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Facts
The assessee sold an immovable property for Rs. 12.04 crores. This property was mortgaged to SBI and Axis Bank as collateral for loans taken by third-party companies, with the assessee acting as a guarantor. Additionally, a title dispute existed with M/s Kothapeta Settibalija Ramamandiram Committee, which had obtained a favorable DRT order. To facilitate the sale by clearing these encumbrances and settling the title dispute, the purchaser directly paid Rs. 7 crores to the banks and Rs. 2 crores to the Committee, as per a Memorandum of Understanding (MoU). The assessee claimed these Rs. 9 crores as deductible expenditure under Section 48(i) for computing Capital Gains, which the Assessing Officer disallowed, but the CIT(A) allowed.
Held
The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, confirming that the Rs. 9 crores paid by the purchaser to clear mortgages and settle title disputes were deductible under Section 48(i) of the Income Tax Act, 1961. The Tribunal reasoned that these payments were essential for perfecting the title and enabling the transfer of the property, thus qualifying as expenditure 'wholly and exclusively in connection with such transfer'. For the bank payments, the principle of 'diversion of income by overriding title' was applied, as the banks had a superior claim due to SARFAESI proceedings, meaning this portion never accrued to the assessee.
Key Issues
Whether payments made by the purchaser directly to banks to clear mortgages and to a third party to settle a title dispute, totaling Rs. 9 crores, qualify as expenditure 'wholly and exclusively in connection with transfer' under Section 48(i) of the Income Tax Act, 1961, for computing capital gains. Also, whether the CIT(A) erred in admitting additional evidence without following due procedure under Rule 46A of the Income-tax Rules, 1962.
Sections Cited
143(3), 144B, 48, 143(2)
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Income Tax Appellate Tribunal, Visakhapatnam Bench
The Tribunal in its order had distinguished the judgments of the Hon’ble Supreme Court in the case of, viz. (i). V.S.M.R
Jagdishchandran Vs. CIT (1997) 227 ITR 240 (SC); and (ii). CIT Vs. Attli N. Rao (2001) 252 ITR 880 (SC). It was observed that in neither of those cases, the Hon’ble Apex Court was considering a situation pertaining to loss of a capital asset on account of a guarantee given for a third party loan. Rather, in both the said cases, the encumbrance was created by the owner of the capital assets for his own benefit and, thus, the respective assessee’s, had already received the value corresponding to the mortgage liability. It was further observed that in none of the said cases, there was any loss or erosion in the value of a capital asset without any benefit whatsoever to the owner.
(emphasis supplied by us) (C). ITO, Ward 1(1), Hyderabad Vs. Arka Properties (P) Ltd., (2025) dated 17.04.2025. In the case before the Tribunal, the assessee had given its agricultural land as security and deposited the title deeds of the land with ICICI Bank Ltd. in respect of the loan taken by the assessee’s sister concern, viz. M/s Soma Infrastructure (P) Ltd. Thereafter, the sister concern defaulted in repayment of the loan taken, and the ICICI bank gave 15 days time for releasing the charge on the assessee’s land, subject to the payment of Rs. 50 crores. Accordingly, the assessee had sold the land for a sum of Rs. 61.25 crores (sale proceeds routed through the lender bank) out of which an amount of Rs. 50 crores was retained by the bank towards the recovery of the loan given to the sister concern. The assessee claimed the amount of Rs. 50 crore (supra) adjusted by the bank towards recovery of the loan of the sister concern as a deduction while computing capital gain on transfer of the subject property. On appeal, the Tribunal by relying on the principle of diversion of income by overriding title, observed that based on the binding contract between the assessee and the bank a charge was created in favour of the bank for a sum of Rs. 50 crore. It was further observed, that as the real income in the hands of the assessee was 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 was applicable in the case of the assessee and, thus, the said payment made by the assessee for release of charge on its land was an expenditure incurred by the assessee necessary for transfer/sale of the property and allowable as a deduction under Section 48(1) of the Act. (emphasis supplied by us) (D). PCIT Vs. Rinki Shashikant Gandhi (2024) 471 ITR 321 (Guj)
In the case before the Hon’ble High Court, the property owned by the guarantor was sold, and the purchaser had paid the amount directly to the lender. On appeal, the High Court held that the amount paid by the purchaser directly to the lender was allowable as a deduction u/s 48 for computing the capital gains on the sale of the property in the hands of the assessee.
