SHYAM GUPTA,DELHI V. ITO, WARD- 35(2), NEW DELHI

ITA 2997/DEL/2018

AI Insights

This case involves an appeal by Shyam Gupta against the order of the Commissioner of Income Tax (Appeals)-12, New Delhi, concerning the assessment year 2013-14. The primary issues in the appeal were the disallowance of exemptions and deductions related to the sale of an inherited property, which included claims under section 54 of the Income Tax Act, 1961, and various costs associated with the property improvements and mortgage discharge. The Assessing Officer had disallowed these claims due to lack of corroborative evidence and the nature of the mortgage, which was not considered to add value to the property. The Tribunal's decision partly reversed the lower authorities' decisions on some claims while upholding others based on legal precedents.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 312240 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-04-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Other Referred Cases: Roshanbabu Mohammed Hussein Merchant, 275 ITR 231
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJESH KR. DHANESTA
• Assessee Lawyers: GUNJAN JAIN
• Keywords: Capital asset; Corroborative evidences; Cost of acquisition; Capital Gains; Diversion of income; Valuation report
• Section: 54

Judgement Text

" 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘B’: NEW DELHI BEFORE SHRI YOGESH KUMAR U.S., JUDICIAL MEMBER AND SHRI AVDHESH KUMAR MISHRA, ACCOUNTANT MEMBER ITA No. 2997/Del/2018, A.Y.2013-14 Shyam Gupta, 39/6, Shakti Nagar, New Delhi PAN: ALBPG3201D Vs. Income Tax Officer, Ward 35(2), E-2, Civic Centre New Delhi (Appellant) (Respondent) Appellant by Ms. Gunjan Jain, CA Respondent by Sh. Rajesh Kr. Dhanesta, SR (DR) Date of Hearing 28/01/2025 Date of Pronouncement 28/04/2025 ORDER PER AVDHESH KUMAR MISHRA, AM This appeal of the assessee for the Assessment Year (hereinafter, the ‘AY’) 2013-14 is directed against the order dated 15.12.2017 of the Commissioner of Income Tax (Appeals)-12, New Delhi [hereinafter, the ‘CIT(A)’]. 2. The assessee has raised following grounds: “1. Under the facts and circumstances of the case, ld. First Appellate Authority has grossly erred in not giving exemption u/s 54 of the Act amounting to Rs.60,70,000/- which was disallowed by Ld. A.O. and was not disputed by the Hon’ble CIT(A) which is bad at law. 2. Under the facts and circumstances of the case, Ld. First Appellate Authority has grossly erred in computation of Capital Gain without ITA No.2997 /Del/2018 Shyam Gupta 2 considering the expense incurred by assessee on Commission on amounting to Rs.2,50,000/- which was disallowed by Ld. A.O. and was not disputed by the Hon’ble CIT(A) which is bad at law. 3. Under the facts and circumstances of the case, Ld. First Appellate Authority has grossly erred in computing indexed cost of improvement at Rs.85,61,215/- instead of the correct indexed cost of improvement of Rs.99,42,844/- by wrongly taking the cost of improvement of Rs.20,00,000/- incurred by the assessee in the financial year 1989- 1990 thereby understating the cost of improvement by Rs.13,81,629/- 4. Under the facts and circumstances of the case, Ld. First Appellate Authority has grossly erred in concluding that the relief to the appellant is amounting to Rs.25,13,894/- which is factually incorrect and not in accordance with the substance of the orders passed by him. 5. Under the facts and circumstances of the case, the ld. CIT(A) has grossly erred in not allowing amount of Rs.43,75,000- paid by the assessee to release the mortgage on the property as cost of improvement is injudicious, and bad at law. 6. The appellant prays for leave to add, amend, alter or withdraw any grounds of appeal.” 3. The relevant facts giving rise to this appeal are that the assessee, engaged in liaisoning work, filed his Income Tax Return (hereinafter, the ‘ITR’) on 12.07.2013 declaring income of Rs.2,22,330/-. The case was picked up for scrutiny for examining of the issue of claim of deduction under section 54 of the Income Tax Act, 1961 (hereinafter, the ‘Act’). The assessee, along with co-owners, had sold an inherited property and had shown NIL Long-Term Capital Gains (hereinafter, the ‘LTCG’) arisen therefrom after claiming deduction under section 54 of the Act. While scrutinizing the case, the Assessing Officer (hereinafter, the ‘AO’) enquired the cost of