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The Transfer of Property Act, 1882
The Income- Tax Act, 1995
Section 80T in The Income- Tax Act, 1995
Shri B. P. Hira, Works ... vs Shri C. M. Pradhan Etc on 8 May, 1959
Section 73 in The Transfer of Property Act, 1882

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Income Tax Appellate Tribunal - Allahabad
Kanti Swaruoop Sharma vs Income-Tax Officer on 15 January, 1992
Equivalent citations: 1992 41 ITD 246 All
Bench: L Aggarwal, O Tripathi



ORDER
 

 L.N. Aggarwal, Judicial Member 
 

1. It is an appeal filed by the assessee against the order of the learned CIT(A) dated 6-2-1987 for the assessment year 1984-85. The following grounds have been taken up :-

1. Because on the facts and circumstances of the case the authorities below have erred in holding that it is not a case of diversion of income by an overriding title.

2. Because the authorities below have not appreciated correctly the merits of the case and have erred in taking an arbitrary view.

3. Because at any rate, the assessee had no volition to apply the proceeds amounting to Rs. 1,50,000 and as such the same could to be considered in the hands of the assessee.

4. Because, in law, the sum of Rs. 1,50,000 diverted away at source since having paid by the purchaser directly to bank and in view of property being under equitable mortgage, the assessee cannot be made liable to any extent w.r.t. the sum of Rs. 1,50,000.

5. Because, without prejudice, the computation of capital gains is unfounded, arbitrary and biased.

6. Because without prejudice, the appellant-assessee was in law, eligible for the claim of deduction under Section 54E of the Income-tax Act, in the circumstances of the case.

7. Because the order under appeal is bad in law as well as on the facts of the case.

8. Because the assessment is illegal, void and against the principles of natural justice.

9. Because proper opportunity was not afforded by the learned Income-tax Officer to the assessee to meet out his case.

10. Because on a proper visualation of the facts of the case, the addition of Rs. 5,200 as unexplained cash is unwarranted and uncalled for.

11. Because, without prejudice, the assessment is excessive.

2. The brief facts of the case are that the assessee is a partner in a firm M/s Shankar Traders. At the time of framing the assessment order, the ITO found that house No. 88/593 Premnagar, Kanpur, belonging to the assessee, had been sold away during the assessment year for Rs. 1,95,000. The assessee had not shown any income as capital gain during the year, on enquiry the ITO estimated the fair market value of the property as on 1-1-1964 at Rs. 30,000 and thereby worked out the capital gains out of the sale price of Rs. 1,95,000 at Rs. 96,000 after allowing deductions under Section 80T of the Income-tax Act. The assessee had admitted the sale of the house but he stressed that the said house was mortgaged with the bank for the loans advanced to the firm M/s Shankar Traders and the bank had also filed the suit for recovery of the said loan and the bank had also claimed in the plaint to realise the amount by the sale proceeds of the above said house. As the house was to be auctioned in this case, the assessee obtained the permission for sale of the house from the bank (bank of India) subject to the assurance that the amount of Rs. 1,50,000 will be directly deposited in the bank out of the sale proceeds to satisfy the loans against which the house was mortgaged. Consequently, after the sale, the amount of Rs. 1,50,000 was paid by the purchaser of the property directly to Bank of India vide Bank Pay Order No. 225090 dated 2-11 -1983. On the basis of the said mortgage and the payment of the sale price directly by the purchaser to the bank, the assessee claimed that the bank had an overriding title over the sale proceeds and the assessee was left only with a right of redemption which he sold only for Rs. 45,000, as the balance was to be deposited in the bank directly to remove the encumbrance on the property for clear sale/title to the purchaser. The said contention was not accepted by the ITO and the capital gains of Rs. 96,000 was added in his income. In appeal too, the learned CIT(A) confirmed the said order. The assessee being aggrieved has come up in appeal before the Tribunal.

3. The learned counsel for the assessee very vehemently argued out that the bank had an overriding title over the property because of the mortgage and the assessee was left with nothing but the right of redemption which he had sold for Rs. 45,000 only, as the balance was appropriated by the bank and as a proof of that the purchaser himself had deposited the alleged amount of Rs. 1,50,000 directly in the bank and it never reached the assessee and nor the assessee had any right to receive the said amount because of the mortgage. In support of that contention, the learned counsel has relied upon the following rulings :-

160 ITR 5 (sic), CIT v. Shakuntala Kantilal [1991] 190 ITR 56 (Bom.), N.M.A. Mohammed Haneefa v. ITO [1987] 23 ITD 409 (Mad.), N. Vajrapani Naidu v. ITO [1989] 28 ITD 459 (Mad.), CIT v. C.N. Patuck [1969] 71 ITR 713 (Bom.), CIT v. M.D. Manohar Rao [1985] 155 ITR 696(AP).

