1. This appeal filed by the assessee relates to the assessment year 1978-79. According to the facts arising in this case, the assessee sold a property at Anna Nagar for a sum of Rs. 3,20,000. Deducting the cost of Rs. 2,42,780 and brokerage of Rs. 16,775, the capital gain on the same was worked out at Rs. 60,507. Before the ITO, the assessee contended that a mortgage loan of Rs. 42,000 due to the Life Insurance Corporation (LIC) and paid directly by the purchaser to the LIC should be deducted from the capital gains. The ITO rejected the contention of the assessee stating that it was not a liability which could be deducted from the capital gains. Thus, the assessment was made by the ITO on a total income of Rs. 20,430. While completing the assessment, the ITO took the sale consideration of the property for the purposes of capital gains at Rs, 3,03,225 (after deducting brokerage) even though the assessee has admitted the same at Rs. 2,67,225 and exemption under Section 54E of the Income-tax Act, 1961 ('the Act') has been allowed at a lower figure compared to the claim of the assessee. Aggrieved, the assessee filed an appeal before the AAC.2. Before the AAC, the assessee contended that the mortgage loan due to the LIC is an outgoing from out of the sale proceeds and as such it should be deducted from the consideration received. According to the assessee, the net consideration received by the assessee was Rs. 2,61,225 as against Rs. 3,03,225 adopted by the ITO. The assessee further submitted that since the loan was discharged by the purchaser by direct payment to the LIC, the assessee never received the amount and should, therefore, not be called upon to pay tax on that amount.
Accordingly, he requested that the capital gains may be computed by taking the net sale consideration at Rs. 2,61,225. On hearing the parties, the AAC held as under : The purpose for which the loan was taken from LIC is not known. If it is taken for the acquisition of the property, it is already included in the cost of acquisition and if it is taken for some other purposes, I fail to understand how it can be claimed as a deduction in computing the capital gains. Now, for the purpose of Section 54E, 'net consideration' has been defined as full value of consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer. It is quite clear from this definition that only expenditure incurred in connection with the transfer can be deducted to arrive at the net consideration. I am, therefore, of the view that the Income-tax Officer was right in not allowing the claim for deduction of the mortgage loan due to the LIC in computing the capital gains. The appeal, therefore, fails on this count.
3. The learned Counsel appearing for the assessee before us made the following submissions : (i) the net sale consideration was only Rs. 2,61,225 as admitted by the assessee and not Rs. 3,03,225 as assessed by the ITO, (ii) the mortgage loan of Rs. 42,000 due to the LIC was an outgoing from out of sale proceeds and as such it should be deducted for ascertaining the net sale consideration, (iii) since the loan was discharged by direct payment to the LIC by the vendee, the assessee did not receive the full consideration at all, (iv) the word 'expenditure' should be given a broad meaning so as to include all outgoings and payments by and on behalf of the assessee, (v) the assessee should not be called upon to pay tax on the amount which he had not actually received, (vi) the capital gains is to be computed by taking only the net sale consideration as the assessee could not deposit the entire sale consideration in specified securities since he did not receive the entire amount.
4. By way of additional ground, the learned Counsel appearing for the assessee made the following submission : "The Commissioner (Appeals) erred in not allowing the submission of the assessee that the amount paid to the LIC in discharge of the mortgage is part of the cost of acquisition/ cost of improvement of the asset and, hence, should have been allowed as a deduction under Section 48 of the Income-tax Act." The departmental representative objected to this additional ground being raised. However, since this appears to be an alternative plea on the same set of facts already on record, we permit the learned Counsel appearing for the assessee to raise this additional ground. We have also heard the learned departmental representative, who supported the order passed by the AAC.5. The fact remains that the assessee was originally the owner of a plot of land admeasuring two grounds and 120 sq. ft. having purchased the site alone by public auction from the Tamil Nadu Housing Board. The allotment of this plot of land is evidenced by a letter dated 20-6-1972. Thereafter he put up a construction thereon and executed a mortgage deed in favour of the LIC for raising a loan of Rs. 50,000.
The mortgage loan was obtained for the purpose of construction according to the recitals in the said deed. Subsequently, the assessee entered into a sale agreement for the sale of the property in question on 4-4-1977. The sale consideration was agreed to be at Rs. 3,20,000.
Clause 10 of the said agreement states as under : The vendor states that the property is subject to a mortgage in favour of the Life Insurance Corporation of India and he shall arrange to pay the same from and out of the advance received from the purchaser, so that at the time of the sale, the property shall be free from any encumbrance and any attachment or otherwise free from any defect by way of Us pendens, etc.
