Capital gains deduction for mortgage payments directly discharged from sale proceeds of encumbered property

Amounts paid directly to mortgagees from the sale consideration of mortgaged immovable property were treated as deductible in computing capital gains, because the payments discharged an encumbrance on the property as part of the transfer. Section 48 was applied to allow deduction of expenditure wholly and exclusively connected with the transfer, since the transferor conveyed only the equity of redemption and had no right to receive sums diverted to mortgagees. The diverted amount was not regarded as consideration accruing to the transferor. Section 51 was held inapplicable because it concerns advance money in failed negotiations, not repayment of a mortgage debt.

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Issues: Whether the amount paid directly to mortgagees out of the sale consideration of immovable property was excludible while computing capital gains under section 48 of the Income-tax Act, 1961.

Analysis: The sale of mortgaged ancestral property was effected with the purchaser being assured of title free from encumbrance, and the amounts paid directly to mortgagees discharged the burden on the property as part of the transfer itself. The expression in section 48 allowing deduction of expenditure incurred wholly and exclusively in connection with the transfer was held to cover such payments, because the assessee conveyed only the equity of redemption and had no right to receive the amounts diverted to mortgagees. The amount did not form part of the consideration accruing to the assessee, and the court also rejected reliance on section 51, since that provision applies to advance money in failed negotiations and not to a mortgage debt constituting a burden on the asset.

Conclusion: The amount paid directly to mortgagees was deductible in computing capital gains, and the assessee succeeded on the issue.

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