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Attili Narayana Rao Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Hyderabad
Decided On
Judge
Reported in(1986)16ITD35(Hyd.)
AppellantAttili Narayana Rao
Respondentincome-tax Officer
Excerpt:
1. this is an appeal filed by the assessee against the order of the commissioner (appeals), visakhapatnam, dated 13-9-1983. the facts leading to the appeal are as follows.2. the assessee is an individual. the assessment year involved is 1982-83 for which the previous year ended by 31-3-1982. the assessee carried on abkari business during the financial years 1970-71 and 1971-72. he stood a surety for the kist amounts which had fallen due from his abkari business and he has mortgaged his immovable property to the state excise department as security for the amounts due to the government. the property that was so mortgaged appears to be a house site of 5346 sq. yards situated near waltair. by virtue of the authority vested in the government perhaps under section 69(1)(b) of the transfer of.....
Judgment:
1. This is an appeal filed by the assessee against the order of the Commissioner (Appeals), Visakhapatnam, dated 13-9-1983. The facts leading to the appeal are as follows.

2. The assessee is an individual. The assessment year involved is 1982-83 for which the previous year ended by 31-3-1982. The assessee carried on abkari business during the financial years 1970-71 and 1971-72. He stood a surety for the kist amounts which had fallen due from his abkari business and he has mortgaged his immovable property to the State Excise Department as security for the amounts due to the Government. The property that was so mortgaged appears to be a house site of 5346 sq. yards situated near Waltair. By virtue of the authority vested in the Government perhaps under Section 69(1)(b) of the Transfer of Property Act, 1882, the State Government sold the property in public auction without intervention of the Court and realised a sum of Rs. 5,62,980. Out of it, it had realised its arrears and interest amounting to Rs. 1,29,020 and paid the balance amount to the assessee. The assessee returned Rs. 83,130 as capital gains as per the working shown in the sheet filed before this Tribunal. The ITO while completing the assessment dated 14-2-1983 under Section 143(3) read with Section 144B of the Income-tax Act, 1961 ('the Act') computed the capital gains at Rs. 2,69,480.

3. When the matter was carried in appeal before the learned Commissioner (Appeals), it was the contention of the assessee that the amount of Rs. 1,29,020 realised by the Excise Department did not reach the asses-see's hands, as it was received by the State Excise Department by overriding title. It was also the contention of the assessee that the interest was paid both to the Excise Department as well as to Smt. A. Polamma for safeguarding the asset and, therefore, then should be considered as an expenditure in realising the sale price. The learned Commissioner (Appeals) in his impugned orders held that he can consider only the deductions contemplated under Section 48 of the Act, viz., (i) the expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the capital asset. He held that the interest amounts paid were neither expenditure incurred in connection with transfer nor can they be considered to be cost of improvement thereto. He further held that the realisation of the amounts due to it from out of the sale proceeds by the State Government has absolutely no bearing on the computation of the capital gains. So also, the interest paid to Smt. A. Polamma has got no connection with the sale of property or realisation of capital gains thereon. Further the expenditure had no connection with the business carried on by the assessee. The abkari business was discontinued long ago and this should be considered as an expenditure in respect of that business and so not deductible under any other head.

Therefore, he disallowed the assessee's claim and confirmed the order of the ITO.4. This second appeal is filed by the assessee against the impugned order of the Commissioner (Appeals). We have heard Shri M.J. Swamy, the learned counsel for the assessee and Shri P. Radhakrishnamurthy, the learned departmental representative. The following submissions are made by the learned counsel for the assessee. Firstly, it was submitted that we are called upon to decide the true meaning of the words 'full value of the consideration received or accruing as a result of transfer of the capital asset' occurring in Section 48. He contended that the words 'full value of the consideration' are quite different from the words 'fair market value of the capital asset' occurring in Section 52 of the Act. He further contended that it is a well known principle of law that no man can convey a better title than what he himself has. At the time of auction in the accounting year relevant to the assessment year 1982-83 what is the interest which the assessee had got in the property sold is the question which requires an answer from us. Admittedly, he argues that by that time the property was mortgaged to the Government or at any rate a charge was created in favour of the Government for realisation of its debt amounting to Rs. 1,29,020. Either it is a mortgage or a charge of the debt due to the Government is a secured debt. He invites our attention to the Supreme Court decision in Rai Bahadur Choudhary Raghuraj Singh v. Murari Lal AIR 1967 SC 1631 where it is held that a secured debt is a debt secured by mortgage and includes a debt secured by a charge under Section 100 of the Transfer of Property Act. Under Section 100, the rights of a charge-holder are those which are exercised by a simple mortgagee. He also submitted that if a charge created on the property is enforceable on a single occasion, the property sold in enforcement thereof will pass unencumbered in the hands of the purchaser. He submitted that the State Government auctioned the property with a view to realise its arrears as well as interest due from the assessee under the mortgage or a charge as the case may be. There is no dispute over the fact that the mortgage or charge in this case is enforceable only on a single occasion and, therefore, he submitted that the property, in this case a house site near Visakhapatnam, would pass to the auction purchaser unencumbered.

