ITO, WARD-1(1), HYDERABAD vs. ARKA PROPERTIES PRIVATE LIMITED, HYDERABAD

The learned DR has also referred to the bank account statements and submitted that the assessee has prepaid this amount to the bank without a default in payment of the loan by the principal borrower. The learned DR has pointed out that after the sale of the property, in question, the repayment was only Rs.40 crores for the loan availed by the sister concern and Rs.10 crore was kept in the deposit account which was adjusted against the loan due subsequently and, therefore, it is clear that at the time of sale of the property, there was no default. The learned DR has then referred to the order of the learned CIT (A) and submitted that the learned CIT (A) has relied upon the decision which are not applicable in the facts of the present case and therefore, the impugned order of the learned CIT (A) is liable to be set aside and the order of the Assessing Officer is to be restored.

On the other hand, the learned AR of the assessee has referred to the letter issued by the ICICI Bank dated 12/03/2015 and submitted that it is only because of the demand of the Bank and settlement/agreement between the bank and the assessee, the property was sold after taking the no objection from the Bank and the sale consideration was directly applied for the repayment of the loan amount. He has referred to clause (5) and (6) of the agreement and submitted that to avoid the auction of the property, which would have damaged the image and reputation as well as the business of the assessee, the assessee took a wise business decision to pay the part payment to the bank as per the said letter dated 12/03/2015 from the sale proceeds of the Page 4 of 24 property, in question, and made the payment of Rs.50 crores to the bank. Thus, once the amount was directly appropriated by the bank for recovery of the loan, the same cannot be assessed as income of the assessee. The learned AR has submitted that the payment of the amount to the bank is nothing but discharge of the charge and diversion by overriding the title which is an allowable deduction u/s 48(1) of the I.T. Act, 1961. Therefore, only the real income derived by the assessee out of the sale transaction can be assessed to tax. As per the terms & conditions of the guarantee agreement, the guarantor shall not sale/transfer, assign, dispose off, mortgage, pledge or create any lien or in any way encumber the immovable and movable properties. Therefore, the transfer of the property was not feasible without bank’s prior written consent by discharging the obligation under the guarantee agreement in full. He has pointed out that M/s. Soma Infrastructure (P) Ltd went into a serious financial difficulty and the loan given by the ICICI Bank became a non-performing asset to the bank on account of default of loan amount and interest thereon. He has referred to the bank account statement and submitted that to the extent of Rs.40 crores was appropriated towards loan overdue repayment and balance of Rs.10 crores was applied towards bank fee and interest. Thus, the learned AR has submitted that it is a case of default on the part of the Soma Infrastructure (P) Ltd for repayment of loan amount and interest thereon and under the unavoidable situation and on account of pressure from the bank, the assessee sold the agricultural land, in question, as per the negotiations with the Bank which has put Page 5 of 24 the condition that the mortgage shall be relaxed but the sale proceeds must be routed through the ICICI Bank only. Only in these conditions, the bank agreed to release the charge on the immovable property subject to the payment of Rs.50 crores. The learned AR has submitted that there was a time limit of 15 days for settling the transaction and accordingly the land was sold for a total sum of Rs.61.25 crores out of which Rs.50 crores was retained by the ICICI Bank towards the recovery of loan given to M/s. Soma Infrastructure (P) Ltd. Thus, the learned AR has submitted that the sum of Rs.50 crores is an allowable deduction as it was incurred to remove the encumbrance u/s 48(1) of the I.T. Act, 1961 and this expenditure is wholly and exclusively in connection with the transfer. He has further submitted that even as per the real income theory, the said amount of Rs.50 crores cannot be considered as income of the assessee when it was directly applied by the Bank towards the recovery/repayment of loan. The learned AR has then referred to the principle of diversion by overriding title and submitted that when the charge is created on the land in favour of the bank which is duly reported under the Company’s Act, then avoiding the processes of SARFASI Act, 2002 to recover the loan amount where the assessee would not have received even a sum of Rs.11.25 crores, the assessee took a wise business decision to sold the property after negotiating with the Bank and taking a permission for sale. The assessee was under the liability as a guarantor arises out of contractual obligation with the Bank. As per the provisions of section 13 of the SDARFASI Act, 2002, the bank is empowered to Page 6 of 24 sell the property and utilize the proceeds against the loan given to M/s. Soma Infrastructure (P) Ltd. The learned AR has relied upon the judgement of the Hon'ble Supreme Court in the case of Sital Das Tirathdas (41 ITR 367 (S.C) as well as in the case of National Cooperative Development Corporate, reported in 119 Taxmann.com 137 (S.C) and submitted that the principle of diversion of overriding title is applied, if a portion of income arising out of corpus held by the assessee is applied for the purpose of meeting some expenditure arising out of an obligation imposed on the assessee by a contract or by statute or by own violation or by the law of the land and if the income is already diverted away by superior title before it reaches the hands of the assessee, then the portion passed or liable to be passed on is not the income of the assessee. There is a binding contract between the assessee and the bank and a charge was created in favour of the bank for a sum of Rs.50 crores which has resulted the appropriation of the proceeds of sale by the bank to the extent of Rs.50 crores. Therefore, the real income in the hands of the assessee is only Rs.11.25 crores out of the total sale consideration of Rs.61.25 crores. Thus, the principle of diversion by the overriding title is applicable in the case of the assessee and the learned CIT (A) has rightly allowed the claim of the assessee. In support of his contention, he has relied upon the following decisions: 1) Bombay City-1 VS C.N. Patuck (71 ITR 713) (Bom.) 2) CIT vs. Thressiamma Abraham (227 ITR 802) (Ker.) 3) Addl.CIT vs. Glad Investments (P) Ltd (105 TTJ 218 (ITAT Delhi)

