INCOMETAX OFFICER, WARD-3(3), VISAKHAPATNAM vs. SARIPALLI VIMALA DEVI, VISAKHAPATNAM

O R D E R

PER S. BALAKRISHNAN, ACCOUNTANT MEMBER :

Saripalli Vimala Devi 2. Briefly stated the facts of the case are that the assessee being an individual, filed the return of income for the AY 2015-16 belatedly on 29/04/2016 admitting a total income of Rs. 1,97,44,630/-. It was noticed that the assessee along with her daughter Smt. Indukuri Uma Maheswari being the legal heirs of one Shri Saripalli Ranga Raju has sold a building located at D.No. 30-15-127A, 30-15-127B and D.No.29-6-1 at Dabagardens, Visakhapatnam, consisting of 3 floors, admeasuring 6067 sq ft for a consideration of Rs.10 Crs to M/s. Cell Point India Pvt Ltd. The assessee being a co-owner of the property, with each 50% of share along with her husband, Sri Saripalli Rangaraju and upon his death, the assessee inherited the property as legal heir being 25% of the share from her husband and the balance share of 25% to her daughter Smt. Indukuri Uma Maheswari. The assessee claimed Rs. 3.75 Crs as cost of acquisition of the property, wherein, the assessee stated that she has repaid the mortgage loan of Rs.5 crores, being the share of her husband and claimed proportionate to her 75% of share in the property, while computing the capital gains. The Ld. AO noticed that since it was not incurred for purchase of property or in connection with the transfer of property at the time of sale, reopened the case U/s. 147 of the Act and issued notice U/s. 148 of the Act on 24/6/2016 which was duly served on the assessee. In response, the assessee filed a reply and requested the return filed on Page No. 2 Saripalli Vimala Devi 29/4/2016 may be treated as return filed in response to the notice U/s.148 of the Act. Subsequently, notice U/s. 143(2) and 142(1) of the Act were issued to the assessee from time to time. During the assessment proceedings, the Ld. AO noticed that the property was originally purchased by Sri Saripalli Ranga Raju (since deceased) and Smt. Saripalli Vimala Devi admeasuring 910 sq yds for a consideration of Rs. 63,29,225/- and Rs. 52,21,220/- respectively against the Doc. No. 98/2004 and 3772/2004. The property was purchased on 9/1/2004 and 30/08/2004 respectively. Subsequently, during the year 2007 the property was mortgaged with State Bank of India against the term loan of Rs. 3 Crs granted to M/s. Amaravathi Inn Pvt Ltd., wherein the assessee and her late husband were Directors. Further, another term loan of Rs. 1.78 Crs was granted to M/s. Amaravathi Residency on 31/3/2008 wherein the assessee and her late husband were partners. The assessee’s husband Sri Saripalli Ranga Raju died intestate on 29/06/2010. The assessee claimed that shae has repaid Rs.10 crores out of which 50% belongs to her husband. Therefore, she claimed 75% from the husband’s share of repayment of loan, amounting to Rs. 5 Crores as cost of acquisition while computing the capital gains, being her share in the property sold, including inheritance. The Ld. AO considered that the repayment of mortgage loan does not constitute cost of acquisition as per section 48 r.w.s

Page No. 3 Saripalli Vimala Devi 55(2) of the Act. The Ld. AO therefore disallowed the claim of the assessee for Rs 3.75 crores (75% of Rs. 5 Crores) claimed as cost of acquisition. Being aggrieved by the order of the Ld. AO, the assessee preferred an appeal before the Ld. CIT(A)-NFAC. The Ld. CIT(A)- NFAC, considering the submissions of the assessee allowed the appeal of the assessee by relying on the decision of the Hon’ble Supreme Court in the case of R.M. Arunachalam vs. CIT (1997) 227 ITR 222 (SC). Being aggrieved by the order of the Ld. CIT(A)-NFAC, the Revenue is in appeal before the Tribunal by raising the following grounds:

“1. The order of the Ld. CIT(A) is erroneous both on facts and in law.

