TaxTMI 
TaxTMI 
2019 (10) TMI 1198
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....d CIT (A) has erred in upholding the order passed by the Ld ACIT, who has erred in disallowing the deduction of Rs. I,48,24,633/- being claimed as expenses while determined the capital gain. (b) The Ld CIT (A) has failed to appreciate the fact that the sale of land area was effected by Kotak Mahindra Bank Ltd (KMBL) and out of the sales consideration received by them they had deducted the said amount towards principal amount of loans as the bank had existing overriding title on the company's assets. (c) The Ld CIT (A) has failed to appreciate the judicial pronouncement of Hon'be Calcutta High Court in the case of Gopee Nath Paul & Sons vs. Deputy CIT [2005] 278 ITR 240 where it was held that on the sale of firm's business as a going concern the amount paid to banks to have the charge lifted was treated the expenses in relation to transfer. " 2. Briefly stated relevant facts of the case are that the assessee is a manufacturer of cotton / polyster sewing and industrial threads and also engaged in processing of cotton yarn. Assessee is in this business for a long time and filed the return of income for the year under consideration declaring the total l....
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....se notice proposing to tax the said claim of deduction amounting to Rs. 1,48,24,633/- as capital gains. In the reply, dated 21.11.2012 and 23.11.2012, assessee submitted the KMBL has overriding title on the mortgaged asset (the said factory land), the bank invoked the SARFAESI Act and took possession of the said land. Eventually, the bank sold the said land and transferred the same to the buyers with any participation of the assessee and received sale proceeds directly to the account of the bank. Assessee has no role to play in all these events. In principle, the bank has become the owner of the land. Therefore, it is the case of the "diversion of income at source by overriding the title". Since, the assessee has lost the title as well as has never received the sale proceeds to his account, the sale proceeds are not taxable in the hands of the assessee. It is a case of diversion of income at source. Therefore, in the aforementioned computation, assessee reflected the same as an allowable deduction. Regarding Rs. 69,75,629/-, it is the case of the assessee that since the assessee claimed interest payable to the bank as deduction in past, to that extent the same is offered now as tax....
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....where the liabilities of the bank were cleared by the sale proceeds of the assets. It was considered as an expenditure incurred wholly and exclusively in connection with the transfer. Assessee also relied on the view of the Andhra Pradesh High Court in such cases. Further, assessee relied on the judgment of the Apex Court in the case of R.M. Arunchalam Etc vs. CIT [1997] 227 ITR 222 (SC) to support its case. Thus, the assessee submitted that AO failed to the fact that there was a pre-existing overriding title in favour of the bank by virtue of joint equitable mortgage created on 5.2.2009 on immovable properties of the assessee. On considering the above written submissions of the assessee, CIT (A) did not go with the said submission. The arguments relating to "diversion of income by overriding title" was also not entertained. Relying on the judgment of the Hon'ble Supreme Court in the case of CIT vs. Attili N Rao [2001] 252 ITR 880 (SC), as well as the judgment of the Allahabad High Court in the case of CIT vs. Sharad Sharma (2008) 305 ITR 24 (All), CIT (A) opined that it a case of application of income and not diversion of income by overriding charges. Eventually, CIT (A) is of....
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.... who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable ". 3.10 The honourable Calcutta High Court held in the case of Gopinath Paul and Sons vs. D.C.I.T. (278ITR 24O) 5. Section 48(1), as it stood in 1992-93, while providing for computation of capital gains permitted in clause (i) deduction of the "expenditure incurred wholly and exclusively in connection with such transfer". The expression 'in connection with such transfer' is wider than the expression '[or the transfer'. Any amount the payment of which is absolutely necessary to effect the transfer will be an expenditure covered by clause (i) of section 48(1). In other words, if without removing any encumbrance, sale or transfer could not be effected, the amount paid for removing that encumbrance will fall under clause (i). 5.1 From the facts as disclosed above, it appears that the amount was received out of the sale of assets of both the firms under orders of this Court subject to meeting of the liability of the Allahabad Bank since confirmed only upon prior payment. Inasmuch as, unless this liability was met, th....
