Taxability of mortgaged property surplus, business loss on guarantee settlement, and sustained disallowance of professional expenses

Sale consideration received on disposal of mortgaged property was treated as accruing to the assessee because the transaction was not shown to be a compelled sale subject to diversion of income by overriding title; the surplus was therefore taxable as long-term capital gain. A write-off arising from settlement of borrower dues in the ordinary course of financing activity and guarantee business was treated as a commercial loss and allowed as business loss. Part of the legal and professional expenses was disallowed because the assessee failed to furnish a satisfactory bifurcation or supporting evidence showing exclusive business use, and the estimated disallowance was sustained.

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Issues: (i) Whether the surplus arising from sale of mortgaged property was taxable as long-term capital gain in the hands of the assessee. (ii) Whether the balance amount written off in settlement with the borrower was allowable as a business loss. (iii) Whether the disallowance of part of the legal and professional expenses was justified.

Issue (i): Whether the surplus arising from sale of mortgaged property was taxable as long-term capital gain in the hands of the assessee.

Analysis: The sale deed and payment schedule showed that the assessee received the sale consideration and only thereafter the mortgage was released and the lender was paid. The sale was not established to be a compelled sale by the lender so as to attract the principle of diversion of income by overriding title. The assessee retained control over the transaction and the income accrued to it.

Conclusion: The addition on account of taxable long-term capital gain was upheld and this issue was decided against the assessee.

Issue (ii): Whether the balance amount written off in settlement with the borrower was allowable as a business loss.

Analysis: The assessee was engaged in financing activities and had given guarantees in the ordinary course of business. The borrower defaulted, a settlement was entered into, and only part of the dues could be recovered. The remaining amount represented a loss arising from business operations and not a colourable device. The mere non-fulfilment of the condition examined by the Revenue did not negate the commercial character of the loss.

Conclusion: The write-off was allowed as a business loss and this issue was decided in favour of the assessee.

Issue (iii): Whether the disallowance of part of the legal and professional expenses was justified.

Analysis: The assessee could not furnish a satisfactory bifurcation or supporting details to show that the full expenditure related exclusively to its own business. In the absence of adequate evidence, the estimate adopted by the appellate authority was not disturbed.

Conclusion: The disallowance of part of the legal and professional expenses was sustained and this issue was decided against the assessee.

Final Conclusion: The appeal succeeded only on the issue of the write-off as business loss, while the additions relating to the capital gain and the professional expenses were sustained.

Ratio Decidendi: Where sale consideration from mortgaged property is received by the assessee and the assessee thereafter discharges the lender's dues, the surplus accrues to the assessee and is taxable; however, a loss arising from a defaulted guarantee arrangement entered in the ordinary course of financing business may be allowed as business loss if commercially incurred and duly settled.

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