4. At the outset, the Ld. Departmental Representative [DR] submitted that the decision of the Hon’ble Supreme Court relied on by the Ld. CIT(A)-NFAC is with respect to Estate Duty and cannot be made applicable to the instant case. The Ld. DR further submitted that the Ld. CIT(A)-NFAC erred in relying on the ratio laid down by the Hon’ble Supreme Court in the case of CIT vs. R.M. Arunachalam {(1997) 141 CTR 0348}. The Ld. DR placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT vs. Paville Projects (P.) Ltd [2023] 453 ITR 447 wherein the Ld. CIT treated the said assessment order as erroneous and prejudicial to the interest of the revenue as allowed by the Ld. AO, being the payment made by the assessee-company to its shareholders as encumbrance charges from the sale proceeds of building as cost of improvement while computing the long-term capital gains. The Ld. DR therefore pleaded that the same ratio may be applied to the instant case.

Page No. 5 Saripalli Vimala Devi 5. Per contra, the Ld. Authorized Representative [AR] heavily relied on the ratio laid down by the Hon’ble Supreme Court in the case of CIT vs. R.M. Arunachalam (supra). The Ld. AR further argued that the assessee acquired 50% in the share of her husband late Sri Saripalli Ranga Raju by way of inheritance and the balance of 50% was conveyed by way of inheritance to her daughter. The Ld.AR further submitted that at the time of inheritance, the assessee’s husband who has created a mortgage of the property during his life time and was subsisting at the time of death of the husband of the assessee. The Ld. AR further submitted that the Hon’ble Supreme Court in Para No.14 of the order in the case of CIT vs. R.M. Arunachalam (supra) held that for the purpose of acquiring of the property, interest of the mortgagee has been acquired by the legal heir and therefore the payment made by the legal heir should be regarded as cost of acquisition U/s. 48 r.w.s 55(2) of the Act. The Ld. AO also submitted that the assessee in order to get a clear marketable title of the property has to discharge the mortgage loans taken by her late husband. The Ld. AR therefore pleaded that the amount paid for clearance of the mortgage loan should be treated as cost of acquisition to the extent of the share acquired/inherited by the assessee.

Page No. 6 Saripalli Vimala Devi 6. We have heard both the sides and perused the material available on record and the orders of the Ld. Revenue Authorities. The facts of the case are that the assessee sold a property for a consideration of Rs. 10 Crs which was jointly purchased along with her husband during the year 2004 by way of making equal contribution by the assessee and her husband. Subsequently, these properties were mortgaged for the purpose of their business with State Bank of India during the year 2007 / 2008. Subsequently, the husband of the assessee Shri Saripalli Ranga Raju died intestate on 29/6/2010. It is an undisputed fact that the property acquired by the assessee along with her husband was held equally by both. It is alleged that the assessee has paid an amount of Rs. 10 Crs towards the loan amount existing at the time of sale of the property. It was argued by the Ld.AR that the assessee therefore claimed an additional amount of Rs.5 Crores as cost of acquisition of the property being 50% of the share in the inherited property of her late husband who was the owner of ½ share of the property which was under mortgage. We are not in agreement with the Ld.AR that the assessee has repaid an amount of Rs. 10 crores. It is noticed from the order of the Ld.AO in Para No. 4 that the assessee has repaid an amount of Rs. 10 Crores for the entire tenure of the loan period. However, it is found that assessee has paid only Rs. 4.78 crores from State bank of India for the entities which Page No. 7 Saripalli Vimala Devi the assessee and her husband are interested. Since the assessee’s husband expired when the property was under mortgage, the right on the property devolved on the assessee and her daughter, both being legal heirs. It was claimed by the Ld. AR that the title of the property was not absolute as there was pre-existed mortgage on the property created by her late husband of the assessee. It was the argument of the Ld. AR that in order to perfect the title of the legal heirs, the right of the mortgagee has to be cleared. Further, there is no dispute on the original cost of purchase and the indexed cost of property purchased originally. The main dispute is with regard to the payment of Rs. 5 Crores for acquiring the valid title by removing the interest and the right of the mortgagee. The assessee being a co-owner of the property inherited 50% of the share of her husband which amounts to 25% of the total value of the property. The remaining 25% of the total value of the property has been inherited by her daughter Smt. Indukuri Uma Maheswari. The assessee has, therefore, computed the capital gains as follows: (Rs.) A Sale consideration of both 10,00,00,000 properties B Indexed cost of purchase 2,51,36,716 C Husband share of payment towards 5,00,00,000 removable of mortgage D Total cost of acquisition= (B + C) 7,51,36,716 E Total capital gain 2,48,63,284 F Assessee’s share of capital gain = 1,86,47,463 (75% of ‘E’)

Page No. 8 However, it is noticed from the order of the Ld. AO that the Ld. AO has not considered Rs. 5 Crs as cost of acquisition as claimed by the assessee. The Ld.AO did not accept the contention of the assessee regarding consideration of Rs.3.75 crores of cost of acquisition. From the material available before us, we noticed that assessee has borrowed Rs.4.78 crores from SBI which was ought to have been considered by the Ld.CIT(A) while arriving at the cost of acquisition.