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....oked powers u/s.l3(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), the title over Plot No.P/1, P/2f P/3A, P/3B and P/4 was automatically divested from the assessee company and vested in Kotak Mahindra Bank Ltd. on 07.01.2010. Further, when the plots were sold by the bank in March, 2010, the sale deeds were executed between the buyer and the bank and the entire consideration received from buyer was appropriated towards the outstanding liability of the bank. The assessee was not at all involved in either the sale of plots or the execution of sale deeds. Therefore, the sale proceeds to the extent of amount appropriated towards loan never reached the assessee as its income and was diverted towards discharge of bank's obligation. 3.12 As regards reliance placed by the Cl. T.{A). while rejecting the assessee's claim upon the judgements of the honourable Supreme Court in the case of Cl. T. vs. Attili N. Rao (252 ITR 880) and the honourable Allahabad High Court in the case of CL T. vs. Sharad Sharma (305 ITR 24), it is submitted that these judgements are not applicable to the facts of the assessee&#....
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....sted from the assessee and vested with Kotak Mahindra Bank Ltd. After taking possession, the bank converted these plots into 7 plots. Further, when the plots were sold by the bank in March, 2010, the sale deeds were executed between the buyer and the bank and the entire consideration received from buyer was appropriated towards the outstanding liability of the bank. The assessee was not at all involved in either the sale of plots or the execution of sale deeds. 3.16 In view of the above, we request your honour to allow the assessee's claim and exclude the principal amount of Rs. 1,48,24,633/- appropriated by Kotak Mahindra Bank Ltd. towards its dues while computing Logn-term Capital Gains." 7. Further, Ld Counsel for the assessee also submitted that the SARFAESI Act, 2002 takes away all the rights of the possession including right to sale the secured property of the assessee. In this regard, Ld Counsel for the assessee brought our attention to the provisions of section 13 relating to "Enforcement of Security Interest" and submitted that vide clause (a) of sub-section 4 of section 13, bank has right to transfer by way of lease, assignment or sale for realisi....
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....land is not perfect; (e) Under the SARFAESI Act, when the bank takes possession of the secured land, the bank gets the 'right to transfer' by way of sale for the purpose of realizing the secured asset vide section 13(4)(a) of the Act. Thus, the assessee lost the right on the said property secured to the bank as the assessee is declared as 'defaulter' under the said Act. The Bank acted as a transferor in the said transfer transaction in matters of executing the transfer deeds and registration deeds. The Bank got the superior rights on the property and assessee had no say in the matter in view of its undisputed default and the provisions of SARFAESI ACT. Further, it is also an undisputed fact that the transferee of the impugned property made the payment to the bank directly no amount was received by the assessee on account of the impugned sale transactions. Thus, we shall now under take to discuss various facets of the doctrines of (i) Over riding Title, (2) Application of Income; and (3) Diversion of Income (Dol) in the following paragraphs. 10. Doctrine of Over-riding title: this doctrine visualises the situation that, to start with, a property is actually owned by t....
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....e by any person referred to in clause (d) of sub-section (4) to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower. 10.2 Interpretation of the above provisions: The provisions of section 13 of the SARFAESl ACT, 2002 provides for enforcement of security interest. According to the said provisions, in case the "borrower (of loan) fails to discharge his liabilities in full' to the secured creditor/Bank, the same may take to following recourses to recover the dues, namely, rt take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset; or (b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset" or (c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor (d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrowe....
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....5 However, in the instant case, the borrower gave in the said rights and has not questioned the bank's initiatives to sell the secured property in any legal forums. In other words, on the facts of the borrower's failure to discharge the liability to the lender-bank, the assessee's title of ownership is subjected to the rights of the Bank, conferred by the said SARFAESI ACT. Thus, the provisions of the said Act provides to the lender-bank the 'over riding title' on the secured property. This is done by the process as per the provisions of law ie the SARFAESI ACT, 2002. These are the ingredients of the doctrine of overriding title. 10.6 Prior to the legislation of the SARFAESI ACT, 2002: It is not out of place to mention that in the period prior to the said Act, the lender banks are under obligation to get such over-riding title on such secured or mortgaged assets from the courts through the process of judgmental law. In other words, in cases of litigation, the Bank needs to obtain the orders from the Courts or DRT, as the case may be, before initiating the 'act of transfer' of the secured assets of the borrower for realising the liabilities. 11. In the ....