We may further observe that in the aforesaid case before the Hon’ble High Court, the department had relied upon the judgment of the Hon’ble Supreme Court in the case of, viz. (i). V.S.M.R Jagdishchandran Vs. CIT (1997) 227 ITR 240 (SC). It was observed that in the case of V.S.M.R Jagdishchandran (Decd.) Vs. CIT (supra), the Hon’ble Apex Court had dismissed the appeal in the facts of the said case on the ground that the mortgage was created by the assessee himself. For the sake of clarity, we deem it apposite to cull out the observations of the Hon’ble High Court of Gujarat in PCIT Vs. Rinki Shashikant Gandhi (supra), as under:
4. The assessee filed his return of income for the Assessment Year 2013-14 declaring total income of Rs. 25,000/- which was assessed under section 143(3) of the Act,1961 by determining the total income of Rs. 3,15,05,000/-. During the year under consideration, the assessee sold an immovable property for a sale consideration of Rs. 5,50,00,000/- and out of the same, deducted expenses incurred in connection with the transfer, a sum of Rs. 3,25,00,000/- being payment made to various illegal occupants and a sum of Rs. 1,50,00,000/- being the payment made to Titco Limited for removing the charge created on the property. The Assessing Officer did not accept the claim of Rs. 3,25,00,000/- towards payment to illegal occupants. However, the Assessing Officer allowed the deduction for payment of Rs. 1,50,00,000/- made to Titco Ltd.
The PCIT, therefore issued a show-cause notice on the ground that the Assessing Officer had incorrectly allowed the deduction of payment to Titco Ltd amounting to Rs. 1.5 cores in view of the decision of the Apex Court in case of V.S.M.R. Jagdadishchandran vs Commissioner of Income Tax reported in 227 ITR 240 wherein it is held that where the property was not mortgaged by previous owner but by assessee himself, then the amount paid to discharge mortgage debts could not be treated as cost of acquisition so as to allow same as deduction. Accordingly, the PCIT set aside the assessment order on the ground that the order has been passed without making inquiry and verification which should have been made in terms of Explanation 2 to section section 263 of the Act,1961. XX XXX XX 10. Having heard learned advocates for the respective parties and considering the impugned order as well as the facts and the findings arrived at by the Tribunal, it is clear the Apex Court in the case of V.S.M.R. Jagdadishchandran (supra) has dismissed the appeal in the facts of the said case on the ground that the mortgage was created by the assessee himself. Relevant facts and the findings arrived at by the Apex Court are as under: “3. 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 asst. yr. 1975-76 and for the same assessment year he sold plot Nos. 1, 3 and half of plot No. 4 for a sum of Rs. 12,600. The ITO computed the capital gains in respect of the said properties at Rs. 68,400. The assessee questioned the computation of capital gains before the AAC 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 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 AAC rejected the said contention. He, however, upheld the contention of the assessee that there was an overriding title of the creditors in respect of the sale proceeds and, therefore, there 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 ITO. The Tribunal, following the decision of the Kerala High Court in Ambat Echukutty Menon vs. CIT (1 (1978) 111 ITR 880 (Ker) , and the decision of the Madras High Court in CIT vs. V. Indira (1979) 119 ITR 837 (Mad) 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 questions referred to above, the assessee filed an application under s. 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. vs. CIT (1981) 127 ITR 713 (Mad) and has held that by discharging the 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.