construction, cost of improvement, etc. claimed by the ITA No.2997 /Del/2018 Shyam Gupta 3 assessee. The AO, holding that the assessee failed to bring any corroboratory evidence to justify his claims of cost of construction and cost of improvement while working the LTCG, disallowed the claims of indexed cost of construction and indexed cost of improvement of Rs.7,30,147/- and Rs.73,47,462/- respectively. Further, the AO noticed that the assessee, while computing the LTCG, had also claimed deduction of mortgage money of Rs.43,75,000/- paid to the bank for getting the said inherited property released from mortgage before selling it. The AO disallowed the claim of deduction mortgage charge of Rs.43,75,000/- paid to the bank on the reasoning that the said property was mortgaged to the bank for the business purposes of the person other than the assessee and the said sum did not make any value addition to the cost of the said property. 3.1 The assessee along with various co-owners sold the ancestral property/residential property; House No. 4/50, Roop Nagar, New Delhi. While working out the Capital Gains arisen on the sale of the above- mentioned property, the assessee had claimed cost of acquisition of the said property as on 01.04.1981 as under: - Cost of land 265.40 Sqr. Yard X 2250 per Sqr. Yard = Rs.5,94,900/- Cost of construction as on 01.04.1981 = Rs.3,42,778/- Total = Rs.9,37,678/- ITA No.2997 /Del/2018 Shyam Gupta 4 The above cost had been worked out on the basis of the assessee’s Valuer report dated 20.02.2015. The AO, based on the note annexed with the said valuation report, inferred that the said property sold in the relevant year was different than what was inherited by the assessee. The note indexed with the said valuation report is reproduced as under: \"The property/house on plot no. 4/50, Roop Nagar, Delhi does not exist at present in the original shape. The valuation of the properties on the basis of the sale deed provided by the Sh. Shyam Gupta S/o Late Smt. Murti Devi. Earlier, Allowable covered area was about 66% of the Plot/Size and the building was two and half storied structure, the covered area has been calculated. The land rate has been provided as per Information provided by the party Rate/Information collected from local enquiry.\" 3.2 Based on the above note/information, the AO inferred that the said property consisting of two and half floors was not inherited as such by the assessee though the said property was in existence on the date of its sale. As per the assessee, his mother bought a property in the year 1967 and thereafter she made certain improvements in 1982-83 and 1989-90 as per requirement of the family, which also got substantiated by the copy of the Wealth Tax Return of the assessee’s mother (late Smt. Murti Devi) for the AY 1992-93. Later on, the old property was demolished and another residential property was built/reconstructed at the cost of Rs.78,32,000/- in the year 1999-2000. Thereafter, the new property was mortgaged to the Canara Bank in the year 1999-2000 as security for business loan. The said property got released from the bank after making payment of ITA No.2997 /Del/2018 Shyam Gupta 5 Rs.1,75,00,000/- to the Canara Bank to get the property released from mortgage in pursuance of the order of the Hon’ble Delhi High Court. Thereafter, the said property was finally transferred/sold for the consideration of Rs.7,40,00,000/- as per the registered deed. 3.3 As per the assessee, his share in the sale consideration was Rs.1,85,00,000/-. Out of which, the sum of Rs.43,75,000/- was claimed to have been paid to the bank for getting the property released from the mortgage. The assessee, inadvertently, did not claim the deduction of Rs.43,75,000/- while computing the LTCG in the ITR. Therefore, the assessee claimed the deduction of Rs.43,75,000/- during the assessment proceedings, but the AO did not allow the same. 3.4 The sale deed of property clearly mentioned the year of construction as 19.09.2000. Besides the cost of acquisition of Rs.9,37,678/- (cost of the land at Rs.5,49,900/- and cost of the old building at Rs.3,42,778/-) as on 01.04.1981, the assessee had also claimed deduction on account of improvement costs claimed having incurred in the AY 1989-90 and 1999- 2000 as under: S. No. Year Indexed cost of improvement (Rs.) 1. 1982-83 1,36,86,716/4 = 34,21,679/- 2. 1989-90 99,06,976/4 = 24,76,744/- 3. 