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....s no process of law involved and the Government never got an absolute overriding title. There is dispute over the sale of land, and assessee never objected to the said sale in any court of law. In this case, AP Government acted on the concessions of the assessee and it never got any overriding title on the land by way of any judgment from any Court/Tribunal. Para 13 of the said High Court's judgment is relevant. 19. Therefore, the legal proposition of law is that when the sale proceeds of mortgaged property are paid to the creditor of the assessee, the same are not deductible in computing the capital gains on the said property. Therefore, the payments made by the buyers of the property to the creditors directly does not make in any difference so long as there is never a overriding title over the mortgaged property. The underlying rationale of the same, in our opinion, is that, in all the above cases, the creditor/ Bank/Government never got the overriding title on the said property either by way of process of law or by an act of law such as the SARFAESI ACT, which provides for unfettered powers over the property to the creditor/Banks. Mere making payment by the buyer directly....
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....unts of the assessee), we are of the opinion in principle, the doctrine of 'diversion of income by overriding title' applies to the facts of the present case. Therefore, the claim of deduction is sustainable in law. Accordingly, the grounds raised by the assessee are allowed. 23. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on September, 2015. xxxx sd/- (AMIT SHUKLA) (D. KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; .9.2015 PER AMIT SHUKLA, JM: I have gone through the order proposed by my learned Brother in this appeal and have also discussed the issue with him. However, I am unable to persuade myself to subscribe to the view proposed by my learned Brother and also unable to agree with the conclusion arrived at on the issue involved. I, therefore, consider it appropriate to express my view and conclusion on the issue by way of passing a separate order. 2. So far as the facts of the case and arguments put forth by the parties, as discussed in the draft order, there is not much dispute. However, to put succinctly, the relevant facts qua the issue involved are that, the assessee comp....
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....1] 252 ITR 880; and Allahabad High Court in CIT vs Sharad Sharma [2008] 305 ITR 24 (All.) and held that there is no diversion of income by overriding title . 4. The contention made by the Ld. Counsel and Id. DR has been elaborately dealt with in the draft order of the Ld. Brother, which are not being reiterated. The core argument of Ld. Counsel had been that, by virtue of statutory provisions of section 13 of SARFAESI Act, there is a clear cut overriding title on the mortgaged property in favour of the bank and the income realized by the bank and appropriated from the sale of such property directly, amounts to diversion of income and, therefore, the said principal amount cannot be held to be taxable in the hands of the assessee and or is allowable as deduction. He also submitted that, in wake of the SARFAESI Act, the earlier judicial decisions will no longer be applicable. At the time of hearing, following decisions were referred and relied upon, some of them will be discussed herein later in this order:- ST. No. Cases relied upon Citation 1 Sitaladas Tirathdas 41ITR 367 (SC) 2 CIT vs. Attili N Rao 252 ITR 880 (SC) 3 Motilal Chahadamilal Jain ....
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....nction has been drawn by the Apex Court that, where the previous owner had created a mortgage on the property in question and the assessee had inherited the said property along with the mortgage, in that event the assessee would be entitled to the deduction of the amount spent in getting mortgage discharged as cost of acquisition u/s 48. However, where the assessee himself has created the mortgage, then the same consequence will not follow and he would not be entitled for deduction. The relevant observation of the Hon'ble Court in R M Arunachalam (supra) laying down this proposition reads as under :- In taking the view that in a case where the property has been mortgaged by the previous owner during his lifetime and the assessee, after inheriting the same, has discharged the mortgage debt, the amount paid by him for the purpose of clearing off the mortgage is not deductible for the purpose of computation of capital gains, the Kerala High Court has failed to note that in a mortgage there is transfer of an interest in the property by the mortgagor in favour of the mortgagee and where the previous owner has mortgaged the property during his lifetime, which is subsisting at the ....
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.... by law upon some property; or charge is otherwise involuntarily created; then the sum so charged must be excluded from the income of the person in enjoyment of the property. In other words, where income is not applied but 'diverted by an 'overriding title' from the assessee who would have otherwise have received it, it cannot be considered as the income of the assessee at all. Where the obligation effectively slices away part of the corpus of the right of the assessee to receive the entire income, it would be a case of 'diversion of income'. But the biggest rider in applying this principle and most determinative factor in deciding such situations as stressed by the Hon'ble Supreme Court in several cases from time to time is the nature and effect of the assessee's obligation in regard to the amount in question, Hon'ble Apex Court in the case of CIT vs. Sitaldas Tirathdas, [1961] 41 ITR 367, laid down the following test with regard to 'diversion of income by overriding title' in the following manner :- "In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obliga....
