Capital gains on mortgaged property: mortgage dues paid from sale proceeds are excluded from consideration for computation.

In computing capital gains on sale of mortgaged property, the amount appropriated directly by the Government towards mortgage dues was treated as deductible from the sale proceeds. The reasoning was that the assessee never received that portion of the auction price, so it could not form part of the consideration realised for section 48 purposes. The balance alone was therefore taken as the amount available for capital gains computation, while cases involving sale free from mortgage were distinguished on their facts.

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Issues: Whether, for computing capital gains on sale of mortgaged property, the amount paid to the Government under the mortgage had to be deducted from the sale proceeds and whether the balance alone represented the assessee's consideration under section 48 of the Income-tax Act, 1961.

Analysis: The property had been mortgaged to the Government and, on sale by public auction, the Government received the mortgage dues directly out of the sale proceeds. The sale price therefore stood diminished to the extent of the Government's interest created by the mortgage. The amount appropriated towards the mortgage never reached the assessee and could not be treated as part of the amount realised by him for purposes of capital gains computation. The contrary cases were distinguished on the footing that they involved sale free from mortgage or no corresponding charge on the property.

Conclusion: The amount payable to the Government under the mortgage was deductible, and capital gains were to be computed only on the balance received by the assessee; the issue was decided in favour of the assessee and against the Revenue.

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