ACIT CIRCLE 3(1), TRICHY vs. G.CHANDRA, TRICHY

आदेश / O R D E R

PER GEORGE MATHAN, JUDICIAL MEMBER

It was a submission that when Mr.Balamurugan was examined, he confirmed that he had purchased 58 Cents of land at Manikandam, Trichy in November, 2009 for a consideration of `12.64 lakhs from the assessee and during the same period had given an advance of `65 lakhs for purchase of adjacent land measuring 2.73 acres to the assessee. It was submitted by Mr.Balamurugan that however the bank adjusted the amount of `65 lakhs against the dues against assessee and failed to release the documents and again March,2012, the said Mr.Balamurugan paid an amount of `2 crores in favour of M/s.Novel Drugs (P) Ltd., to settle the bank dues and thereafter the documents were released for the property from the Bank and thereafter power of attorney is executed in his favour. It was stated by Mr.Balamurugan that the said property was converted into 35 plots and he had advanced `2.65 crores to the assessee against the property. It was a submission that consequently the ld. Assessing Officer had brought to tax the capital gains arising on the transfer of the immovable property of 2.7 acres. On appeal, Ld.CIT(A) had deleted the addition by holding that there was a diversion of income at source in so far as the assessee had mortgaged the property to State Bank of India for the loan dues from the Principal debtor and upon the principal debtor defaulting for repayment, the bank instead of selling property in public auction, arranged the buyer, who paid the consideration for the properties mortgaged directly to the bank and the bank appropriated the entire consideration towards the loan due.

It was a submission that Ld.CIT(A) held that the assessee had lost her right to receive the sale consideration already vested with the bank by operation of law, overriding the title of the assessee. It was a submission that this finding of the Ld.CIT(A) was erroneous in view of the decision of the Hon’ble Jurisdictional High Court in the case of Sri Kanniah Photo Studio Vs. I.T.O, Kumbakonam in [2015] 62 taxmann.com 357(Mad.) wherein the Hon’ble Madras High Court has categorically held “amount paid by assessee in discharge of mortgage created after acquiring property would not be deductible as expense while computing capital gains u/s.48(1)(i) of the Act. The ld.D.R also placed reliance on the decision of Co-ordinate Bench of this Tribunal in the case of I.T.O Vs. Shri V.S.Chandrakumar in for assessment year 2010-11 vide order dated 28.03.2018 wherein it has been held as follows:-

“6. Transfer, admittedly, is defined in Sec.2(47) of the Act, it is an inclusive definition. Capital Gains on transfer of a capital asset is leviable as per Sec.45 of the Act. The Capital Gains arises in the previous year, in which, the transfer of the capital asset took place. The exclusion from the levy of Capital Gains is provided in Sec.47 of the Act. A mortgage is defined as a legal agreement by which a bank, building, society, etc., lends money at interest in exchange for taking title of the debtor’s property, with the condition that the conveyance of title becomes void upon the payment of the debt. A perusal of the provisions of Sec.2(47) which is an inclusive definition clearly shows that a mortgage is not considered as a transfer in so far as there is no extinguishment of any right of the assessee in the property mortgaged. In a transaction of mortgage, the mortgager has the right to redeem his property after paying the debt amount. In the present case, it is true that the assessee has stood as a guarantor for the loans taken by the firm, in which, his close relatives are partners and for such purpose as standing guarantor, he has mortgaged his property against the loans. Thus, what has happened here is that the assessee having stood as a guarantor, he steps into the shoes of the lender, the minute lender sells the property mortgaged against the loans taken by the close relatives. Thus, the assessee takes the place of lender, City Union Bank, in respect of the loans taken by the firms whose loans the assessee has stood guarantee for. Thus, when the mortgage was done by the assessee, though some interest in the property is transferred, in so far as the owner of the mortgage property becomes a limited owner, such mortgage does not fall within the ambit of the term transfer u/s.2(47) of the Act. It must be remembered that there is no extinguishment of any rights in the property and whatever rights that have been mortgaged on account of the mortgage is a redeemable right. U/s.73 of the Transfer Properties Act, where a mortgage property is sold, the mortgagee has a prior claim over the other creditors and the mortgagee is entitled to receive payment directly in discharge of the debts when a property is sold. In the present case, the assessee had mortgaged the property when he stood as a guarantor. When the mortgage was encashed by the sale of the property, the transfer of the capital asset has taken place from the hands of the assessee to the purchaser in the auction. Though, the auction has been done by the City Union Bank, the transfer has been done from the hands of the assessee. Therefore, as

per the provisions of Sec.45 the Capital Gains that may arise, is liable to be assessed only in the hands of the assessee.

It was a prayer that the order of the CIT(Appeals) was liable to be reversed.

5.1 In respect of Revenue’s appeal, it is noticed that the issue is now squarely covered by the decision of Hon’ble Jurisdictional High Court in the case of Sri Kanniah Photo Studio Vs. I.T.O, Kumbakonam referred to supra, also decision of Co-ordinate Bench of this Tribunal in the case of I.T.O Vs. Shri V.S.Chandrakumar referred to supra.

Consequently, respectfully following the decision of Hon’ble Jurisdictional High Court in Sri Kanniah Photo Studio (supra), as also the decision of Co-ordinate Bench of this Tribunal in Shri V.S.Chandrakumar(supra), the findings of the ld.CIT(A) on this issue stands reversed. However, admitting the prayer of the ld.A.R on behalf of the assessee in respect of invoking of Rule-27 of the ITAT Rules, as it is noticed that other grounds which have been raised before the Ld.CIT(A) in Form No.35, have not been adjudicated by the Ld.CIT(A), the order of the CIT(Appeals) is set aside and issue of the levy and computation of capital gains is restored to the file of Ld.CIT(A) for re-adjudication in respect of all other grounds being Ground Nos. 2, 3, 4, 5, 6 & 7 of Grounds of appeal filed before the Ld.CIT(A), as also Grounds Nos.2 & 3 of the additional grounds raised before the Ld.CIT(A).

Order pronounced in the open court after conclusion of hearing on 17th December, 2018, at Chennai.