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....f obligation is to be examined. 10. If we apply the above principle of law, then here in this case, there cannot be denying fact that all throughout the obligation was upon the assessee to discharge its debt liability and to clear the charge on the mortgaged property. This can be gauged by following facts; the business loan was taken by the assessee for its own business purpose and liability to repay the loan/debt was on the assessee; interest paid/payable was claimed/allowable as deduction of expenses incurred for the business purpose in computation of total income; assessee was under the legally binding covenant to repay the loan along with the interest; property was mortgaged to the Bank to secure the debt/loan by the assessee; liability to free the charge on mortgage land was upon the assessee; Had the loan and interest been waived off by the bank, then assessee would have shown this as its income u/s 41(1); further, if the assessee would have paid back the entire loan, then the mortgaged property would have got vested back to assessee. Thus, the obligation was always upon the assessee and it would not be shifted to the bank merely because the bank took possession of the ....
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.... the question in the following manner :- "8, We are of the view that the Tribunal and the High Court were in error. What was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised therefore belonged to the assessee. From out of that price, the State deducted its dues towards "/cists" and interest due from the assessee and paid over the balance to him. The capital gain that the assessee made was on the immovable property that belonged to him. Therefore, it is on the full price realised (less admitted deductions) that the capital gain and the tax thereon has to be computed". From the above proposition, it is amply clear that no such deduction of the dues realized by a creditor from the sale of immovable property of the assessee is allowable from the computation of capital gain in such cases and circumstances. (ii) Decision of Bombay High Court in CIT vs Roshanbabu Mohammed Hussein Merchant, [2005] 275 ITR 231 (Bom) In this case, the question of law admitted by the Hon'ble Jurisdictional High Court read as under :- "Whether the repayment of the mortgage debt created by the assess....
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....fter the discharge of mortgage debt. In such a case, the expenditure incurred by the assessee to discharge the mortgage debt created by the previous owner to acquire absolute interest in the property is treated as 'cost of acquisition' and is deductible from the full value of consideration received by the assessee on transfer of that property. However, where the assessee acquires a property which is unencumbered, then, the assessee gets absolute interest in that property on acquisition. When the assessee transfers that property, the assessee is liable for capital gains tax on the full value (less admitted deductions) realised, even if an encumbrance is created by the assessee himself on that property and the assessee is under an obligation to remove that encumbrance for effectively transferring the property. In other words, the expenditure incurred by the assessee to remove the encumbrance created by the assessee himself on the property which was acquired by the assessee without any encumbrance is not allowable deduction under section 48 of the Income Tax Act. 15. It is true that in none of the aforesaid cases, the Apex Court has specifically held that repayment of....
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.... to hereinabove. 18. For all the aforesaid reasons, we answer question set out at para 2 in the negative, i.e., in favour of the revenue and against the assessee. From the law as discussed and decided by the Hon'ble Jurisdictional High court it is absolutely clear that, firstly, when the assessee himself has created a mortgaged charge, then no deduction is allowable for discharging the charge or encumbrance created by the assessee on mortgaged asset; and secondly, when the property is sold for discharge of such a mortgaged debt, then whether the amount has been actually realized by the assessee or not is immaterial and the whole of the amount of sale realised is to taxed as capital gain in the hands of the assessee. This is evident from the highlighted portion of the judgment and clinches the issue before hand. (Hi) CIT vs Sharad Sharma, [2008] 305 ITR 24 (Allahabad) :- The question of law referred to the Hon'ble High Court for opinion was as under :- "Whether on the facts and circumstances of the case, the Tribunal was justified in holding that there was an overriding charge against the sale proceeds of property and the assessee was not ....
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.... the income attributable to an assessee get diverted by overriding title'? The determinative factor, in our view, is the nature and effect of the assessee's obligation in regard to the amount in question. When a third person becomes entitled to receive the amount under an obligation of an assessee even before he could lay a claim to receive it as his income, there would be a diversion of income by overriding title; but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the asses see, it will be a case of application of income by the assessee and not of diversion of income by overriding title. In view of the discussion made above we find that in the present case the assessee was not entitled to the deduction as claimed on account of discharge of mortgage debt of Rs. 95,000/- to the Bank. In fact the entire amount of sale consideration had been received by the assessee and thereafter part of it applied for discharge of the mortgage debt. It was thus a case of application of income received, (emphasis added)." 12. Thus, from the proposition of law and ratios as culled out from the above decisi....
