2018 (10) TMI 676 - AT - Income Tax

Tribunal rules mortgage payment as cost of acquisition, no capital gain incurred

Smt. Premlata Tibrewala Versus The Income Tax Officer, Ward 4 (2), Jaipur.

The Tribunal accepted the assessee's argument that the amount paid to discharge the mortgage debt should be considered as the cost of acquisition, ... Long term capital gains - The assessee inherited the said flat by Will after the death of her father. - legal representative of the deceased, bequeathed the capital asset in favour of the assessee appellant - Residential flat in a Cooperative Housing Society - deduction of payment made for the purpose of clearing of the mortgage - Indexed cost of acquisition. Held that:- As a result of such payment made for the purpose of clearing of the mortgage the interest of the mortgagee in the property has been acquired by the heir. The said payment has, therefore, to be regarded as cost of acquisition under section 48 read with section 55(2) of the IT Act. For the purpose of indexation, the cost of acquisition in the hands of the deceased father of the assessee has to be taken into consideration and not at the time of acquisition of the property by the assessee. Thus when the assessee has received nothing from the sale consideration of the property in question, then the question of any capital gain in the hands of the assessee does not arise. Accordingly, following the decision of Hon’ble Supreme Court in the case of R.M. Arunachalam vs. CIT [1997 (7) TMI 5 - SUPREME COURT], the amount for discharge of mortgage interest has to be considered as cost of acquisition and accordingly the net consideration on sale of the flat in question will be Nil. Accordingly, we set aside orders of the authorities below, qua this issue and allow the claim of the assessee. Issues Involved:1. Taxation of long-term capital gain.2. Liability of legal representative for tax.3. Indexation benefit for the cost of acquisition.Detailed Analysis:1. Taxation of Long-Term Capital Gain:The primary issue in this case was whether the sum of Rs. 72,62,167/- should be taxed as long-term capital gain in the hands of the assessee. The assessee argued that the flat in question was inherited through a Will and was mortgaged to Punjab National Bank (PNB) as collateral for a loan taken by M/s. MPL Corporation Ltd. The sale proceeds of Rs. 94,00,000/- were paid directly to PNB for clearing the outstanding dues, and hence, the assessee did not receive any amount. The assessee contended that this amount should be deducted from the sale consideration under sections 45 and 48 of the IT Act while computing capital gains. The CIT (A) did not accept this contention, holding that the liability to discharge the debt was on the brother of the assessee as per the Will.2. Liability of Legal Representative for Tax:The assessee alternatively argued that any tax liability should be fastened on the legal representative of the deceased, who had bequeathed the capital asset. The CIT (A) rejected this argument, stating that the liability to discharge the debt was on the brother of the assessee as per the Will, and thus, the tax liability could not be transferred.3. Indexation Benefit for the Cost of Acquisition:The assessee claimed that the cost of acquisition should include the amount paid to discharge the mortgage debt and that the indexation benefit should be calculated from the year the father of the assessee acquired the property. The CIT (A) and AO restricted the indexation benefit to the year of the father's death, denying the benefit from the year of acquisition by the father.Judgment:1. Taxation of Long-Term Capital Gain:The Tribunal accepted the assessee's contention that the amount paid to discharge the mortgage should be considered as the cost of acquisition. The Tribunal relied on the decision of the Hon'ble Supreme Court in the case of R.M. Arunachalam vs. CIT, which held that the payment made to clear the mortgage debt should be regarded as the cost of acquisition under section 48 read with section 55(2) of the IT Act. The Tribunal concluded that since the assessee did not receive any amount from the sale consideration, there was no capital gain arising from the transaction.2. Liability of Legal Representative for Tax:The Tribunal did not find merit in the argument that the tax liability should be transferred to the legal representative. The Tribunal focused on the fact that the mortgage debt was discharged by the sale proceeds directly paid to PNB, and the assessee did not receive any amount from the sale.3. Indexation Benefit for the Cost of Acquisition:The Tribunal held that the indexation benefit should be calculated from the year the father of the assessee acquired the property. The Tribunal cited the decision of the Hon'ble Bombay High Court in the case of CIT vs. Manjula J. Shah, which held that the indexed cost of acquisition should be determined with reference to the cost inflation index for the first year in which the asset was held by the previous owner. Thus, the Tribunal allowed the indexation benefit from the financial year 1991.Conclusion:The Tribunal set aside the orders of the authorities below and allowed the appeal of the assessee. The amount paid for discharging the mortgage debt was considered as the cost of acquisition, and the indexation benefit was allowed from the year the father of the assessee acquired the property. Consequently, there was no capital gain arising from the sale transaction, and the tax demand raised against the assessee was quashed.