In Civil Appeals Nos. 6098- 6101 of 1983 [since reported as R. M. Arunachalam etc. vs. CIT (1997) 141 CTR (SC) 348 filed against the judgment of the Full Bench of the Madras High Court in S. Valliammai & Anr. vs. CIT (supra) we have examined the correctness of the view of the Kerala High Court in Ambat Echukutty Menon vs. CIT (supra) and have held that the said decision does not lay down the correct law in so far as it holds that where the previous owner had mortgaged the property during his life time the clearing 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 obtains only the mortgagors interest in the property and by discharging the mortgage debt he acquires the mortgagees interest in the property and, therefore, the amount paid to clear off the mortgage is the cost of acquisition of the mortgagees interest in the property which is deductible as cost of acquisition under s. 48 of the Act. In the present case, we find that the mortgage was created by the assessee himself. It is not a case where the property had been mortgaged by the previous owner and the assessee had acquired only the mortgagors interest in the property mortgaged and by clearing the same he had acquired the interest of the mortgagee in the said property. The questions raised by the assessee in the application submitted under s. 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 agreement with the order of the High Court dismissing the application filed by the assessee under s. 256(2) of the Act.”
In the facts of the present case, the findings of fact arrived by the Tribunal is to the effect that the assessee did not create any mortgage on the property but he had given a personal guarantee to Titco Ltd for discharge of the debt for which there was a charge over the property and for release of the mortgage on the personal guarantee of the assessee, the amount was paid by the buyer directly to the Titco Ltd. It is also not in dispute that the assessee did not avail any loan on mortgage of the property sold by him.
In view of such factual aspect, the Tribunal has rightly held that the assessment order by the Assessing Officer is neither erroneous nor prejudicial to the interest of the Revenue.” (emphasis supplied by us) 44. We thus, in terms of our aforesaid deliberations, are of the considered view that as the sum of Rs. 7 crores (supra) was taken by the aforementioned banks, viz. (i). SBI; and (ii) Axis Bank Ltd. directly from the purchasers of the property, viz, M/s APSN Properties LLP & Ors., therefore, as per the principle of diversion of income by overriding title as the said banks had a superior tile over the subject mortgaged property based on the demand notices issued by them under Section 13(2) of the SARFASI Act, 2002; and further as per the real income theory, when no part of the sale consideration was either received or accrued to the assessee, therefore, drawing support from the aforesaid judicial pronouncements it can safely be concluded that the said amount could not have been assessed in the hands of the present assessee before us.
We, thus, finding no infirmity in the order of the CIT(A), wherein he had based on a well-reasoned order, observed that the sum of Rs. 9 crores paid directly by the purchaser of the subject property to, viz. (i) SBI (Rs.
3.50 crores) and (ii) Axis Bank (Rs. 3.50 crores) to clear mortgage /encumbrances on the title of the property that was provided to the said banks as collateral by the assessee as a guarantor for the loans raised by third-party companies, i.e., M/s. Siva Sivani Surgical Cottons Pvt. Ltd. and M/s. Maddipoti Consultants Pvt. Ltd.; AND (iii) M/s Kothapeta Settibalija Ramamandiram Committee (Rs. 2.00 crores) in order to settle the title disputes of the rival claimant, was rightly claimed as a deductible by the assessee under section 48(1) of the Act, while computing the “Capital gains” on the sale of the subject properties, uphold his order. The Grounds of appeal Nos. 2.2 to 2.8 and Ground of appeal No. 2.1 (to the extent relevant to the subject issue) raised by the revenue are dismissed.
46. As we have upheld the view taken by the CIT(A) and dismissed the appeal filed by the revenue, therefore, the cross-objections filed by the assessee, which are supportive of the CIT(A) order, having been rendered as merely academic in nature, are dismissed as not pressed.
47. In the result, the appeal of the revenue is dismissed in terms of our aforesaid observations, while for the cross-objections filed by the assessee, which are supportive of the CIT(A) order, having been rendered as merely academic in nature, are dismissed as not pressed.
Order pronounced in the Open Court on 10th October, 2025.