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....lender and the Court can adjudicate the amount due and pass the final award whereas, now no intervention of the Court is required and rights have been vested to the bank/secured creditors itself. (iv) The Court earlier use to appoint Receiver to take possession of the secure assets, sell it and appropriate the proceeds towards payment of lender's dues and now under the Act after taking over the possession of the secured assets, the secured creditor can transfer the secure assets by way of lease, assignment or sale in its own right in the capacity of a transferor and not on behalf of the borrower. Secure creditor issues sale certificate to the transferor and the borrower is not required to execute the document, relating to transfer. (v) Lastly, earlier the Civil suit for recovery could be filed by the lender if the borrowers have defaulted any payments of dues, whereas now section 13 of the Act has given a huge powers to the lenders and if notice has been issued, the borrower cannot sale, lease or transfer the asset. 14. However, such a distinction as made by the Id. Counsel above are purely superficial and will not make any difference to the legal propositi....
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....very relevant to understand the law as envisaged in Section 13, which are reproduced as under:- (f) "Borrower" means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of a securitisation company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance; (j) "default" means non-payment of any principal debt or interest thereon or any other amount payable by a borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in the books of account of the secured creditor; (I) "financial asset" means any loan or advance granted or any debentures or bonds subscribed or any guarantees given or letters of credit established or any other credit facility extended by any bank or financial institution; (I) "financial asset" means debt or receivables and includes- (i) a claim ....
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....any bank or financial institution or any consortium or group of banks or financial institutions and includes- (i) debenture trustee appointed by any bank or financial institution; or (ii) securitisation company or reconstruction company, whether acting as such or managing a trust set up by such securitisation company or reconstruction company for the securitisation or reconstruction, as the case may be; or (Hi) any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created for due repayment by any borrower of any financial assistance; (ze) "Secured debt" means a debt which is secured by any security interest: (zf) "Security interest" means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in section 31; Now in light of these definitions let us examine Section 13 which envisages the enforcement of security interest. The section 13 reads as under :- (1) Notwithstanding anything contained in section 69 or section 69A ....
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....sing the secured asset: PROVIDED that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt: PROVIDED FURTHER that where the management of whole of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security for the debt. (c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor; (d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt. (5) Any payment made by any person referred to in clause (d) of sub-section (4) to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower. (6) Any transfer of secured asset after taking possession thereof or takeover of management und....
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....of his secured assets after depositing the workmen's dues with the liquidator in accordance with the provisions of section 529A of that Act: PROVIDED ALSO that the liquidator referred to in the second proviso shall intimate the secured creditors the workmen's dues in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956) and in case such workmen's dues cannot be ascertained, the liquidator shall intimate the estimated amount of workmen's dues under that section to the secured creditor and in such case the secured creditor may retain the sale proceeds of the secured assets after depositing the amount of such estimated dues with the liquidator: PROVIDED ALSO that in case the secured creditor deposits the estimated amount of workmen's dues, such creditor shall be liable to pay the balance of the workmen's dues or entitled to receive the excess amount, if any, deposited by the secured creditor with the liquidator: PROVIDED ALSO that the secured creditor shall furnish an liquidator to pay the balance of the workmen's dues, if any. Explanation : For the purposes of this subsection,- (a) "record date" means the date agreed upon by....
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....r fails to discharge his liability in full within the period and in terms of notice, then, the secured creditor may take recourse to various measures as illustrated in the various clauses to sub-section 4 of section 13, to recover his secured debt only. The secured creditor has to take recourse u/s 14(1) of the Chief Metropolitan Magistrate or District Magistrate to take over the possession of the property. Thus, the crucial focus of sub-section (4) is that powers and measures is "to recover the secured debt" only and not over and above. In other words the title in some of the cases is passed for securing the debt and realizing the same. Shift in title is not shift on obligations of the borrower albeit obligation of the borrower is being discharged by the lender. (iv) The measures as illustrated in various clauses of the subsection (4) are purely mechanism to secure the debts like, taking possession of the secured asset (mortgaged asset) including the right to transfer; take over the management of the business of the borrower, appoint any person to manage the secured assets; to give time to person who has acquired the secured assets from the borrower for recovery of money;....