1999-2000 1,71,54,692s/-/4 = 42,88,673/- Rs.1,01,87,096/- ITA No.2997 /Del/2018 Shyam Gupta 6 3.5 Since the original building was not in existence on the date of sale of the said property as mentioned in the registered deed; therefore, the AO allowed only the indexed cost of land by taking the cost of acquisition of the land at Rs.5,49,900/-. Thus, out of the above-mentioned sum of Rs.1,01,87,096/-, the AO allowed the cost of the land at Rs.28,39,634/- and disallowed the indexed cost of improvement of Rs.73,47,462/- for want of corroboratory evidence. Besides, the AO also disallowed the indexed cost of the old building at Rs.7,30,147/-. 3.6 Aggrieved with the assessment order, the assessee preferred appeal and succeeded partly. As per the assessee, the CIT(A) allowed relief of Rs.44,54,470/-. However, the relief, allowed by the CIT(A), as per the AO, was Rs.7,30,147/-. 4. The Ld. AR submitted that the AO and the Ld. CIT(A) had admitted that the property sold resulting the LTCG under reference was different and built in 1999-2000, which was different than what was inherited by the assessee. The old property was remodified/reconstructed/refurbished to new property. Hence, the entire cost of acquisition as on 01.04.1981 and improvement cost of Rs.1,01,87,096/- mentioned above in para 3.4 have to be allowed as deduction. Besides, the above, the sum of Rs.43,75,000/- paid to the bank for getting the property released from the mortgage should also be allowed as deduction on the reasoning that had ITA No.2997 /Del/2018 Shyam Gupta 7 the property not got released from the mortgage, the same would have not been sold. The Ld. AR thus, prayed for allowance of following deductions while computing LTCG: i. Indexed cost of acquisition as on 01.04.1981, ii. Improvement cost of Rs.1,01,87,096/- and iii, Mortgage charge of Rs.43,75,000/- 5. On the other hand, the Ld. Sr. DR supported the order of the Ld. CIT(A). 6. We have heard both parties and have perused the material available on the record. There is no dispute on the fact that the property was inherited by the assessee along with his brothers. Further, there is also no dispute on the fact that the property sold out in the relevant year was different than the inherited property. The appellant assessee had not produced any corroboratory supporting evidence of cost of improvements. However, the circumstantial evidence; such as the Wealth Tax Return of the assessee’s mother (late Smt. Murti Devi) for the AY 1992-93 and municipal tax, etc. support the assessee’s claim. Unless the old property was not demolished or remodified/reconstructed/refurbished, the new property would have not come. Therefore, the entire facts and circumstances of the case have to be taken into account. We are of the considered view that the part of demolition/recodification/reconstruction/ refurbishing cost would have been met out of the sale of old building ITA No.2997 /Del/2018 Shyam Gupta 8 material also. Whether netting of the same has been claimed by the assessee as cost of improvement. 7. Keeping in view the above, it is held that the indexed cost of land and building as disclosed by the assessee has to be allowed while computing the LTCG. Ordered accordingly. Further, after giving a thoughtful consideration on merit of the case, facts and circumstances of the case, we are of the considered view that the 5% of cost of improvements would have been met out of sale of old building material. Therefore, the claim of 5% of cost of improvements (other than the cost of acquisition as on 01.04.1981) required to be disallowed while computing the LTCG. We therefore, order accordingly. 8. Now the next issue is in respect of claim of deduction of the mortgage charge of Rs.43,75,000/-. This issue has been duly considered by the Hon’ble Bombay High Court in the case of Roshan babu Mohammed Hussein Merchant, 275 ITR 231, The relevant part of the decision is as under: “10. We have carefully considered the rival submissions. As stated hereinabove, the only question required to be considered in these appeals is, whether the repayment of mortgage debt is an expenditure incurred in connection with the transfer of the capital asset allowable under Section 48(i) of the Income Tax Act ? ITA No.2997 /Del/2018 Shyam Gupta 9 11. The Apex Court in the case of RM. Arunachalam (supra) while keeping the issue relating to diversion by overriding title open, has held (227 ITR 