That means neither the charge nor a mortgage liability goes with the property to the purchaser. In those circumstances, he submitted that the amount realised by the Government, viz., Rs. 1,29,020 is an amount which the assessee is obliged to pay out of his income and an amount which by the nature of the application cannot be said to be a part of the income of the assessee. He cited before us the famous decision of the Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367.

Drawing a distinction between the income diverted by overriding title and application of income the Supreme Court held as follows : ... In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income....

There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequences, in law, does not follow.... (p. 374) In fact in that case but for the fact that no charge was created over any specific item of the assessee's property or a general charge over all his property towards discharge of maintenance claim of the assessee's wife and children the Supreme Court would have decided the matter in favour of the assessee by holding that the payments made towards maintenance under the decree in favour of the wife and children of the assessee represent income diverted before it reaches the assessee. This is clearly stated by the Hon'ble Supreme Court when it had observed as follows : ... The matter in the present case would have been different, if such an overriding charge had existed either upon the property or upon its income which is not the case.... (p. 375) So on the basis of this ratio, the learned counsel argued that in all cases where a charge is created over the property or a mortgage is created over the property the money realised by the mortgagee or a charge-holder constitutes an overriding charge and the amounts realised either by the charge-holder or mortgagee on the sale of the hypotheca never reaches the assessee as his income. The sine qua non for computing the capital gains tax is that the income should be the income of the assessee. The full value of the consideration received or accrued as a result of transfer of a capital asset is the value received towards the interest held by the assessee in that property. If he holds a limited interest then he is deemed to have received a proportionate price which can be legitimately ascribed to that limited interest and nothing more. A simple mortgagee holds an interest in the mortgaged property. A charge-holder is also a secured creditor.

Therefore, the amount realised by the assessee towards his interest in the hypotheca which is described as 'the full value of the consideration received or accruing as a result of the transfer of a capital asset' cannot be taken to be full market value of Rs. 5,62,980 realised out of the auction held by the State Government but it should be held as Rs. 5,62,980 minus Rs. 1,29,020, i.e., Rs. 4,33,960.

Therefore, the learned counsel argued that the returned capital gains by the assessee should have been accepted and to the extent of the excess computed orders of the lower authorities are bad in law.

5. The learned departmental representative, in the first instance, very much relied upon the decisions of the lower authorities. He also contended that payment of the amount due under the charge created in favour of the Government is a mode of appropriation made by the assessee after the whole of the sale consideration came into his hands.

He further argued that for purposes of computation of capital gains only such of the deductions enumerated in Section 48 can be considered and there is no scope for any other type of deductions to be considered under that section. He vehemently contended that the words 'full value of the consideration' unmistakably point out the intent of the Legislature that they mean only the full price realised by the sale of the property. The learned departmental representative contended that only the following items of expenditure are entitled for deduction while computing the capital gains : (i) expenditure incurred wholly and exclusively in connection with such transfer ; (ii') the cost of acquisition of the capital asset and the cost of any improvement thereto. The amount paid to the Government under the charge or mortgage cannot be said to be the cost incurred for acquisition of capital asset nor can it be considered to be the cost of any improvement thereto. So also, there is no scope to argue that the payment to the Government can be considered to be an expenditure incurred wholly and exclusively in connection with such transfer. The learned departmental representative heavily relied upon the recent decision of the Andhra Pradesh High Court in CIT v. Bilquis Jahan Begam [1984] 150 ITR 508. In that case the assessee was one of the heirs of the deceased who had inherited, inter alia, the property in question which was subsequently sold. The estate duty liability was sought as a deduction from out of the capital gains computed in the hands of the assessee. The Andhra Pradesh High Court held that the estate duty corresponding to the property inherited does not constitute expenditure referable to the property as such by the assessee and having regard to the provisions contained in Sections 48, 49 and 55 of the Act, the estate duty paid does not qualify itself to be treated either as cost of acquisition of the asset or cost of improvement to the asset.