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.... (on actual value) and from the sale proceeds recovers a sum of Rs. 50 lakhs plus interest of Rs. 10 lakhs, i.e. the amount of secured debt due. Then, the moot point is, whether (B' is entitled to appropriate all the money of Rs. 2 crores; or the secured interest /debt due of Rs. 60 lakhs; or the balance sum of Rs. 1.40 crores is to be paid back to the assessee as this was not part of secured interest or debt due. No where the SARFAESI Act, provides that the 'B' is entitled to appropriate all, albeit only to the extent of balance secured debt of Rs. 60 lakhs. If the contention of the Ld. Counsel is accepted, then the logical proposition would be that, to the extent of Rs. 60 lakhs there was a 'diversion of Income by overriding title' and for the balance money of Rs. 1.40 crores, there was no such diversion and the title belonged to the assessee. This would, in my humble opinion would not be correct proposition, because, the title on the and passes to the bank only to fulfill the obligation of the assessee and enable the Bank to recover its own due money/debt. There would be no deviation of the aforesaid principles, even in the case where the amount realize....
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....s of account but also shown it as its income as LTCG in the computation of income, albeit claimed a wrong deduction of principal amount as cost of acquisition. The assessee now cannot plead otherwise. Even if we go by the proposition that entries in the books of account are not relevant for deciding the taxability of income, then also the fundamental aspect that permeates in this case is that, the liability/debt was entered in the books of account and duly reflected in the audited balance sheet and all throughout the obligation to discharge its self created liability/debt was upon the assessee which remained its obligation till the end. Hence, such a discharge of liability/debt even under the action taken by lender under the SARFAES1 Act was nothing but application of income. 19. To conclude, under the SARFAESI Act the Bank merely gets a statutory enforceable power/right to sell and dispose off the security interest, the obligation of payment of which was on the borrower and the borrower has not done or played his part of covenant to discharge his obligation on the outstanding loan. In all such cases, the income on sale of secured asset by the secured creditor for its secured in....
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....2. (ii) Whether, on the facts and circumstances of the case, the entire sale consideration, which is received by the Kotak Mahindra Bank from the transfer of mortgaged assets under the provisions of section 13 of the SARFAESI Act, will not be chargeable to Income tax in the hands of the assessee on the principle of "diversion of income by overriding title". 3. The Hon'ble President was pleased to nominate Hon'ble Accountant Member as a Third Member to decide the above questions, vide his order dated 12-05-2019. The Hon'ble Third Member vide his order dated 10- 05-2019 has decided the issues in the following manner:- PER G.S.PANNU, VICE PRESIDENT: "The following points of difference have been referred to me by the Hon'ble President under Section 255(4) of the Income-tax Act, 1961 (in short 'the Act') : "(i) Whether, on the facts and circumstances of the case, the assessee was justified in claiming the deduction of Rs. 1,48,24,633/- out of full value of consideration arising from the transfer of mortgaged capital asset by the Kotak Mahindra Bank, which took over the possession of the said asset under the provisions of the SARFAESI Act, 2002. ....
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....rtioned against the principal component of the loan was claimed as deduction under Section 48 of the Act alongwith the indexed cost of acquisition and improvements ( Rs. 3,43,583/- and other incidental expenses of Rs. 6000/- relating to sales). The Assessing Officer disallowed the above claim of the assessee and made an addition of Rs. 1,48,24,633/- while computing the income under the head 'Capital Gains'. On further appeal by the assessee, the CIT(A) upheld the order of the Assessing Officer. Aggrieved by the same, assessee preferred further appeal before the Tribunal. 3. When the matter came up before the Division Bench, the appellant contended that the consideration received by KMBL on sale of plots, to the extent it was adjusted by KMBL towards principal component of the loan, never accrued to the assessee and was in the nature of 'diversion of income by overriding title' and, therefore, the same should be allowed as deduction while computing the income under the head Capital Gains. The learned Accountant Member concurred with the submissions advanced on behalf of the assessee on this issue and ordered deletion of addition made on this account. In deleting the addition, the....