222 at page 236) as follows: \"This would show that a charge differs from a mortgage in the sense that in a mortgage there is transfer of interest in the property mortgaged, while in a charge no interest is created in the property charged, so as to reduce the full ownership to a limited ownership. The creation of a charge under section 74(1) of the Estate Duty Act cannot, therefore, be construed as creation of an interest in property that is the subject-matter of the charge. The creation of the charge under section 74(1) only means that in the matter of recovery of estate duty from the property which is the subject-matter of the charge the amount recoverable by way of estate duty would have priority over other liabilities of the accountable person. In that sense the claim in respect of estate duty would have precedence over the claim of the mortgagee because a mortgage is also a charge.\" It was further held by the Apex Court (at page 239) as follows: \"...... in a mortgage there is transfer of an interest in the property by the mortgagor in favour of the 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) of the Act. The position is, however, different where the mortgage is created by the owner after he has acquired the property. The clearing off of the mortgage debt by him prior to transfer of the property would not entitle him to claim deduction under section 48 of the Act because in such a case he did not acquire any interest in the property subsequent to his acquiring the same.\" ITA No.2997 /Del/2018 Shyam Gupta 10 12. In the case of V.S.M.R. Jagdishchandran (supra), the Apex Court while following its decision in the case of RM Arunachalam (supra) held that where the mortgage is created by the assessee himself, then the expenditure incurred by the assessee to repay the mortgage debt cannot be held to be the cost of acquisition or cost of improvement allowable under Section 48(ii) of the Income Tax Act. 13. Subsequently, the Apex Court in the case of CIT V/s. Attili N. Rao (252 ITR 880) has considered the issue relating to diversion of income by overriding title. In that case the assessee therein had mortgaged immovable property to the State Government as a security for the amounts due to the State. The State Government in exercise of its power under the mortgage, sold the mortgaged property in auction and from the quantum realised, the State deducted the amount due to it and paid over the balance to the assessee. In computing the capital gains accruing on sale of the above property, the assessee claimed deduction of the amount appropriated by the State Government towards the mortgage debt. The Tribunal held that on mortgage created by the assessee, the State Government had an interest in the mortgaged property and on sale of the said property the amount of sale proceeds to the extent of the mortgage debt was diverted to the State Government by overriding title and the amount paid towards mortgage debt has not reached the hands of the assessee. The above decision of the Tribunal was upheld by the Andhra Pradesh High Court. Reversing the decision of the High Court, the Apex Court held (at page 883) as follows: \"What was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised therefor 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 is on the full price realised (less admitted deductions) that the capital gain and the tax thereon has to be computed.\" 14. From the aforesaid decisions of the Apex Court, it is clear that there is a distinction between the obligation to discharge the mortgage debt created by the previous owner and the obligation to discharge the ITA No.2997 /Del/2018 Shyam Gupta 11 mortgage debt created by the assessee himself. Where the property acquired by the assessee is subject to the mortgage created by the previous owner, the assessee acquires absolute interest in that property only after the interest created in the property in favour of the mortgage is transferred to the assessee, that is after the discharge of mortgage debt. In such a case, the expenditure incurred by the assessee to discharge the mortgage debt created by the previous owner to acquire absolute interest in the property is treated as 'cost of acquisition' and is deductible from the full value of consideration received by the assessee on transfer of that property. However, where the assessee acquires a property which is unencumbered, then, the