Overriding title does not arise when sale proceeds are used to repay secured debt, so capital gains stay fully taxable.

Sale proceeds from a residential property offered as collateral security remained includible in capital gains computation, because the property continued to be the assessee's capital asset and the bank's receipt of the proceeds was only a discharge of debt. The sale of the property and the utilisation of the consideration to clear the company's dues were treated as separate transactions, and no pre-existing overriding title in favour of the bank over the sale consideration was established. On that basis, the plea of diversion by overriding title failed and the capital gains were computed on the full sale consideration.

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Issues: Whether the amount realised from sale of the residential property, which had been offered as collateral security and later utilised to discharge the bank dues of the company, could be excluded from capital gains computation on the footing of diversion by overriding title.

Analysis: The property remained the assessee's capital asset even though it had been offered as collateral security and possession had been taken by the bank under section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The sale of the property and the use of the sale proceeds to settle the loan were treated as two separate transactions. The payment made to the bank was only discharge of an obligation and did not amount to a pre-existing title in favour of the bank over the sale consideration. The authorities relied on by the assessee were distinguished on facts, while the principle applied from the cited precedent was that deductions for debt repayment do not create an overriding title over sale proceeds for capital gains purposes.

Conclusion: The sale consideration could not be excluded from capital gains on the ground of diversion by overriding title, and the addition was upheld against the assessee.

Final Conclusion: The capital gains were rightly computed on the full sale consideration, and the assessees' challenge failed.

Ratio Decidendi: Sale proceeds used to discharge a debt secured against the property do not, by that reason alone, amount to diversion of income by overriding title; they remain includible in capital gains computation.

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