S.VENKATASUBRAMANIAN,CHENNAI vs. ITO, CHENNAI

आदेश / O R D E R

Facts apropos are that assessee’s who are salaried 3. employees had filed return of income for the impugned assessment year declaring income of �1,57,620/- and �1,45,400/- respectively.

During the course of assessment proceedings, it was noted by the ld. Assessing Officer that assessee’s who were jointly owning a residential property had sold it for a consideration of �70,00,000/-. Assessee’s had claimed a loss on sale of property in its return of income. For arriving at such loss assessee’s had set off the amount paid by them to M/s. Axis Bank on a loan raised a company called M/s. Shreyas Communication and Services P. Ltd, in which the assessee’s were Directors. Subject property which was sold was offered as collateral for the loans raised by the said company from M/s. Axis Bank. & 428/Mds/2017 :- 3 -:

Argument of the assessee before ld. Assessing Officer was that there was diversion of entire consideration received at source to M/s. Axis Bank, before it became the income of the assessees. As per the assessees, bankers had taken possession of the house preventing any transactions, without settling the loan taken by the company.

Contention of the assessee was that advance received against the sale of the property was appropriated by the banker and the sale deed was entered subsequently. Assessees in support of this contention, filed a possession notice issued by Axis Bank and settlement request of loan. However, ld. Assessing Officer was not impressed. According to him, property was mortgaged by the assessees for obtaining loan for a company in which they were directors. As per ld. Assessing Officer this was only self created mortgage and self created mortgage was not a charge on the property. Reliance was placed on the judgment of Apex Court in the case of CIT vs. Attili N. Rao 252 ITR 880. Ld. Assessing Officer declined to consider the claim of the assessee. He recomputed capital gains of the assessee and total capital gains worked out �37,57,471/- and assessee’s individual share �18,78,735/.

hands and the full sale consideration which was received in advance was handed over to the company to settle its bank dues. Reliance was placed on the judgment of Hon’ble Gujarat High Court in the case of CIT vs. Mahanbhai Pamabhai 91 ITR 393 and that of Delhi Bench of the Tribunal in the case of Rajasthan Petro Synthetics Ltd vs. ACIT (2014) 49 Taxmann.com 599. However, ld. Commissioner of Income Tax (Appeals) was not impressed. According to him, both the decisions relied on by the assessee were completely different on facts.

According to him, by virtue of the judgment of Hon’ble Apex Court of Attili N. Rao (supra) the additions were rightly made by the ld. Assessing Officer. While holding so, the Ld. Commissioner of Income Tax (Appeals) made a detailed analysis of the judgment of Apex Court in Attili N. Rao (supra) and reached a conclusion that facts were very similar. He thus upheld the order of the ld. Assessing Officer.

Now before me, ld. Authorised Representative reiterated the 5. same contentions which were taken before the lower authorities.

Further, according to him, by virtue of Sec. 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) once possession was taken over by the borrower assessee lost all rights for selling the concerned property.

Reliance was also placed on the decision of Delhi Bench of the Tribunal & 428/Mds/2017 :- 5 -: in the case of ACIT vs. Glad Investments (P) Ltd (2006) 102 ITD 227 and Rajasthan Petro Synthetics Ltd vs. ACIT, (2014) 66 SOT 140. For advancing the argument that securitization of credit exposures by banks and credit institution involved a transfer of outstanding balances in loans/advances and packaging into transferable and tradable securities, reliance was also placed on the judgment of Hon’ble Apex Court in the case of M/s. Transcore vs. Union of India & Anr, Civil case No.3228 of 2006, dated 29.11.2006.

whereby the bank agreed to settle the loan for a sum of �70,00,000/- against the due of �93,35,000/-. Assessee’s on 11.08.2010 entered into a sale agreement for selling the residential property offered as collateral, and received a consideration of �70,00,000/- from the buyer who paid the amount directly to the bank accounts of the assessees.