Accordingly, the purchaser paid Rs. 30,000 to the LIC by a cheque drawn on the Indian Overseas Bank, Anna Nagar, Madras, to discharge the outstanding mortgage loan. From the facts obtained, it was seen that the assessee himself has paid Rs. 12,000 by way of interest on the said mortgage loan to the LIC. Thereafter, the sale deed was executed on 25-7-1977 for a sum of Rs. 3,20,000. The LIC in its letter dated 16-6-1977 requested the Sub-Registrar of Assurances, West Madras, requesting him to register the endorsement of the discharged mortgage deed dated 27-6-1977. The assessee has shown the calculation of net capital gain amounting to Rs. 6,889 in comparison with the capital gain arrived at by the ITO at Rs. 11,675.
6. Thus, according to the learned Counsel appearing for the assessee, the mortgage loan of Rs. 42,000 should be allowed as a deduction in the sale consideration. Inasmuch as the mortgage loan was discharged by the purchaser directly, according to the learned Counsel, the assessee did not receive the full consideration as stated in the sale deed.
According to him, this must be considered as an expenditure and the 'expenditure' should be given a broad meaning to include all outgoings and payments made by -on behalf of the assessee. To illustrate the meaning of the word 'expenditure', he relied upon a decision of the Supreme Court in the case of Indian Molasses Co. (P.) Ltd. v. CIT  37 ITR 66 and another judgment of the Supreme Court in the case of CIT v. Nainital Bank Ltd.  62 ITR 638 and yet another judgment of the Madras High Court in the case of Pereira and Roche v. CIT  61 ITR 371. He also made a point of reference in this respect to the meaning of the word 'expenditure' defined in the Law Dictionary by Biswas at p. 285. The learned Counsel also invited our attention to Section 2(h) of the Expenditure Tax Act, 1957, in this respect.
7. In common parlance a gain on transfer of any asset would be represented by the difference between its sale price and purchase cost.
Section 48 of the Act elaborates the same in respect of capital gains computation. It provides to be placed on the credit side the full value of the consideration received or accruing as a result of the transfer of the capital asset and on the debit side (i) the expenditure incurred wholly and exclusively in connection with such transfer and (ii) (a) the cost of acquisition of the capital asset and (b) the cost of any improvement thereto. The resultant figure, if the balance is on the debit side, shall represent capital gain and if on the credit side shall represent the capital loss.
8. In order to construe that what was paid to discharge the mortgage loan with the LIC is an expenditure, the learned Counsel appearing for the assessee relied upon a decision of the Madras High Court in the case of CIT v. A. Venkataraman  Tax 65(3) 119. In that case, the Madras High Court held that the payment made to the tenants to obtain the vacant possession was an expenditure incurred wholly and exclusively in connection with the agreement of sale which preceded the transfer and in fulfilment of the condition of sale. The amount paid was, therefore, deductible as an expenditure under Section 48(1).
9. Another decision relied upon by the learned Counsel was that in the case of CIT v. C.V. Soundararajan  150 ITR 80 (Mad.). In that case, the purchaser paid a sum of Rs. 60,000 to the mother of the assessee in order to purchase her right of residence to enable the assessee to sell the property in question with full title. On these facts, the High Court held that the assessee did not have the benefit of the said sum of Rs. 60,000 when the interest of the mother in the property in question had been purchased by getting the relinquishment for a consideration of Rs. 60,000 and, hence, the said amount could not be taken as consideration paid in respect of the interest of the assessee. According to the facts appearing in this case, the property was purchased from two different persons having two distinct rights in the property in question. Therefore, this judgment will be of no assistance to the assessee.
10. The assessee's counsel placed reliance on a decision of the Tribunal in the case of ITO v. United Breweries Ltd.  10 ITD 189 (Bang.) wherein the Tribunal was of the view that the legal expenditure incurred in litigation before the civil court in connection with the enhancement of the compensation awarded by the Land Acquisition Officer is an allowable expenditure under Section 48 while computing the capital gain. The learned Counsel also invited our attention to a passage occurring in Law of Income-tax by Sampat Iyengar, Vol. II, Seventh edn., p. 2182 while explaining the word 'expenditure' deductible from the total consideration.
11. Again, the learned Counsel relying upon Section 54E contended that the assessee could not invest more than what he has received.