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....that even the learned Judicial Member has accepted the fact that because of the default in payment of loan by the assessee to KMBL, the mortgaged property vested with the bank. Once that is so, the consideration received on transfer of said property never accrued to the assessee as the asset itself did not belong to the assessee. It was further contended that the property was sold by KMBL in its own right and not as the agent of the assessee. There was no principal-agent relationship between KMBL and the assessee. My attention was drawn to clause nos. 9, 11 and 12 of the notice issued by KMBL under Section 13(2) of the SARFAESI Act dated 30.11.2009, possession notice by KMBL dated 07.01.2010 and the sale certificate by KMBL. In the possession notice dated 07.01.2010, it was pointed out that the assessee had expressed its inability to repay the loan and KMBL has in clear terms stated that they have taken over the possession of the mortgaged property and assessee was asked not to deal with the said property. Further, it was pointed out that as per sale certificate, the property was sold by the authorised officer on behalf of KMBL and not on behalf of the assessee. According to him, t....
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....as on account of the assessee. The amount retained by KMBL towards loan liability was merely an application of income by the assessee. In this regard, the learned DR relied on the decision of the Chennai Bench of the Tribunal in the case of Geetha Subrabamiam vs. ITO on ITA Nos. 427 & 428/MDS/2017 dated 27.04.2017. It was further argued that merely by taking over possession of the assets of borrower under SARFAESI Act, the secured creditor does not acquire the ownership of the assets or becomes the owner of the assets. In this regard, he placed reliance on the decision of the Delhi Bench of the Tribunal in the case of Rajasthan Petrosynthetics Ltd in ITA no. 1397/Del/2013 dated 22.08.2014. It was further argued that if KMBL would have realised any amount in excess of the amount of loan liability recoverable by KMBL, the excess would have been returned by KMBL to the assessee. Thus, it cannot be said that the ownership of the assets vested with KMBL only and asset was sold by KMBL on principal to principal basis and not as agent of the assessee. 9. I have carefully considered the rival submissions, perused the respective orders passed by the learned Judicial Member and learned Ac....
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....ment made by a person for the purpose of clearing off the mortgage created by the previous owner is to be treated as cost of acquisition of the interest of the mortgagee in the property and is deductible under section 48." (underlined for emphasis by me) 10. Further, in the case of CIT vs. Attilli N. Rao [2001] 252 ITR 880 (SC) the question before the Hon'ble Supreme Court was as under: "1. Whether on the facts and in the circumstances of the case and in law, the Appellate Tribunal was correct in holding that the amount realised by the sale of the assessee's interest in the property was only Rs. 4,33,960 i.e., Rs. 5,62,980 minus Rs. 1,29,020 ? 2. Whether on the facts and in the circumstances of the case and in law, the Appellate Tribunal was correct in holding that the amount realised under the charge or mortgage by the Government by public auction does not partake of the character of 'full value of consideration' envisaged under section 48 of the Income-tax Act ? 3. Whether on the facts and in the circumstances of the case and in law, the Appellate Tribunal was justified in holding that the amount payable by the assessee in di....
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.... a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable." (underlined for emphasis by me) 12. It is evident from the aforesaid rulings of the Hon'ble Supreme Court, which have been relied by the learned Judicial Member, that when the charge on the property has been created by the assessee himself, he cannot claim deduction of the principal amount of the loan either as expenditure under Section 48 of the Act or as 'diversion of income by overriding title'. To this extent, I concur with the view of the learned Judicial Member. In the case of Attilli N. Rao (supra), the Hon'ble Supreme Court, while arriving at the conclusion, observed that at the time when the property was sold, the property belonged to the assessee and, therefore, the sale consideration of the said property also belonged to the assessee and denied the deduction claimed by the assessee from the full value of consideration received on sale of property. This aspect needs to be anal....
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....d debts by the borrower. [(3A) If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any objection, the secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate [within fifteen days] of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower: Provided that the reasons so communicated or the likely action of the secured creditor at the stage of communication of reasons shall not confer any right upon the borrower to prefer an application to the Debts Recovery Tribunal under section 17 or the Court of District Judge under section 17A.] (4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely :- (a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale ....