6. Thus, we have considered the arguments advanced on either side at length. We are inclined to agree with the arguments advanced on behalf of the assessee. Our reasons are as follows : Capital gains, in our opinion, can be computed only with reference to the pro tanto consideration received by the assessee towards his interest in the property sold. Suppose, a person's interest is not fulfledged and he is holding a limited interest then for purposes of computing capital gains tax the whole price realised by the sale of the whole interest in the property cannot be taken for the simple reason that no man can convey a better title than what he himself has. In our understanding of the facts of this case the assessee created a mortgage or a charge in this property in favour of the Government as long back as the accounting year relevant to the assessment years 1970-71 and 1971-72. Therefore, by the date of auction conducted by the State Government which took place in the accounting year relevant to the assessment year 1982-83 two persons were having interest in the property. The assessee, no doubt, holds the property subject to the mortgage deed or a charged debt due to the Government. The debt due to the Government is a secured debt. In the auction the property was sold free of charge or mortgage in favour of the Government. Thus, the full sale price realised by the sale of the property was having two components : the first of the components represents the price which can be ascribed to the interest of the assessee held in the property and the second represents the arrears of debt as well as interest due to the Government and is embedded in it. In our opinion, as there is a clear charge or mortgage over the same property which was subsequently sold by public auction by the Government the amount realised under the charge or mortgage is an amount which never reached the hands of the assessee but which reached the Government by an overriding title. In fact, the ITO 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. Therefore, in our opinion, the amount that is realised by the sale of the asses-see's interest in the property was only Rs. 4,33,960, i.e., Rs. 5,62,980 minus Rs. 1,29,020. The assessee in a sense having not full interest in the property cannot be made liable to the capital gains on a full price realised by the sale of full interest in the property. A person who has got a restricted interest cannot have the benefit of a person having full interest. Capital gains can be computed only with reference to the price realised by the assessee towards his interest in the property. In our opinion, the decision of the Andhra Pradesh High Court in Bilquis Jahan Begum's case (supra) is distinguishable inasmuch as in that their Lordships were considering the deductibility of estate duty from the resultant capital gains. They took the view that the liability for the payment of estate duty is a personal liability of the accountable person and not a liability of the estate itself. So also, they clearly and categorically held that though the estate duty is generally burdened on the property inherited, it cannot be considered to be an encumbrance against the property and cannot, therefore, be related to the property as such. Therefore, it can be seen that they have not considered the liability as an encumbrance against the property and in the nature of the personal liability. But can there be any two opinions that the mortgage or charge created in the case before us constitutes an encumbrance over the property Further, their Lordships of the Andhra Pradesh High Court were considering the deductions permissible under Section 48 only. The question like the one now cropped up before us did not arise for consideration of the Andhra Pradesh High Court. Their Lordships of the Andhra Pradesh High Court had their own reservations to hold that the deductions specifically referred to in Section 48 are exhaustive.

Their Lordships held as follows : ... Whether the deductions specifically referred to in Section 48 are exhaustive or not is quite a different matter for consideration ; but it would be wrong to say that the full value of the consideration for the sale of the property could be reduced by the estate duty liability, unless such a liability could be held to be a valid deduction under Section 48 of the Act...." (p. 513) Therefore, in our opinion, the Andhra Pradesh High Court decision is an authority only for the proposition that the estate duty liability cannot constitute a valid deduction under Section 48. But that is not the issue before us.

