ITO, TIRUPPUR vs. SHRI V.S. CHANDRAKUMAR, TIRUPPUR

Revenue & CO No.178/Chny/2016 is a Cross-Objection filed by the assessee in the Revenue’s appeal, against the Order of Commissioner of Income Tax (Appeals)-3, Coimbatore, in IT Appeal No.144/15-16 dated 29.06.2016 for the AY 2010-11.

Ms. Vijayaprabha, JCIT represented on behalf of the Revenue and Shri T. Banusekar, CA, represented on behalf of the assessee.

It was submitted by the Ld.DR that the assessee is an individual who is the owner of an immovable property representing a plot of land which was mortgaged to the City Union Bank as the assessee stood as a guarantor in respect of a loan taken by Wet Tree, in which, the assessee’s close family members were partners. As the said firm was unable to re- pay its loans, the City Union Bank auctioned the property for a sale consideration of Rs.2.55 Crs. and had appropriated the entire sale consideration. It was a submission that the AO on the ground that the transfer had taken place in respect of the property owned by the assessee, brought to tax the Long Term Capital Gains. It was a submission that on appeal, the Ld.CIT(A) had deleted the levy of Long Term Capital Gains by holding that no consideration had been received or accrued to the assessee and the same cannot be counted for computing Capital Gains. Further, the Ld.CIT(A) had held that there was no profits and gains arising from the transfer of the capital asset to the assessee and that the title also did not vest with the assessee as it was mortgaged with the bank, which would sell it and realize the dues. It was a submission that this finding of the Ld.CIT(A) was erroneous and liable to be reversed.

In reply, the Ld.AR placed reliance upon the decision of the Co- ordinate Bench of this Tribunal in the case of M/s.Glad Investments (P)

We have considered the rival submissions.

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.

Now coming to the issue as to whether Capital Gains can be levied when the assessee has not received any consideration on account of the transfer. Here, it must be remembered that when the mortgaged property of the guarantor is sold for discharge of a loan taken by the firm for whom the assessee has stood guarantee then the assessee steps into the shoes of the lender who has withdrawn his loan by encashment of the mortgaged property and the firm would be liable to treat the assessee as a lender for the consideration representing the sale value of the mortgaged property. Thus, when the assessee being the guarantor, steps into the shoes of the lender, who has encashed the mortgage property, it is deemed that the assessee has given the loan to the firm representing the sale consideration of the mortgage property. Thus, even though, the assessee has not received any portion of the sale consideration, the Capital Gains is liable to be assessed in the hands of the assessee treating the auction amount as the sale consideration.

A perusal of the decision of the Co-ordinate Bench of this Tribunal in the case of M/s.Glad Investments (P) Ltd., shows that the facts in that case was entirely different in so far as what has been sold there was shares and the transfer of the shares in question was completed when the shares were pledged as the assessee therein had completed the requisite formalities for the transfer at that stage itself. In the present case, there was no transfer nor were the requisite formalities for the transfer completed at the stage of the mortgage. The decision relied upon by the Ld.AR in the case of Smt.Thressiamma Abraham also has no applicability in the present facts in so far as the decision was in relation to a claim u/s.54E of the Act. Further, this view of ours that Capital Gains is leviable on the sale of the mortgaged property is supported by the Hon’ble Supreme Court in the case of Shri Attili N. Rao reported in 252 ITR 880 (SC). Thus, it cannot be said that the assessee has not received any consideration on account of the sale of the mortgage property as the assessee has steps into the shoes of the lender when the mortgage property was sold and the sale consideration appropriated.

At the time of hearing, the Ld.AR did not wish to press the Cross- Objection and consequently, the Cross-Objection filed by the assessee is dismissed as not pressed.