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....nder sub-section (4), by the secured creditor or by the manager on behalf of the secured creditor shall vest in the transferee all rights in, or in relation to, the secured asset transferred as if the transfer had been made by the owner of such secured asset. (7) Where any action has been taken against a borrower under the provisions of sub-section (4), all costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall be recoverable from the borrower and the money which is received by the secured creditor shall, in the absence of any contract to the contrary, be held by him in trust, to be applied, firstly, in payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money so received shall be paid to the person entitled thereto in accordance with his rights and interests. [ (8) Where the amount of dues of the secured creditor together with all costs, charges and expenses incurred by him is tendered to the secured creditor at any time before the date of publication of notice for public auction or inviting....
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....g the amount of such estimated dues with the liquidator : Provided also that in case the secured creditor deposits the estimated amount of workmen's dues, such creditor shall be liable to pay the balance of the workmen's dues or entitled to receive the excess amount, if any, deposited by the secured creditor with the liquidator : Provided also that the secured creditor shall furnish an undertaking to the liquidator to pay the balance of the workmen's dues, if any. Explanation.-For the purposes of this sub-section,- (a) "record date" means the date agreed upon by the secured creditors representing not less than [sixty per cent] in value of the amount outstanding on such date; (b) "amount outstanding" shall include principal, interest and any other dues payable by the borrower to the secured creditor in respect of secured asset as per the books of account of the secured creditor. (10) Where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the secured creditor may file an application in the form and manner as may be prescribed to the Debts Recovery Tribunal having jurisdiction or....
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....-section (2) of Section 13 of the SARFAESI Act, the right of the borrower with respect to the secured asset gets restricted, and he is not allowed to part with the secured asset without the prior approval of the secured creditor. Further, on non-repayment of loan or instalment amount within the period specified in the notice issued under Sub-section (2) of Section 13 of the SARFAESI Act, all the rights in the secured asset get vested with the secured creditor and the borrower has no right in the said asset. The borrower is not free to decide even the way in which the secured asset shall be parted with. It is the sole discretion of the secured creditor as to how the secured asset shall be dealt with. This right in favour of the secured creditor is created by virtue of SARFAESI Act; and, this has been interpreted by the learned representative for the assessee to say that the mortgaged property vested with KMBL and, therefore, the property was sold by KMBL in its own right. In my considered opinion, the fall-out of noncompliance envisaged in Sub-section (2) of Section 13 of the SARFAESI Act provides the secured creditor all or any of the rights enumerated in Sub-section (4) thereof. C....
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....he assessee. 18. The situation can also be seen de hors the SARFAESI Act. The assessee in the present case availed mortgage loan from KMBL and, one of the condition was that if the assessee defaults in repayment of loan and interest, the mortgaged property will be sold by KMBL to recover the outstanding loan and interest amount from the assessee. The assessee and KMBL, both were aware of this fact at the time of advancing of loan by KMBL to the assessee; and, the assessee voluntarily chose to enter into such an arrangement wherein property owned by it was mortgaged to the bank as security; admittedly, assessee agreed to the condition of disposal of the property by KMBL in case of default in repayment of loan by it. This arrangement, even without force of any law, was clear and unambiguous. Thus, it was only a voluntary action on the part of the assessee to enter into such an obligation and assessee was not compelled by law or any other obligation beyond it's control to enter into such an arrangement. Once that is so, any action taken by KMBL to enforce it's right to recover the amount which, in the present case, is right to sell the property to recover amount cannot be said to b....
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....st be given to the intent and purpose of the law. The purpose of SARFAESI Act, and which clearly emerges from the phraseology of Section 13 of SARFAESI Act, is to effectuate and expedite the recovery of secured interest of the secured creditor and certainly not, so far as the present case is concerned, to reduce or to impair the provisions of the Act in determination of income-tax liability of the assessee. 20. In my considered opinion, so far as the instant dispute is concerned, the legal position prevailing prior to SARFAESI Act is also germane even after the enactment of SARFAESI Act. The law laid down by the Hon'ble Courts with respect to 'diversion of income by overriding title' and deduction to be claimed under Section 48 of the Act while computing the income from Capital Gains, which are discussed by the ld. Judicial Member and also relied upon by the ld. DR, are still good law, and is fully applicable in the instant case. 21. In view of the above reasoning, I hold that in the present case there was no diversion of sale proceeds by overriding title, but on the contrary, there is only a mere application of the sale proceeds realised on sale of plots towards the disc....