7. In our opinion, the issue before us is somewhat seemed to have been covered by the decision of the Madras High Court in CIT v. C.V.Soundararajan [1984] 150 ITR 80. In that case in a family partition the assessees were allotted a property in which their mother was given a right of residence. In order to obtain a relinquishment of the said right of residence to enable them to sell the property, the assessees paid to their mother a sum of Rs. 60,000. In computing the capital gains arising on the sale of the property, the claim of the assessees for deduction of Rs. 60,000 was allowed by the ITO. The Commissioner while exercising his revisionary powers set aside the said order giving deduction. The Tribunal held that the money received by the mother was for extinguishment of her right of residence in the property and, hence, it could not be taken into the computation of capital gains and, accordingly, directed its deduction. The Tribunal refused to refer the matter to the High Court. The revenue approached the High Court under Section 256(2) of the Act. Dismissing the applications, the Madras High Court held that admittedly the assessee did not have the benefit of the 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 assessees. Consequently, the High Court held that the Tribunal was right in its view.

8. Therefore, it can be very easily seen that capital gains can be computed only with reference to the consideration paid in respect of the interest of the assessees and not with reference to the interest of third parties in the property sold. If in the facts of the Madras case the position of the mother is replaced with that of a mortgagee as in the case before us the ratio of the Madras High Court clearly applies and in this case also the amount of Rs. 1,29,020 should be deducted before computing capital gains. Even assuming that the expression 'full value of the consideration received as a result of transfer of capital asset' occurring in Section 48 represents full sale price actually paid one fact cannot be forgotten. If the full interest in the property is conveyed then only the full sale price of the property in the case before us would have been realised. Before getting full interest in the property sold, the assessee has to discharge the secured mortgaged debt or debt charged on the property. Then in such a case the amount that is payable to discharge the mortgaged debt or the charged debt over the property with a view to acquire the full title or complete title over the property can be legitimately called as expenditure incurred towards the cost of acquisition of the capital asset. In our opinion, acquiring part interest in the asset also comes under incurring expenditure towards cost of acquisition of capital asset. Therefore, viewed from any angle it appears to us that this amount of Rs. 1,29,020 should not be considered while computing the capital gains in the hands of the assessee.

9. As regards the deductibility of interest of Rs. 3,825 payable to Smt. A. Polamma, no argument worth the name was advanced by the learned counsel for the assessee. Therefore, we do not see any reason to interfere with the orders of the lower authorities as far as the deductibility of the amount of Rs. 3,825 is concerned.

10. In the result, the appeal is partly allowed to the extent indicated above and we direct the ITO to compute the amount of capital gains afresh in accordance with our findings given above.

1. This is an appeal filed by the assessee against the order of the Commissioner (Appeals), Visakhapatnam, dated 13-9-1983. The facts leading to the appeal are as follows.

2. The assessee is an individual. The assessment year involved is 1982-83 for which the previous year ended by 31-3-1982. The assessee carried on abkari business during the financial years 1970-71 and 1971-72. He stood a surety for the kist amounts which had fallen due from his abkari business and he has mortgaged his immovable property to the State Excise Department as security for the amounts due to the Government. The property that was so mortgaged appears to be a house site of 5346 sq. yards situated near Waltair. By virtue of the authority vested in the Government perhaps under Section 69(1)(b) of the Transfer of Property Act, 1882, the State Government sold the property in public auction without intervention of the Court and realised a sum of Rs. 5,62,980. Out of it, it had realised its arrears and interest amounting to Rs. 1,29,020 and paid the balance amount to the assessee. The assessee returned Rs. 83,130 as capital gains as per the working shown in the sheet filed before this Tribunal. The ITO while completing the assessment dated 14-2-1983 under Section 143(3) read with Section 144B of the Income-tax Act, 1961 ('the Act') computed the capital gains at Rs. 2,69,480.