4. On the other hand, the learned Departmental Representative has stressed that the property was sold for Rs. 1,95,000 and the assessee received the entire amount, i.e. Rs. 45,000 in cash and Rs. 1,50,000 by a credit entry in the account books of the firm M/s. Shankar Traders which being an independent entity in the eyes of law was accountable for the said amount to the assessee. He has thus stressed that no doubt the property was mortgaged, still the assessee received the entire amount and thus was to be assessed on the capital gams of the property which has been rightly computed by the ITO and confirmed by the learned CIT(A). He has relied on the decisions of the Hon'ble Supreme Court reported in CIT v. Sitaldas Tirathdas [1961J41 ITR 367 and CIT v. Imperial Chemical Industries (India) (P.) Ltd. [1969] 74 ITR 17.

5. We have heard the parties as length and we find that the arguments of the learned counsel for the assessee cannot be lightly brushed aside. The Bench of the Tribunal at Madras has dealt with like situations in detail in their orders in the cases of N.MA. Mohammed Haneefa (supra) and N. Vajrapani Naidu (supra). In the first case, the Tribunal had disposed of the case with the following words :-

The case of the assessee on this issue is that what was sold was only the equity of redemption inasmuch as the property has been mortgaged and, therefore, the amount paid by the vendor directly to the banks for discharging the dates as well as the amount utilised for discharging the other unsecured security sundry creditors of the business cannot be treated as consideration received or accruing to the assessee.

** ** ** The Transfer of Property Act recognises that ownership is a bundle of rights and when a properly is mortgaged, some interest in the property is transferred with the result that the owner of the mortgaged property becomes a limited owner. Consequently, when he sells the property subject to the mortgage, he should be selling only his limited ownership and the secured creditors would be entitled to receive the payments in discharge of the mortgage from the transferee with notice. Thus, it is claimed on behalf of the assessee that the amounts paid directly to the banks by the purchaser cannot be considered to be part of the consideration paid to the assessee at all, not only because he did not actually receive it but also because he was not entitled to receive it since that amount had to be given to the banks by overriding title, in respect of their interest in the property created by the mortgagee.

Since we have already seen that under the Transfer of Property Act a mortgagee has an interest in the property and the mortgagee is entitled to the payment of the sale proceeds for the discharge of the debts, we must hold that the amount paid directly to the mortgagee accrued to him and not the assessee and hence could not be treated as part of the full consideration paid for transfer of property.

Likewise, in the case of N. Vajrapani Naidu (supra), the Tribunal had held as under :

... the mortgagee is entitled to claim the amounts due to him directly under Section 73 of the Transfer of Property Act and the money has to be paid in the court under Section 57 of the Transfer of Property Act as had happened in this case. Therefore, these amounts had been diverted by overriding title and the assessee had no right to receive these amounts. The situation would have been the same if the assessee had sold the property burdened with the mortgage, in that event also the purchaser would have retained out to the mortgagee and paid to the assessee only the balance and it cannot be said that the amount so retained was also consideration for transfer because the assessee was not entitled to receive that amount in any event. Thus, in our considered opinion .what was sold was only the equity of redemption and the consideration received was only the amount actually received, not including the amount paid directly to the mortgagees.

6. More or less the facts of the present case also appear to be similar. Admittedly, the house was mortgaged with the bank. The bank had also filed a suit for recovery of the amount and also alleged to have recovered the same by sale of the mortgaged house. The assessee to avoid the sale by court sold the house himself with the consent of the bank on the assurance that out of the sale proceeds, the bank loan till be paid directly by the purchaser. It is immaterial whether the money is paid by the purchaser to the mortgagee or by the court, as the assessee does not get that amount and he gets only the balance amount.

