| The Tax Publishers2019 TaxPub(DT) 7240 (Mum-Trib) : (2020) 181 ITD 0001 : (2019) 202 TTJ 0001 : (2020) 077 ITR (Trib) 0603 INCOME TAX ACT, 1961
Section 45 Section 4 Section 48
If borrower assessee had created a mortgaged debt by itself and if for discharge of its debt liability, mortgaged property had been taken over or taken into possession by the secured creditor/lender to realize loan/debt amount directly, then neither deduction of loan amount was allowed under section 48 nor it was a case of 'diversion of income by overriding title'. The amount appropriated by Bank after disposing of the mortgaged property of assessee was thus, purely an application of income.
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Capital gains - Deduction under section 48 - Mortgaged property sold by bank on assessee's failure to pay loan amount - Principle amount of loan whether diverted from overriding title
Assessee took a corporate term loan of Rs. 306 lakhs from M/s. Kotak Mahindra Bank Ltd. (KMBL). The assessee became a defaulter and bank (KMBL) classified the company's account as NPA (Non-performing Asset). Bank took over possession of the factory land of the assessee and sold the mortgaged property. Assessee claimed interest liability as an allowable expenditure in the accounts of the assessee. The net amount of Rs. 1,48,24,633, which was appropriated towards principal segment of the loan was shown in the computation of capital gains arising of sole of land. However, the principal amount of loan was claimed as deductible under section 48 along with the indexed cost of acquisition and improvements (Rs. 3,43,583;-and other incidental expenses of Rs. 6,000 relating to sales). The AO treated principal amount as chargeable to capital gains. Assessee submitted the KMBL had overriding title on the mortgaged asset (the said factory land). In principle, the bank had become the owner of the land. Therefore, it is the case of the 'diversion of income at source by overriding the title'. Held: When the charge on the property had been created by the assessee himself, he cannot claim deduction of the principal amount of the loan either as expenditure under section 48 or as 'diversion of income by overriding title. Once the borrower receives notice under sub-section (2) of section 13 of the SARFAESI Act, his right to part with the property was restricted; and, the borrower cannot transfer the secured asset by way of sale, lease or otherwise without prior written consent of the secured creditor. The borrower is not free to decide even the way in which the secured asset shall be parted with. The amount recovered by KMBL can by no stretch of imagination be treated as 'diversion of income by overriding title'. The principle of 'diversion of income by overriding title' applies when the transaction was beyond the control of the assessee due to which assessee had to make commitment to either divert it's income or part with income earned by it in a particular manner. Such principle would not be attracted in cases wherein assessee by his own past action creates a future obligation for himself to utilize the amount in a particular manner. Assessee cannot claim any part of such application as deduction for the purpose of computing capital gain in terms of section 48. Thus, the claim of the assessee cannot be accepted in the facts of the present case. Consideration from sale of property to the extent of principal component of loan adjusted by the bank cannot be treated as 'diversion of income by overriding title' and was thus not deductible from the total consideration accrued to the assessee from sale of property.
Relied:Sitaladas Tirathdas (1961) 41ITR 367 (SC) : 1961 TaxPub(DT) 145 (SC), CIT v. Attili N Rao (2001) 252 ITR 880 (SC) : 2001 TaxPub(DT) 1632 (SC), CIT v. Sharad Sharma (2008) 305 ITR 24 (All) : 2008 TaxPub(DT) 793 (All-HC) and Raja Bejoy Singh Dudhania (1933) 1 ITR 135 (PC) : 1933 TaxPub(DT) 32 (Privy Council). Distinguished: Sitaldas Tirathdas (1961) 41 ITR 367 (SC) : 1961 TaxPub(DT) 145 (SC), Raja Bejoy Singh Dudhuria v. CIT (1933) 1 ITR 135 (PC) : 1933 TaxPub(DT) 0032 (Privy Council), P.C. Mullick (1938) 6 ITR 206 (PC) : 1938 TaxPub(DT) 39 (Privy Council) and Gopinath Paul and Sons v. Dy. CIT (2005) 278 ITR 240 (Cal) : 2005 TaxPub(DT) 1393 (Cal-HC).
REFERRED : Motilal Chahadamilal Jain v. CIT (1991) 190 ITR 1 (SC) : 1991 TaxPub(DT) 1331 (SC), CIT v. Mathubhai C Patel (1999) 238 ITR 403 (SC) : 1999 TaxPub(DT) 147 (SC), CIT v. Roshanbabu Mohd. Hussein Merc (2005) 275 ITR 231 (Bom) : 2005 TaxPub(DT) 1285 (Bom-HC), Gopinath Paul and Sons v. Dy. CIT (2005) 278 ITR 240 (Cal) : 2005 TaxPub(DT) 1393 (Cal-HC) and Addl. CIT v. Glad Investment (P)) Ltd. 22 ITD 227 (Del-Trib).
FAVOUR : Against the assessee.
A.Y. : 2010-2011
IN THE ITAT, MUMBAI BENCH
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