, following the decision of the Kerala High
court in Ambat Echukutty Menon v. commissioner of Income Tax, (1978) 111 ITE
880, and the decision of the madras High Court in commissioner of Income Tax. v.
V. Indira, (1979) 119 ITR 837, 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 question referred to above, the assessee filed an application
under section 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. V. Commissioner of Income
Tax, (1981) 127 ITR 713, and has held that by discharging the mortgage debt
subsisting on the property which was the subject matter of a sale, the assessee
was no either improving or perfecting his title or improving the property in
any manner and, therefore, the amount paid for discharging the morlgage debt
cannot be taken to be for the cost of acquisition as contended by the assessee.
In
Civil Appeals Nos. 6098-6101 of 1983 filed against the judgment of the Full
Bench of the Madras High Court in S. Valliammai & Anr. V. Commissioner of
Income Tax (supra) we have examined the correctness of the view of the Kerala
High Court in ambat Echukutty Menon V. commissioner of Income Tax (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 'Costs of acquisition' nor as 'costs 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 mortgagor's interest in the property and by discharging the
mortgage debt he acquires the mortgagee's interest in the property and,
therefore, the amount paid to clear off the mortgage is the cost of acquisition
of the mortgagee's interest in the property which is deductible as cost of
acquisition under section 48 of the Act, In the present case , we find that the
mortgage was cleated 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 mortgagee by the previous owner and the assessee had acquired only the
mortgagor's interest in the property mortgaged and by clearing the same he had
acquired the interest of the mortgagee in the said property. The question
raised by the assessee in the application submitted under Section 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 to impugned order, we
are in agreement with the order of the High Court dismissing the application
filed by the assessee under section 256(2) of the Act.
The
appeal is, therefore, dismissed. No order as to costs.
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