The money which came in to the bank accounts of the assessee’s was paid for settlement of the loan and thereafter the document of the property were released by the bank. The question before us, is whether the above sequence show diversion of income through overriding title. No doubt by virtue of SARFAESI Act once the borrower takes possession of the secured asset, sale of such an asset could be effected only when the debtor agrees to pay the amount realized from the sale, against the outstanding dues. However, this in my opinion will not establish an overriding title to the borrower on the income arising out of the sale of the property. Offering a property as a collateral security and selling the property which was offered as a collateral security are two independent and different transactions. Just because the seller is duty bound to pay the proceeds to the borrower for the settlement of the loan, would not perse create an overriding title on the income arising from the sale of the property. It is not a pre-existing title on the income arising out from the sale of the & 428/Mds/2017 :- 7 -: property. The proceeds of the sale are only used to satisfy a debt.

When proceeds of a sale is used to satisfy the debt, the debt cannot be set off against such proceeds while computing capital gains. It is only a application of income. Just because the property was offered as a collateral will not in my opinion change the complexion of the transactions.

ownership of the assets. This case in my opinion only further the view taken by the Revenue and does not help the assessee. Coming to the last of the judgment which was relied by the ld. Authorised Representative viz-a-viz that of Hon’ble Apex Court in Transcore (supra), in this case their Lordships were called upon to interpret the term Securitization under the SARFAESI Act. This case in my opinion was not at all on the tax issue and would not help assessee’s case. As against this ld. Commissioner of Income Tax (Appeals) relied on the judgment of Apex Court in Attili N. Rao (supra) while upholding the order of the ld. Assessing Officer. Relevant observation of the ld. Commissioner of Income Tax (Appeals) as it appear in paragraphs 16 to 18 of his order is reproduced hereunder:-

‘’16. However, disagreeing with the findings of the High Court, the Hon'ble Supreme Court held that what was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised, there from belonged to the assessee. From out of that price, the State deducted its dues towards 'kist' and interest due from the assessee and paid over the balance to him. The capital gain that the assessee made was on the immovable property that belonged to him. Therefore, it was on the full price realised (less admitted deductions) that the capital gain and the tax thereon had to be computed. Therefore, it was observed by the Apex Court that the High Court was not correct in holding that amount realised by the sale of the assessee's interest in the property was only Rs. 4,33,960/-, i.e., Rs. 5,62,980/ minus Rs.1,29,020/-.

17.On perusal of the above case law, it is noticed that in the referred case the impugned capital asset was mortgaged by the assessee with State Government to & 428/Mds/2017 :- 9 -: provide security for the amounts of 'kist' which were due by him to the State. In the present case of the appellant, the impugned property was mortgaged as collateral security for obtaining loan for the company in which the appellant and his wife were directors/shareholders and not for their own business purposes. As categorically held in the above referred case, the amount of interest deducted' by the State Government, cannot be reduced as cost of acquisition of capital asset for calculating capital. On similar instance, the amount of Rs. 70 lakhs paid to Axis Bank to avail of 'One Time Settlement' scheme for the company cannot be considered as cost of acquisition or the expenditure incurred wholly and exclusively towards transfer of the impugned capital asset.

18.Regarding the contention of the appellant that there was a diversion of entire sale consideration at source, the following judgement of the Hon'ble Apex Court can be relied on to controvert the same. V. S. M. R. Jagadishchandran ... vs Commissioner of Income Tax (1997) 141 CTR SC 361. This appeal by the assessee was directed against the order dt. 25th July, 1984 passed by the Hon'ble jurisdictional Madras High Court in TC No. 145 of 1983 wherein the High Court on an application filed under s.256(2) of the Act declined to direct the Tribunal to state a case and refer the following questions of law to the High Court : "1. Whether the Tribunal is right in holding that the levy of the capital gains of Rs. 68,400/- was proper under the facts and circumstances of the case? 2. Whether the Tribunal was right in holding that mortgage debts did not constitute diversion at source? 3. Whether the debts discharged by the applicant on the properties cannot be said to enhance the cost of acquisition."

In the circumstances, I am of the opinion that computation of capital gains was rightly done by the ld. Assessing Officer and confirmed by & 428/Mds/2017 :- 10 -: the ld. Commissioner of Income Tax (Appeals). I do not find any reason to interfere with the orders of the lower authorities.

Order pronounced on Thursday, the 27th day of April, 2017, at Chennai.