14. While we are affirming the impugned judgment of the High Court, we are unable to endorse the view of the Kerala High Court in Ambat Echukutty Menon's case (supra)to which reference has been made by the High Court in the impugned judgment. In that case, the assessee, as one of the heirs, had inherited property from the previous owner who had mortgaged the same during his lifetime and after his death the heirs, including the assessee, had discharged the mortgage created by the deceased. The said property was subsequently acquired under the Land Acquisition Act, 1894, and for the purpose of capital gains the assessee sought deduction of the amount spent to clear the mortgage. The High Court held that the capital asset had become the property of the assessee by succession or inheritance on the death of the previous owner under section 49(1) and the cost of acquisition of the asset is to be deemed to be the cost for which the previous owner acquired it, as increased by the cost of any improvement of the assets incurred or borne either by the previous owner or by the assessee. According to the High Court, having regard to the definition of the expression 'cost of improvement' contained in section 55(1)(b) in order to entitle the assessee to claim a deduction in respect of the cost of any Page No. 9 Saripalli Vimala Devi improvement, the expenditure should have been incurred in making any additions or alterations to the capital asset that was originally acquired by the previous owner and if the previous owner had mortgaged the property and the assessee and his co- owners cleared off the mortgage so created, it could not be said that they incurred any expenditure by way of effecting any improvement to the capital asset that was originally purchased by the previous owner. This decision has been followed in subsequent decisions of the High Court in Salay Mohamad Ibrahim Sait v. ITO [1994] 210 ITR 700 (Ker.) and K.V. Idiculla v. CIT [1995] 214 ITR 386 / 81 Taxman 190 . A contrary view has been taken by the Gujarat High Court in CIT v. Daksha Ramanlal [1992] 197 ITR 123 . In taking the view that in a case where the property has been mortgaged by the previous owner during his lifetime and the assessee, after inheriting the same, has discharged the mortgage debt, the amount paid by him for the purpose of clearing off the mortgage is not deductible for the purpose of computation of capital gains, the Kerala High Court has failed to note that in a mortgage there is transfer of an interest in the property by the mortgagor in favour of mortgagee and where the previous owner has mortgaged the property during his lifetime, which is subsisting at the time of his death, then after his death his heir only inherits the mortgagor's interest in the property. By discharging the mortgage debt his heir who has inherited the property acquires the interest of the mortgagee in the property. As a result of such payment made for the purpose of clearing off the mortgage the interest of the mortgagee in the property has been acquired by the heir. The said payment has, therefore, to be regarded as 'cost of acquisition' under section 48, read with section 55(2). The position is, however, different where the mortgage is created by the owner after he has acquired the property. The clearing off the mortgage debt by him prior to transfer of the property would not entitle him to claim deduction under section 48 because in such a case he did not acquire any interest in the property subsequent to his acquiring the same. In Daksha Ramanlal's case (supra) the Gujarat High Court has rightly held that the payment made by a person for the purpose of clearing off the mortgage created by the previous owner is to be treated as cost of acquisition of the interest of the mortgagee in the property and is deductible under section 48.

Page No. 10 The position is, however, different where the mortgage is created by the owner after he has acquired the property. The clearing off the mortgage debt by him prior to transfer of the property would not entitle him to claim deduction under section 48 because in such a case he did not acquire any interest in the property subsequent to his acquiring the same.

Page No. 12 Saripalli Vimala Devi loan amounting to Rs. 5 Crs, being her late husband’s share in the loan. We agree with the plea of the Ld AR that the assessee is entitled only to proportionate share (25% of value) on repayment of principal amount of mortgage loan for acquiring valid title by way of inheritances, paid to clear the title equally along with another legal heir being daughter Smt. Indukuri Uma Maheswari. We therefore remit the matter back to the file of the Ld. AO directing to re-compute the capital gains and pass appropriate order in tune with the observations of the Tribunal as discussed in the aforesaid paragraphs of this order. It is ordered accordingly.