1992 (2) TMI 55 - HC - Income Tax

Redemption of mortgage counts as cost of acquisition for capital gains u/ss 48 and 55(2)(i)

HC held that amounts paid by the assessee to redeem a mortgage constitute part of the 'cost of acquisition' for computation of capital gains. The court ... Entitlement to claim deduction paid for redemption of the mortgage - computation of capital gains - HELD THAT:- In our opinion, what has been overlooked in those cases is that the word 'property' does not mean merely physical property, but also means the right, title or interest in it. In the case of a mortgage or lease, different persons will have different rights in the same property. If a person is an absolute owner of the property, then it can be said that he has all the rights and interest in that property. If the property is mortgaged or leased, then the owner of the property would possess only those rights which are not transferred to the mortgagee or the lessee, as the case may be. When a person who has mortgaged the property transfers it to another person, what he transfers is only those rights which he possesses. The transferee would get the property subject to the rights created by the previous owner in favour of others. When the assessee discharged the mortgage by paying the mortgagee, what he did was to purchase that right or interest which the mortgagor did not then possess and which the mortgagee had in the property. When the assessee sold the property, he did not merely sell the right, title or interest which he had received from the donor, but also the right, title or interest which he had purchased from the mortgagee. For this reason, the case would not be covered by section 49(1)(ii) nor by section 55(2)(ii) for the purpose of computation of the capital gains. Therefore, the case, in our opinion, will be governed either by section 48 read with section 55(2)(i) or partly by section 48(1)(ii) and partly by section 49(1) read with section 55(2)(i) of the Act. In either case, what is required to be considered is the cost of acquisition of the asset to the assessee. Payment to the mortgagee for removing that encumbrance was certainly the cost of acquisition of the interest of the mortgagee and, therefore, that was required to be taken into account for the purpose of computing the total cost of acquisition of the property which the assessee sold and thereby made capital gains. Question is answered in the affirmative, i.e., in favour of the assessee and against the Revenue, with no order as to costs. Issues Involved:1. Whether the assessee is entitled to claim deduction of Rs. 25,000 paid for redemption of the mortgage for the purpose of computing capital gains.Summary:Issue 1: Deduction of Rs. 25,000 Paid for Redemption of MortgageThe Tribunal referred the question of whether the assessee is entitled to claim deduction of Rs. 25,000 paid for redemption of the mortgage for computing capital gains to the High Court u/s 256(1) of the Income-tax Act, 1961. The assessee received 292 sq. yards of land as a gift, which was subject to a mortgage, and sold it for Rs. 59,956. She claimed a deduction of Rs. 25,000 paid to the mortgagee, which was rejected by the Income-tax Officer and the Appellate Assistant Commissioner. The Tribunal, however, held that the assessee sold more than just the gifted capital asset; she sold the interest transferred to the mortgagee, and thus the Rs. 25,000 paid to redeem the mortgage should be considered in computing the capital gain u/s 48(ii).The Revenue argued that the cost of acquisition should be computed as per section 49 and section 55(2)(ii), considering the cost to the previous owner or the fair market value as of January 1, 1954. The Tribunal's computation u/s 48 was deemed erroneous by the Revenue. The High Court examined relevant provisions, including sections 45, 48, 49, and 55, and noted that the cost of acquisition should be the cost to the previous owner or the fair market value on January 1, 1954, if the asset was acquired by gift.The High Court considered precedents from the Kerala High Court in Ambat Echukutty Menon v. CIT and the Madras High Court in CIT v. V. Indira, which supported the Revenue's view but lacked detailed reasoning. The High Court disagreed with these precedents, emphasizing that 'property' includes rights and interests. The assessee acquired the property subject to the mortgage and later acquired the mortgagee's interest by paying Rs. 25,000. Thus, the cost of acquisition included this payment.The High Court concluded that the case was not fully governed by section 49(1)(ii) or section 55(2)(ii) but partly by section 48 and section 55(2)(i). The Rs. 25,000 paid to the mortgagee was part of the cost of acquisition and should be deducted in computing capital gains. The question was answered in the affirmative, in favor of the assessee, with no order as to costs.