Capital gains exclude amounts diverted to satisfy a prior Government charge, while unsupported interest deduction is denied.

In capital gains computation, sale proceeds diverted to discharge a prior Government charge on the property were excluded because that amount never reached the assessee and related only to the transfer of the assessee's actual interest. The deduction was also treated as necessary to secure complete title, so the secured amount was not includible in the taxable gain. By contrast, the interest payment was not shown to be expenditure incurred wholly and exclusively in connection with the transfer, nor part of cost of acquisition or improvement, so the deduction was denied. The assessment was therefore to be recomputed on that basis.

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Issues: (i) Whether the amount appropriated by the Government towards arrears secured on the property was to be excluded while computing capital gains on the auction sale of the assessee's interest in the property. (ii) Whether the interest payment of Rs. 3,825 was allowable in computing capital gains.

Issue (i): Whether the amount appropriated by the Government towards arrears secured on the property was to be excluded while computing capital gains on the auction sale of the assessee's interest in the property.

Analysis: The sale proceeded subject to a mortgage or charge in favour of the Government, and the secured debt was discharged out of the auction proceeds before the balance was paid to the assessee. The consideration for capital gains purposes had to be confined to the value referable to the assessee's own interest in the property, because the amount diverted to the Government never reached the assessee as his income and represented an overriding claim attached to the property. The deduction was viewed also as an amount necessary to obtain complete title and, in that sense, relatable to acquisition of the full interest in the asset.

Conclusion: The amount of Rs. 1,29,020 was not to be included in the assessee's capital gains computation and the assessee succeeded on this issue.

Issue (ii): Whether the interest payment of Rs. 3,825 was allowable in computing capital gains.

Analysis: No sufficient basis was shown to bring the interest payment within the permitted deductions for capital gains computation. It was neither established as expenditure incurred wholly and exclusively in connection with the transfer nor as cost of acquisition or improvement of the capital asset.

Conclusion: The claim for deduction of Rs. 3,825 was rejected and the assessee failed on this issue.

Final Conclusion: The capital gains assessment was required to be recomputed by excluding the secured Government amount, while the disallowance of the interest payment was sustained, resulting in a partial allowance of the appeal.

Ratio Decidendi: For capital gains computation, consideration must be confined to the value referable to the transferor's actual interest in the asset, and amounts diverted by a prior mortgage or charge that never reach the assessee are not includible in the computation.

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