Overriding title in mortgage discharge excludes diverted sale proceeds from capital gains and limits taxation to equity of redemption.

Sale proceeds applied directly to discharge a mortgage were treated as diverted at source by overriding title, so that amount never became receivable by the transferor and was excluded from capital gains consideration; only the balance representing the assessee's equity of redemption was taxable, with capital gains to be recomputed accordingly and the related deduction under section 80T applied. Relief under section 54E was denied because the statutory deposit requirement was not complied with.

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Issues: (i) whether, for capital gains purposes, the amount paid directly to the bank in discharge of the mortgage was diverted at source by overriding title and only the balance representing the equity of redemption was includible in the assessee's consideration; (ii) whether the assessee was entitled to relief under section 54E.

Issue (i): whether, for capital gains purposes, the amount paid directly to the bank in discharge of the mortgage was diverted at source by overriding title and only the balance representing the equity of redemption was includible in the assessee's consideration.

Analysis: The property was mortgaged and the purchaser, with the bank's consent, paid part of the sale price directly to the bank so that the encumbrance could be cleared and title passed free from mortgage. The assessee did not actually receive that amount and, during the subsistence of the mortgage, retained only the equity of redemption. On the principles governing diversion of income by overriding title, the amount appropriated to discharge the mortgage never formed part of what was truly receivable by the assessee. The Tribunal treated the consideration as confined to the amount actually available to the assessee, namely the value attributable to the equity of redemption, and directed recomputation of capital gains accordingly, with the usual deduction under section 80T.

Conclusion: The issue was decided in favour of the assessee; only the amount of Rs. 45,000 was held to be the relevant consideration for capital gains.

Issue (ii): whether the assessee was entitled to relief under section 54E.

Analysis: The relief was unavailable because the statutory benefit depended on deposit of the sale proceeds or capital gains in the prescribed manner, which the assessee had not made.

Conclusion: The issue was decided against the assessee.

Final Conclusion: The capital gains were directed to be recomputed on the reduced consideration attributable to the assessee's equity of redemption, while the claim under section 54E failed.

Ratio Decidendi: Where sale consideration is diverted at source to discharge a mortgage and never becomes receivable by the transferor, that amount is excluded from the consideration for capital gains and only the amount representing the transferor's real interest is taxable.

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