3. When the matter was carried in appeal before the learned Commissioner (Appeals), it was the contention of the assessee that the amount of Rs. 1,29,020 realised by the Excise Department did not reach the asses-see's hands, as it was received by the State Excise Department by overriding title. It was also the contention of the assessee that the interest was paid both to the Excise Department as well as to Smt. A. Polamma for safeguarding the asset and, therefore, then should be considered as an expenditure in realising the sale price. The learned Commissioner (Appeals) in his impugned orders held that he can consider only the deductions contemplated under Section 48 of the Act, viz., (i) the expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the capital asset. He held that the interest amounts paid were neither expenditure incurred in connection with transfer nor can they be considered to be cost of improvement thereto. He further held that the realisation of the amounts due to it from out of the sale proceeds by the State Government has absolutely no bearing on the computation of the capital gains. So also, the interest paid to Smt. A. Polamma has got no connection with the sale of property or realisation of capital gains thereon. Further the expenditure had no connection with the business carried on by the assessee. The abkari business was discontinued long ago and this should be considered as an expenditure in respect of that business and so not deductible under any other head.

Therefore, he disallowed the assessee's claim and confirmed the order of the ITO.4. This second appeal is filed by the assessee against the impugned order of the Commissioner (Appeals). We have heard Shri M.J. Swamy, the learned counsel for the assessee and Shri P. Radhakrishnamurthy, the learned departmental representative. The following submissions are made by the learned counsel for the assessee. Firstly, it was submitted that we are called upon to decide the true meaning of the words 'full value of the consideration received or accruing as a result of transfer of the capital asset' occurring in Section 48. He contended that the words 'full value of the consideration' are quite different from the words 'fair market value of the capital asset' occurring in Section 52 of the Act. He further contended that it is a well known principle of law that no man can convey a better title than what he himself has. At the time of auction in the accounting year relevant to the assessment year 1982-83 what is the interest which the assessee had got in the property sold is the question which requires an answer from us. Admittedly, he argues that by that time the property was mortgaged to the Government or at any rate a charge was created in favour of the Government for realisation of its debt amounting to Rs. 1,29,020. Either it is a mortgage or a charge of the debt due to the Government is a secured debt. He invites our attention to the Supreme Court decision in Rai Bahadur Choudhary Raghuraj Singh v. Murari Lal AIR 1967 SC 1631 where it is held that a secured debt is a debt secured by mortgage and includes a debt secured by a charge under Section 100 of the Transfer of Property Act. Under Section 100, the rights of a charge-holder are those which are exercised by a simple mortgagee. He also submitted that if a charge created on the property is enforceable on a single occasion, the property sold in enforcement thereof will pass unencumbered in the hands of the purchaser. He submitted that the State Government auctioned the property with a view to realise its arrears as well as interest due from the assessee under the mortgage or a charge as the case may be. There is no dispute over the fact that the mortgage or charge in this case is enforceable only on a single occasion and, therefore, he submitted that the property, in this case a house site near Visakhapatnam, would pass to the auction purchaser unencumbered.

That means neither the charge nor a mortgage liability goes with the property to the purchaser. In those circumstances, he submitted that the amount realised by the Government, viz., Rs. 1,29,020 is an amount which the assessee is obliged to pay out of his income and an amount which by the nature of the application cannot be said to be a part of the income of the assessee. He cited before us the famous decision of the Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367.

Drawing a distinction between the income diverted by overriding title and application of income the Supreme Court held as follows : ... In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income....

There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequences, in law, does not follow.... (p. 374) In fact in that case but for the fact that no charge was created over any specific item of the assessee's property or a general charge over all his property towards discharge of maintenance claim of the assessee's wife and children the Supreme Court would have decided the matter in favour of the assessee by holding that the payments made towards maintenance under the decree in favour of the wife and children of the assessee represent income diverted before it reaches the assessee. This is clearly stated by the Hon'ble Supreme Court when it had observed as follows : ... The matter in the present case would have been different, if such an overriding charge had existed either upon the property or upon its income which is not the case.... (p. 375) So on the basis of this ratio, the learned counsel argued that in all cases where a charge is created over the property or a mortgage is created over the property the money realised by the mortgagee or a charge-holder constitutes an overriding charge and the amounts realised either by the charge-holder or mortgagee on the sale of the hypotheca never reaches the assessee as his income. The sine qua non for computing the capital gains tax is that the income should be the income of the assessee. The full value of the consideration received or accrued as a result of transfer of a capital asset is the value received towards the interest held by the assessee in that property. If he holds a limited interest then he is deemed to have received a proportionate price which can be legitimately ascribed to that limited interest and nothing more. A simple mortgagee holds an interest in the mortgaged property. A charge-holder is also a secured creditor.

