V.S.M.R. JAGDISHCHANDRAN (DEAD) BY LRSversusCOMMISSIONER OF INCOME TAX, MADRAS

.
-~
               V.S.M.R. JAGDISHCHANDRAN (DEAD) BY LRs.
                                  v.
                                                                                      A

                COMMISSIONER OF INCOME TAX, MADRAS

                                    JULY 9, 1997
                                                                                      B
                   [S.C. AGRAWAL AND D.P. WADHWA, .TJ.]


           Income tax :

            Capital Gai11s-<:omputatio11 of-Ded11ction1-'Cost of acquisition' or
     'cost of improvement' of capital asset-Where the mmtgage was created by          C
     the assessee, mmtgage debt discharged by the assessee out of the sale proceeds
     of the enrnmbered immovable propeny-Held, not deductible from capital
     gains either as cost of acquisitio11 or as cost of improvement.

           Income Tax Act :                                                           D
           Sections 45, 48 & 256(2 )-Reference-Questirm raised in assessee's
     application-Held, Assessee's applicaiio11 did not raise arguable question of
     law and High Cowt 1ightly rejected that applicatio11.

           The assessee sold a house, subject to encumbrance and other plots E
     and Revenue computed the capital gains. The assessee challenged the said
     computation contending that the debts in respect of which the mortgage
     had been executed were discharged by the buyer out of the sale proceeds,
     and that the debts should be considered as increase in cost of acquisition
     of the properties and that in any event the debts may be created as F
     improvement to the properties or as the cost of obtaining clear title to the
     properties. The AAC, however, upheld the contention of the assessee that
     there was an overriding title of the creditors in respect of the sale proceeds
     and there was diversion at source on the basis of such overriding title and
     the assessee was not liable to be charged under the capital gains in respect G
     of the sale of properties. Tribunal held that the clearing of the mortgage
     debt could neither be treated as 'cost of acquisition' nor as 'cost of
     improvement' made by the assessee. The Tribunal, therefore, held that the
     deduction of the capital gains was not justified and declined to refer the
     question to the High Court. The assessee therefore filed an application
     under section 256(2) of the Act, which has been rejected hy the High Court. H
                                          83
    84                   SUPREME COURT REPORTS (1997) SUPP. 2 S.C.R.

A        Dismissing the appeal, this Court                                       ;
                                                                                     .
                                                                                     .

          HELD : The assessee failed to raise any arguable question oflaw and
    the said question was rightly rejected by the High Court. [86-D]

         Ambat Echkutty Menon v. CIT, (1978) 111 ITR 880, overruled.
B
          Commissioner of Income Tax v. V. Indira, (1979) 119 ITR 837 and S.
    Va/liammai v. CIT, (1981) 127 ITR 713, referred to.

    CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4385 of 1997.

C        From the Judgment and Order dated 25.7.83 of the Madras High
    Court in T.C.P. No. 145 of 1983.

          Ms Baby Krishna for the Appellant.

         G.C Sharma, B.K. Prasad, B.S. Ahuja and C. Radha Krishna for the
D   Respondent.

         The Judgment of the Court was delivered by

         S. C. AGRAWAL, J. Special leave granted.

E         This appeal by the assessee is directed against the order dated July
    25, 1984 passed by Madras High Court in T.C. No. 145 of 1983 wherein
    the High Court on an application filed under Section 256(2) of the Act
    declined to direct the Tribunal to state a case and refer the following
    questi~ns of law to the High Court :-


F           11
             1. Whether the Tribunal was right in holding that the levy of the
            capital gains of Rs. 68,400 is proper under the facts and cir-
            cumstances of the case ?

            2. Whether the Tribunal was right in holding that mortgage debts
            does not constitute diversion at source ?
G
            3. Whether the debts discharged by the applicant on the properties
            cannot be said to enhance the cost of acquisition ?"

