Capital gains on mortgaged asset sale: self-created loan repayment is not deductible and no overriding title applies.

Where the assessee itself created the mortgage and the secured creditor sold the asset under SARFAESI to recover dues, the amount appropriated towards repayment of the self-created principal liability was not deductible under section 48 because it was neither cost of acquisition nor expenditure incurred in connection with transfer. The bank's realisation of sale proceeds also did not amount to diversion of income by overriding title, as SARFAESI enforcement did not transfer beneficial ownership to the bank and the amount remained discharge of the assessee's own obligation. The capital gains computation therefore included the adjusted amount, and the plea for exclusion failed.

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Issues: (i) Whether the principal amount of loan appropriated by the bank on sale of the mortgaged asset was deductible while computing capital gains under section 48; (ii) whether the sale proceeds realised by the bank were not chargeable in the assessee's hands on the footing of diversion of income by overriding title under the SARFAESI Act.

Issue (i): Whether the principal amount of loan appropriated by the bank on sale of the mortgaged asset was deductible while computing capital gains under section 48.

Analysis: The assessee had itself created the mortgage in favour of the bank. On default, the secured creditor invoked section 13 of the SARFAESI Act and sold the secured asset to recover the outstanding dues. The governing principle is that where the mortgage is created by the assessee itself, discharge of that liability is not cost of acquisition or expenditure incurred wholly and exclusively in connection with the transfer. The amount applied towards repayment of the self-created debt remains part of the assessee's obligation and is only application of income.

Conclusion: The deduction of the principal amount was not allowable under section 48 and is against the assessee.

Issue (ii): Whether the sale proceeds realised by the bank were not chargeable in the assessee's hands on the footing of diversion of income by overriding title under the SARFAESI Act.

Analysis: The statutory powers under section 13 of the SARFAESI Act enable the secured creditor to take possession and realise the secured debt, but they do not transfer beneficial ownership so as to create a diversion of income by overriding title in favour of the bank. The decisive factor remains the nature of the obligation. Since the liability originated from the assessee's own mortgage arrangement, the sale proceeds retained by the bank were received in discharge of that obligation and not diverted before accrual to the assessee in law. The earlier judicial principle treating such repayment as application of income continued to apply.

Conclusion: The sale proceeds were chargeable in the assessee's hands and the plea of diversion of income by overriding title fails.

Final Conclusion: The majority held that the amount adjusted by the bank towards the assessee's principal loan liability could not be excluded from capital gains computation and that the transaction did not involve diversion of income by overriding title.

Ratio Decidendi: Where the assessee itself creates the mortgage and the secured creditor realises the debt by sale of the secured asset, the amount appropriated towards repayment of that self-created liability is only application of income and is neither deductible under section 48 nor excluded on the theory of diversion by overriding title.

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