7. The Hon'ble Delhi High Court in the case of CIT v. Shakuntala Rajeshwar [1986] 160 ITR 840 had held that an amount of Rs. 1 lakh paid to the tenant to vacate the premises was deductible although this case was not on the mortgage yet the ratio applies to the present case that any encumbrance on the property, if redeemed on payment, the said amount has to be deducted from the sale price while determining the capital gains out of the sale of the property.

8. In another case of Shakuntala Kantilal (supra), the Hon'ble Bombay High Court had laid down the same ratio. In that case, the assessee, who owned a piece of land, had entered into an agreement of sale of the said property with one 'R'. Subsequently, the assessee entered into another agreement of sale with 'C. The sale deed was executed in the last in favour of 'C' on the assurance given by 'C' to 'R' that he will deduct Rs. 35,504 from the total consideration and paid to him by way of compensation due to an earlier agreement by the assessee to sell the said property to him. It was held that the alleged amount of Rs. 35,504 was a deductible expenditure while computing the capital gain on the sale proceeds of the said land.

9. On the other hand, the decisions relied upon by the learned Departmental Representative of the Hon'ble Supreme Court, in Sitaldas Tirathdas's case (supra) and Imperial Chemical Industries (India) (P.) Ltd.'s case (supra), the Hon'ble Supreme Court had held that the true test for the application of Rule of diversion of income as it had an overriding charge, is whether the amount sought to be deducted, in truth ever reached the assessee as his income or not. It was further held that obligations no doubt there are in every case, but it is the nature of the obligation which is a decisive fact. There is a difference between the 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, whereby applicant's income is diverted before it reaches the assessee, it is deductible, but where the income is required to be applied to discharging of obligation after such income reaches the assessee, the same, consequence in law, does not follow. Even if these principles enunciated by the Supreme Court arc applied to the present case, still the finding will be in favour of the assessee. Here, the property being under the mortgage, it was not an obligation for the assessee just to utilise the amount for discharge of the bank loan, but it was an obligation for which the assessee was compelled to discharge and the amount was deducted at source by the purchaser himself and deposited in the bank directly through a pay order favouring the bank just to ensure a clear title to him. In fact, the facts of the case are that the assessee was left nothing with him except the equity of redemption and for that the price he got was only Rs. 45,000, as the balance he neither could claim and nor was paid to him, but was paid directly by the purchaser to the bank. A mere entry in the accounts of the firm crediting the alleged amount in his name by itself does not amount to payment of the said amount to the assessee. Admittedly, the firm had run into very heavy losses and this is why the bank was compelled to file a suit for recovery as the firm was no more in a position to pay the amount of loan to the bank. As the assessee had mortgaged his house as security to the bank loan advanced to the firm, the responsibility was of the assessee to pay up the loan and in case he fails to pay, the house was to be auctioned and sold to realise the amount. Till the mortgage existed, the assessee was left with no title in the house except the equity of redemption and the price of the said equity of redemption was only Rs. 45,000 as the balance of Rs. 1,50,000 was to be appropriated by the bank either by court's sale or by consent by the intending purchaser. Taking all these circumstances into consideration, we are of the opinion that the decisions of the Madras Tribunal, in N.M.A. Mohammed Haneefa's case (supra) and N. Vajrapani Naidu's case (supra) applies on all fours to the present case. Even the decisions of the Hon'ble Supreme Court relied upon by the learned Departmental Representative indirectly lends support to the case of the assessee and do not militate against the contentions raised by him. We, therefore, hold that the bank has an overriding title over the property and the real value to which the assessee was entitled was only Rs. 45,000 and not the balance Rs. 1,50,000 which was directly paid to the bank by the intending purchaser. Issue Nos. 1 to 5 are, therefore, decided accordingly and the ITO is directed to compute the capital gain on the amount of Rs. 45,000 after allowing the usual deductions permissible under Section 80T according to law.

10. Ground No. 60 is regarding the applicability of Section 54E. The said section has no applicability as the assessee has nowhere deposited the alleged amount as the same is available only to the person who deposits the sale proceeds/capital gains in the bank or other specified institution. The said issue is, therefore, decided against the assessee.

11. Ground Nos. 7, 8 and 9 are general and they do not need any comment.

12. Ground No. 10 is regarding the addition of Rs. 5,200 as unexplained cash. The said ground has not been seriously argued out. Moreover, this does not arise out of the order of the learned CIT(A). We, therefore, decide the issue against the assessee.

13. Ground No. 11 is general and does not need much comment.

14. In the result, the appeal is partly allowed.