Therefore, the amount realised by the assessee towards his interest in the hypotheca which is described as 'the full value of the consideration received or accruing as a result of the transfer of a capital asset' cannot be taken to be full market value of Rs. 5,62,980 realised out of the auction held by the State Government but it should be held as Rs. 5,62,980 minus Rs. 1,29,020, i.e., Rs. 4,33,960.

Therefore, the learned counsel argued that the returned capital gains by the assessee should have been accepted and to the extent of the excess computed orders of the lower authorities are bad in law.

5. The learned departmental representative, in the first instance, very much relied upon the decisions of the lower authorities. He also contended that payment of the amount due under the charge created in favour of the Government is a mode of appropriation made by the assessee after the whole of the sale consideration came into his hands.

He further argued that for purposes of computation of capital gains only such of the deductions enumerated in Section 48 can be considered and there is no scope for any other type of deductions to be considered under that section. He vehemently contended that the words 'full value of the consideration' unmistakably point out the intent of the Legislature that they mean only the full price realised by the sale of the property. The learned departmental representative contended that only the following items of expenditure are entitled for deduction while computing the capital gains : (i) expenditure incurred wholly and exclusively in connection with such transfer ; (ii') the cost of acquisition of the capital asset and the cost of any improvement thereto. The amount paid to the Government under the charge or mortgage cannot be said to be the cost incurred for acquisition of capital asset nor can it be considered to be the cost of any improvement thereto. So also, there is no scope to argue that the payment to the Government can be considered to be an expenditure incurred wholly and exclusively in connection with such transfer. The learned departmental representative heavily relied upon the recent decision of the Andhra Pradesh High Court in CIT v. Bilquis Jahan Begam [1984] 150 ITR 508. In that case the assessee was one of the heirs of the deceased who had inherited, inter alia, the property in question which was subsequently sold. The estate duty liability was sought as a deduction from out of the capital gains computed in the hands of the assessee. The Andhra Pradesh High Court held that the estate duty corresponding to the property inherited does not constitute expenditure referable to the property as such by the assessee and having regard to the provisions contained in Sections 48, 49 and 55 of the Act, the estate duty paid does not qualify itself to be treated either as cost of acquisition of the asset or cost of improvement to the asset.

6. Thus, we have considered the arguments advanced on either side at length. We are inclined to agree with the arguments advanced on behalf of the assessee. Our reasons are as follows : Capital gains, in our opinion, can be computed only with reference to the pro tanto consideration received by the assessee towards his interest in the property sold. Suppose, a person's interest is not fulfledged and he is holding a limited interest then for purposes of computing capital gains tax the whole price realised by the sale of the whole interest in the property cannot be taken for the simple reason that no man can convey a better title than what he himself has. In our understanding of the facts of this case the assessee created a mortgage or a charge in this property in favour of the Government as long back as the accounting year relevant to the assessment years 1970-71 and 1971-72. Therefore, by the date of auction conducted by the State Government which took place in the accounting year relevant to the assessment year 1982-83 two persons were having interest in the property. The assessee, no doubt, holds the property subject to the mortgage deed or a charged debt due to the Government. The debt due to the Government is a secured debt. In the auction the property was sold free of charge or mortgage in favour of the Government. Thus, the full sale price realised by the sale of the property was having two components : the first of the components represents the price which can be ascribed to the interest of the assessee held in the property and the second represents the arrears of debt as well as interest due to the Government and is embedded in it. In our opinion, as there is a clear charge or mortgage over the same property which was subsequently sold by public auction by the Government the amount realised under the charge or mortgage is an amount which never reached the hands of the assessee but which reached the Government by an overriding title. In fact, the ITO 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. Therefore, in our opinion, the amount that is realised by the sale of the asses-see's interest in the property was only Rs. 4,33,960, i.e., Rs. 5,62,980 minus Rs. 1,29,020. The assessee in a sense having not full interest in the property cannot be made liable to the capital gains on a full price realised by the sale of full interest in the property. A person who has got a restricted interest cannot have the benefit of a person having full interest. Capital gains can be computed only with reference to the price realised by the assessee towards his interest in the property. In our opinion, the decision of the Andhra Pradesh High Court in Bilquis Jahan Begum's case (supra) is distinguishable inasmuch as in that their Lordships were considering the deductibility of estate duty from the resultant capital gains. They took the view that the liability for the payment of estate duty is a personal liability of the accountable person and not a liability of the estate itself. So also, they clearly and categorically held that though the estate duty is generally burdened on the property inherited, it cannot be considered to be an encumbrance against the property and cannot, therefore, be related to the property as such. Therefore, it can be seen that they have not considered the liability as an encumbrance against the property and in the nature of the personal liability. But can there be any two opinions that the mortgage or charge created in the case before us constitutes an encumbrance over the property Further, their Lordships of the Andhra Pradesh High Court were considering the deductions permissible under Section 48 only. The question like the one now cropped up before us did not arise for consideration of the Andhra Pradesh High Court. Their Lordships of the Andhra Pradesh High Court had their own reservations to hold that the deductions specifically referred to in Section 48 are exhaustive.

