English mortgage qualifies as capital asset, but exemption under section 11(1A) is limited to proportionate reinvestment.

An English mortgage acquired out of sale proceeds was treated as acquisition of another capital asset because the mortgagee's interest is property within the wide meaning of capital asset under the Income-tax Act. Section 11(1A) therefore applied to charitable trust property transfers where net consideration is used to acquire a new capital asset to be held under trust. However, where only part of the net consideration is so applied, exemption is restricted to the proportion allowed by the statutory formula and cannot extend to the entire gain. The relief was thus confined to the amount actually utilised for the mortgage acquisition.

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Issues: (i) Whether an English mortgage acquired against part of the sale proceeds constituted acquisition of another capital asset so as to attract exemption under section 11(1A) of the Income-tax Act, 1961. (ii) Whether, on the facts, the assessee was entitled to full exemption or only proportionate exemption under section 11(1A) of the Income-tax Act, 1961.

Issue (i): Whether an English mortgage acquired against part of the sale proceeds constituted acquisition of another capital asset so as to attract exemption under section 11(1A) of the Income-tax Act, 1961.

Analysis: Section 11(1A) deems capital gains to have been applied for charitable purposes where the net consideration from transfer of a capital asset held under trust is utilised for acquiring another capital asset to be so held. A mortgage involves transfer of an interest in the mortgaged property to the mortgagee; in an English mortgage, that transfer is absolute subject to retransfer on repayment. The mortgagee's interest is property and falls within the wide meaning of capital asset under section 2(14). The assessee's acquisition of the mortgage therefore amounted to acquisition of another capital asset.

Conclusion: The issue was answered in favour of the assessee.

Issue (ii): Whether, on the facts, the assessee was entitled to full exemption or only proportionate exemption under section 11(1A) of the Income-tax Act, 1961.

Analysis: The assessee utilised only part of the net consideration for acquiring the mortgage. Under section 11(1A)(a)(ii), where only part of the net consideration is utilised for acquiring the new capital asset, exemption is restricted to the extent specified by the statutory formula. The statute does not permit full exemption when the whole of the net consideration has not been so utilised.

Conclusion: The issue was answered in favour of the Revenue and against the assessee.

Final Conclusion: The trust was entitled to exemption only to the extent permitted by section 11(1A) because acquisition of the English mortgage was acquisition of a capital asset, but the relief remained proportionate to the amount of net consideration actually applied.

Ratio Decidendi: An English mortgage creates a capital asset because it transfers an interest in immovable property to the mortgagee, and exemption under section 11(1A) is available only to the extent the net consideration from transfer of the original capital asset is actually utilised for acquiring the new capital asset.

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