          The assessee sold a house property No. 22, Chairman Muthurama
    Iyer Road, Madurai for a sum of Rs. 90,000 subject to incumbrance in the
H   assessment year 1975-76 and for the same assessment year he sold plot Nos.
   V.S.M.R. JAGDISHCHANDRAN v. C.l.T. MADRAS [S.C. AGRAWAL,J.] 85

 1, 3 and half of plot No. 4 in T.S. No. 831/1 for a sum of Rs. 12,600. The A
 Income Tax Officer computed the capital gains in respect of the said
 properties at Rs. 68,400. The assessee questioned the computation of
capital gains before the Appellate Assistant Commissioner and contended
 that the debts in respect of which mortgage had been executed were
discharged by the buyer himself out of the sale proceeds, that the debts B
should be considered as increase in cost of acquisition of the properties
and that in any event the debts may be treated as improvement to the
property or as the cost of obtaining clear title to the property. The
Appellate Assistant Commissioner rejected the said contention. He, how-
ever, upheld the contention of the assessee that there was an overriding
title of the creditors in respect" of the sale proceeds and, therefore, there C
was diversion at source on the basis of such overriding title and the assessee
was not liable to charge under the capital gains in respect of the sale of
the properties and, therefore, he deleted the capitals gains of Rs. 68,400
as computed by the Income Tax Officer. The Tribunal, following the
decision of the Kerala High Cour~ in Ambat Echukutty Menon v. Commis- D
sioner of Income Tax (1978) 111 ITR 880, and the decision of the Madras
High Court in Commissioner of Income Tax v. V. Indira (1979) 119 ITR
837, held that clearing of the mortgage debt could neither be treated as
'cost of acquisition' nor as an 'cost of improvement' made by the assessee.
The Tribunal, therefore, held that the deduction of the capital gains was
not justified. Since the Tribunal declined to refer to the High Court the E
questions referred lo - above, the assessee filed an application under
Section 256(2) of the Act before the High Court which has been rejected
by the impugned order. The High Court has relied upon the decision of
the Full Bench of the High Court in S. Valliammai & Anr. v. Commissioner
of Income Tax, (1981) 127 ITR 713, and has held that by discharging the F
mortgage debt subsisting on the property which was the subject matter of
a sale, the assessee was not either improving or perfecting his title or
improving the property in any manner and, therefore, the amount paid for
discharging the mortgage debt cannot be taken to be for the cost of
acquisition as contended by the assessee.
                                                                            G
      In Civil Appeals Nos. 6098-6101 of 1983 filed against the judgment
of the Full Bench of the Madras High Court in S. Valliammai & Anr. v.
Commissioner of Income Tax, (supra) we have examined the correctness
of the view of the Kerala High Court in Ambat Echukutty Menon v.
Commissioner of Income Tax, (supra) and have held that the said decision H
    86                    SUPREME COURT REPORTS [1997) SUPP. 2 S.C.R.

A docs not Jay down the correct law in so far as it holds thilt where the           ...
    previous owner had mortgaged the property during his life time the clear-
    ing off the mortgage debt by his successor can neither be treated as 'cost
    of acquisition' nor as 'cost of improvement' made by the assessee. It has
    been held that where a mortgage was created by the previous owner during
    his time and the same was subsisting on the date of his death, the successor
B   obtains only the mortgagor's interest in the property and by discharging
    the mortgage debt he acquires the mortgage's interest in the property and,
    therefore, the amount paid to clear off the mortgage is the cost of acquisi-
    tion of the mortgage's interest in the property which is deductible as cost
    of acquisition under Section 48 of the Act. In the present case, we find that
C   the mortgage was cleared by the assessee· himself. It is not a case where
    the property had been mortgaged by the previous owner and the asse~see
    had acquired only the mortgagor's interest in the property mortgaged and
    by clearing the same he had acquired the interest of the mortgage in the
    said property. The ·questions raised by the assessee in the application
D   submitted under Section 256(2) of the Act do not, therefore, raise any
    arguable question of law and the said application was rightly rejected by
    the High Court. In the circumstances, even though we are unable to agree
    with the reasons given in the impugned order, we are in the agreement with
    the order of the High Court dismissing the application filed by the assessee
    under Section 256(2) of the Act.
E
          The appeal is, therefore, dismissed. No order as to costs.

    R.K.S.                                                    Appeal dismissed.