Therefore, according to him, what he has actually received should alone be taken into consideration for the purpose of capital gain tax.
Section 54E provides exemption from Income-tax in respect of capital gains arising from the transfer of any capital asset (not being a short-term capital asset) in cases where the full value of the consideration received or accruing as a result of the transfer is invested or deposited by the assessee in specific assets within a period of six months after the date of the transfer. Where only a part of the consideration is so invested or deposited, a proportion of the capital gain is exempted from income-tax. In support of this contention, he cited a decision in Smt. Harkhaben C. Patel v. I TO  19 Taxman 63 (Ahd. - Trib.).
12. Another submission made by the learned Counsel appearing for the assessee by way of additional ground is that the mortgage loan should be considered as cost of acquisition or cost of improvement since the mortgage loan was obtained for the purpose of construction. Section 48 provides for deduction from the full value of the consideration received or accruing as a result of the transfer of capital asset of the 'cost of acquisition' thereof. The word 'acquire' according to its plain and natural meaning is a word of very wide import. According to this section, capital gains has to be computed after making deduction from the full value of consideration, inter alia, all cost of acquisition of the capital asset and any expenditure of capital nature in making any additions or alterations to the asset. There is a decision of the Delhi High Court in the case of CIT v. Mithileshkumari  92 ITR 9, wherein the Delhi High Court was of the view that the interest paid by the assessee on money borrowed for the purchase of open plot of land constituted part of actual cost to the assessee within the meaning of Section 12B(2)(ii) of the Indian Income-tax Act, 1922, for the purpose of determining the capital gain derived from the sale of the land. In this connection, the learned departmental representative relied upon a decision of the Madras High Court in the case of CIT v. V. Indira  119 ITR 837 wherein it was held that Section 48 provides for the deduction of cost of acquisition of the capital asset and also cost of any improvement thereto subject to the terms of the other sections. As the asset became the property of the assessee by way of gift, the cost of acquisition has to be in accordance with Section 49(1) of the Act. As the previous owner has not paid the amount of Rs. 6,943 and the same has been paid by the assessee, it cannot be treated as the cost to the previous owner and it cannot qualify for deduction as cost of acquisition of the property.
The amount cannot also be allowed as a deduction as the cost of any improvement thereof as the expression 'thereto' would appear to cover a case where the amount is expended in the asset itself. As the amount has been paid only to improve the title of the owner rather than improving the asset as such, there is no scope for deducting the amount in the computation of the capital gains. In the present case, the mortgage amount was utilised for the purpose of putting up construction and, therefore, this amount was utilised in the asset itself. Since it was incurred by the previous owner, who is the assessee herein, the decision of the Madras High Court in a way supports the case of the assessee.
13. The learned departmental representative, however, relied upon a decision of the Kerala High Court in the case of Ambat Echukutty Menon v. CIT  111 ITR 880. In that case, the Kerala High Court held as under : ...Having regard to the definition of 'cost of improvement' contained in Section 55(1)(b), in order to entitle the assessee to claim a deduction in respect of the cost of any improvement, the expenditure should have been incurred in making any additions or alterations to the capital asset that was originally acquired by the previous owner. Whether the previous owner had mortgaged the property and the assessee and his co-owners cleared off the mortgage so created, it could not be said that they incurred any expenditure by way of effecting any improvement to the capital asset that was originally purchased by the previous owner....
However, the facts appearing in that case are different from the present case inasmuch as the assessee in the present case, who is the previous owner, obtained loan from the LIC for putting up construction claimed deduction of the amount paid to the LIC since the amount of mortgage loan was spent for the purpose of improving the capital asset.
14. Thus, considering the fact that the assessee obtained the mortgage loan from the LIC for the purpose of putting up constructions, looking into the ratio laid down in the above-said decisions, we are of the view that the amount paid to the LIC should be considered as an amount representing the cost of improvement to the property which would be deductible under Section 49(1), read with Section 55(1)(b) of the Act.
The assessment shall be modified accordingly.
15. Another argument advanced by the learned Counsel appearing for the assessee was that in view of Section 54E, the capital gains should be computed by taking only the net sale consideration as the assessee could not deposit the entire sale consideration in specific securities since he did not receive the entire amount. The assessee has invested Rs. 2 lakhs on fixed deposit in July 1977. In view of our earlier finding that the assessee is entitled to relief under Section 49(1), read with Section 55(1)(b), there is no necessity to make any pronouncement on this point since the assessee is getting a larger relief.