Self-created mortgage payments are not deductible from capital gains, and profit may be estimated when books are not produced.

A self-created mortgage discharged from sale proceeds was treated as an application of income, not a diversion by overriding title, so the amount paid to the bank was not deductible in computing capital gains and the full transfer consideration remained chargeable subject only to statutory deductions. Where the assessee failed to produce books of account for verification, rejection of the declared result and estimation of net profit on a reasonable basis was permissible. The 2.5% turnover estimate was upheld as fair on the facts, and the Revenue's additions were maintained.

---

---

Issues: (i) Whether the amount directly paid to the bank against the mortgaged property could be deducted while computing capital gains on sale of the property and related assets; (ii) Whether the estimation of net profit at 2.5% of turnover was justified in the absence of production of books of account.

Issue (i): Whether the amount directly paid to the bank against the mortgaged property could be deducted while computing capital gains on sale of the property and related assets.

Analysis: The mortgage was created by the assessee itself to secure business borrowings, so the charge on the property was self-created. The amount paid to discharge that liability did not constitute diversion of income by overriding title. It represented application of income, and the capital gains had to be computed on the full value realised from transfer, subject only to admissible deductions under the Act. The authorities relied on by the assessee were distinguished, while the principles governing self-created encumbrances and discharge of mortgage debt were applied.

Conclusion: The deduction was not allowable and the disallowance was upheld in favour of the Revenue.

Issue (ii): Whether the estimation of net profit at 2.5% of turnover was justified in the absence of production of books of account.

Analysis: The books of account were not produced before the Revenue authorities for verification. In such circumstances, rejection of the declared book result and estimation of profit on a reasonable basis was permissible. The reduced rate adopted by the appellate authority was treated as fair and justified on the facts.

Conclusion: The estimation of net profit at 2.5% was upheld in favour of the Revenue.

Final Conclusion: The assessee's substantive challenges to the capital gains computation and profit estimation failed, and the additions sustained by the appellate authority were maintained.

Ratio Decidendi: A liability arising from a self-created mortgage is an application of income, not diversion by overriding title, and where books of account are not produced, profit may be determined on a reasonable estimation basis.

---