Their Lordships held as follows : ... Whether the deductions specifically referred to in Section 48 are exhaustive or not is quite a different matter for consideration ; but it would be wrong to say that the full value of the consideration for the sale of the property could be reduced by the estate duty liability, unless such a liability could be held to be a valid deduction under Section 48 of the Act...." (p. 513) Therefore, in our opinion, the Andhra Pradesh High Court decision is an authority only for the proposition that the estate duty liability cannot constitute a valid deduction under Section 48. But that is not the issue before us.

7. In our opinion, the issue before us is somewhat seemed to have been covered by the decision of the Madras High Court in CIT v. C.V.Soundararajan [1984] 150 ITR 80. In that case in a family partition the assessees were allotted a property in which their mother was given a right of residence. In order to obtain a relinquishment of the said right of residence to enable them to sell the property, the assessees paid to their mother a sum of Rs. 60,000. In computing the capital gains arising on the sale of the property, the claim of the assessees for deduction of Rs. 60,000 was allowed by the ITO. The Commissioner while exercising his revisionary powers set aside the said order giving deduction. The Tribunal held that the money received by the mother was for extinguishment of her right of residence in the property and, hence, it could not be taken into the computation of capital gains and, accordingly, directed its deduction. The Tribunal refused to refer the matter to the High Court. The revenue approached the High Court under Section 256(2) of the Act. Dismissing the applications, the Madras High Court held that admittedly the assessee did not have the benefit of the 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 assessees. Consequently, the High Court held that the Tribunal was right in its view.

8. Therefore, it can be very easily seen that capital gains can be computed only with reference to the consideration paid in respect of the interest of the assessees and not with reference to the interest of third parties in the property sold. If in the facts of the Madras case the position of the mother is replaced with that of a mortgagee as in the case before us the ratio of the Madras High Court clearly applies and in this case also the amount of Rs. 1,29,020 should be deducted before computing capital gains. Even assuming that the expression 'full value of the consideration received as a result of transfer of capital asset' occurring in Section 48 represents full sale price actually paid one fact cannot be forgotten. If the full interest in the property is conveyed then only the full sale price of the property in the case before us would have been realised. Before getting full interest in the property sold, the assessee has to discharge the secured mortgaged debt or debt charged on the property. Then in such a case the amount that is payable to discharge the mortgaged debt or the charged debt over the property with a view to acquire the full title or complete title over the property can be legitimately called as expenditure incurred towards the cost of acquisition of the capital asset. In our opinion, acquiring part interest in the asset also comes under incurring expenditure towards cost of acquisition of capital asset. Therefore, viewed from any angle it appears to us that this amount of Rs. 1,29,020 should not be considered while computing the capital gains in the hands of the assessee.

9. As regards the deductibility of interest of Rs. 3,825 payable to Smt. A. Polamma, no argument worth the name was advanced by the learned counsel for the assessee. Therefore, we do not see any reason to interfere with the orders of the lower authorities as far as the deductibility of the amount of Rs. 3,825 is concerned.

10. In the result, the appeal is partly allowed to the extent indicated above and we direct the ITO to compute the amount of capital gains afresh in accordance with our findings given above.


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