We have considered the rival submission as well as relevant material available on record. The solitary issue raised by the Revenue in this appeal is whether the learned CIT (A) is justified in allowing the claim of deduction in respect of the amount paid to the bank to remove the encumbrance created by way of guarantee agreement and mortgage of the land in question Page 8 of 24 against the loan taken by the sister concern M/s. Soma Infrastructure (P) Ltd. The Assessing Officer noted that the assessee has made the payment of Rs.50 crores towards the loan liability of the borrowing company and then calculated the capital gain on the net consideration of Rs.11,25,00,000/- out of the total sale consideration of Rs.61.25 crores. The Assessing Officer disallowed this claim of Rs.50 crores as deduction against the capital gain on sale of the land, in question. On appeal, the assessee contended before the learned CIT (A) that it has given the said land as a security for the loan taken by the sister concern M/s. Soma Infrastructure (P) Ltd during the financial year 2011- 12 from ICICI Bank Ltd. The title deeds were kept with the Bankers on a simple mortgage. Meanwhile the entire group of the assessee went into severe financial crisis resulting the default in payment of loan taken loan taken by M/s. Soma Infrastructure (P) Ltd. The Bankers started the action for the recovery of the loan by selling the mortgaged property of the assessee. Under these compelling circumstances during the year under consideration, the assessee had sold the land in question for a consideration of Rs.61.25 crores after taking the permission from the Bank. The entire consideration receivable by the assessee was routed through the ICICI Bank and only the net surplus was given to the assessee. Thus, the assessee contended before the learned CIT (A) that the ICICI Bank has retained Rs.50 crores towards the loan outstanding and defaulted by the borrowing company. The assessee has also explained that due to the financial crisis, even the salaries of the employees were not paid in time and therefore, Page 9 of 24 the assessee was compelled to negotiate with the Bank and sold the land, in question to pay the outstanding loan of the ICICI Bank and had the balance sale consideration of Rs.11.25 crores. Thus, the assessee has asserted its claim of deduction of Rs.50 crores as used for discharge of the encumbrances on the land in question and only the balance amount was declared as income of the assessee for computation of the capital gain. The assessee relied upon various judgements of the Hon'ble Supreme Court as well as the High Courts to buttress its contention that when the sale consideration was applied towards the discharge of liability and overriding title of the Bank on the said property, the same was a diversion of income at source of the sale proceeds itself and therefore, the assessee cannot be charged to tax on the entire sale consideration. Alternatively, the assessee also claimed that since the payment of Rs.50 crores was collected and applied to remove the encumbrances on the property to clear the title therefore, the same is an expenditure incurred wholly and exclusively in connection with the transfer as per the provisions of section 48(1) of the I.T. Act, 1961. The learned CIT (A) has decided this issue in para 6.3.2 to 6.5.2 as under:

The learned DR has assailed this finding of the learned CIT (A) on the strength of various decisions as cited in the foregoing part of this order. However, we find that in the case in hand, the loan was not taken or availed by the assessee and therefore, by creating a charge on this land, the assessee has not availed any benefit out of the said transaction. Thus, entering into a guarantee agreement and mortgaging the land, in question with Page 21 of 24 the bank as a security against the loan taken by the sister concern has resulted a restriction in the title and right of the assessee in the land in question. Though the learned DR has disputed the default of the repayment because the Bank has initially applied only Rs.40 crores towards the recovery of the loan and kept the balance amount of Rs.10 crores separately, however, as it is clear from the bank account statements placed at page No.82 and 83 of the paper book that the entire amount of Rs.50 crores was collected by the Bank from the sale consideration and out of which Rs.40 crore was transferred to the term loan account and the balance amount was shown as bank fees and interest outstanding. Therefore, merely because the amount was splitted into 2 parts, it cannot be said that the entire amount of Rs.50 crores was not an outstanding due towards repayment of the loan availed by M/s. Soma Infrastructure (P) Ltd. Even otherwise, the bank has agreed to allow the assessee to transfer/sell the property in question with a condition that it will receive a sum of Rs.50 crores out of the sale consideration. The assessee has filed a communication from the bank dated 12/03/2015 which reads as under:

Therefore, the recovery of Rs.50 crores from the sale proceeds of land in question was a mandatory condition as per the said letter to allow the assessee to sell the land in question to be utilized for the purpose of repayment/part repayment of the term loan facility of Rs.200 crores provided to M/s. Soma Infrastructure (P) Ltd. Accordingly, when the assessee has not Page 23 of 24 availed any benefit by furnishing the security/guarantee and mortgaging the land in question with the Bank, the payment made by the assessee for release of charge on the said land is an expenditure incurred by the assessee necessary for transfer/sale of the property and allowable as a deduction u/s 48(1) of the I.T. Act, 1961. Therefore, in the facts and circumstances as discussed above, we do not find any error or illegality in the impugned order of the learned CIT (A), qua this issue and the same is upheld.