assessee gets absolute interest in that property on acquisition. When the assessee transfers that property, the assessee is liable for capital gains tax on the full value (less admitted deductions) realised, even if an encumbrance is created by the assessee himself on that property and the assessee is under an obligation to remove that encumbrance for effectively transferring the property. In other words, the expenditure incurred by the assessee to remove the encumbrance created by the assessee himself on the property which was acquired by the assessee without any encumbrance is not allowable deduction under Section 48 of the Income Tax Act. 15. It is true that in none of the aforesaid cases the Apex Court has specifically held that repayment of the mortgage debt created by the assessee himself is not an expenditure incurred for effectively transferring the property. However, it is implicitly held by the Apex Court that the expenditure incurred to remove the encumbrance created by the assessee himself on a property on which the assessee had absolute interest is not an expenditure incurred for effectively transferring the property as contemplated under Section 48 of the Income Tax Act. It is not in dispute that in both the appeals which are before us, the property on which the encumbrance was created by the assessee was acquired by the assessee free from encumbrances. Therefore, in the light of the decisions of the Apex Court referred to hereinabove, it must be held that the assessee is not entitled to the deduction of the expenditure incurred to remove the encumbrance created by the assessee himself. ITA No.2997 /Del/2018 Shyam Gupta 12 16. The contention that the assessee has not received a pie from the transfer and the entire sale proceeds realised on transfer of the mortgaged asset has been appropriated towards discharge of mortgage is also without any merit. As held by the Apex Court, when the property belonging to the assessee is sold in discharge of the mortgage created by the assessee himself, then, irrespective of the amount actually received by the assessee, the capital gain has to be computed on the full price realised (less admissible deduction) on transfer of the asset. To illustrate, suppose the assessee mortgages its capital asset and obtains loan of Rs.1 lakh from a Bank. Thereafter if the assessee transfers the said capital asset with the consent of the bank for Rs.1 lakh and pays the entire amount of Rs.1 lakh to the bank to discharge the mortgage created by the assessee, then it is not open to the assessee to contend that the capital gains tax is not leviable on transfer of the property because the assessee has not received a pie on transfer of that capital asset. 17. As regards the decisions of this court in the case of Shakuntala Kantilal (supra) followed in the case of Abrar Alvi (supra) and the decisions of the Kerala High Court in the case of Smt.Thressiamma Abraham (supra) which are strongly relied upon by the counsel for the assessee, we are of the opinion that the said decisions are no longer good law in the light of the subsequent decisions of the Apex Court referred to hereinabove. 18. For all the aforesaid reasons, we answer question set out at para 2 in the negative i.e. in favour of the revenue and against the assessee.” 9. Here in the present case, the business concern which kept the above referred property on mortgage is different person that the assessee. This issue of claim of deduction of mortgage charges as deduction while computing the LTCG is held squarely covered by the decision of the Hon’ble Bombay High Court in the case of Roshanbabu Mohammed Hussein Merchant (supra). We therefore, following the reasoning given by ITA No.2997 /Del/2018 Shyam Gupta 13 the Hon’ble Bombay High Court in the case of Roshanbabu Mohammed Hussein Merchant (supra), hold that the Ld. CIT(A) is justified in upholding the disallowance of claim of deduction of the mortgage charge of Rs.43,75,000/-. We therefore, also uphold the disallowance of Rs.43,75,000/-. 10. In the result, appeal of the assessee is partly allowed as above. Order pronounced in open Court on 28th April, 2025 Sd/- Sd/- (YOGESH KUMAR U.S.) (AVDHESH KUMAR MISHRA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:28/04/2025 Binita, Sr. PS Copy forwarded to: 1. Appellant 2. Respondent 3. PCIT/CIT 4. CIT(A) 5. Sr. DR-ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI "