SREEKUMARAN NAIR Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) The question raised in the appeal filed by the assessee is whether the Tribunal was justified in holding that the amount spent by the assessee to clear the mortgage created by the previous owner from whom he inherited property is not an allowable deduction in the computation of capital gains on the sale of the property under S.48(2) of the I.T. Act. We have heard Sri. T. M. Sreedharan, counsel appearing for the appellant, and standing counsel appearing for the respondent.

(2.) The property sold is land and a cashew factory previously owned by the appellant's father during his life - time and father had created a mortgage over the property in favour of a Bank and availed loan. After his death, the loan amount had accumulated to Rs. 30 lakhs. When appellant and other legal heirs proposed to sell the property, the purchasers insisted on clearance of the mortgage debt and therefore appellant and other legal heirs discharged the mortgage debt and sold the property after perfecting their title. Strangely the sale consideration accounted is Rs. 20 lakhs as against discharged mortgage amount of Rs. 30 lakhs The assessing officer has accepted the sale consideration returned, but disallowed the mortgage debt claimed as deduction under S.48(2) of the Act on the ground that the same does not represent the cost of acquisition. Counsel for the appellant has relied on the decision of the Supreme Court in V.S.M.R. Jagadishchandran (Decd.) v. CIT, 227 ITR 240 (SC) wherein the Supreme Court relying on their earlier decision in RM. Arunachalam Chettiar v. CIT, 227 ITR 222 (SC) held that discharge of mortgage debt is cost of acquisition and so much so it is an allowable deduction under S.48(2) of the Act. We find force in this contention because on death of original owner, all the legal heirs got only right of mortgagor and by discharging the mortgage debt, they have acquired perfect title over the property, and so much so, the cost incurred for releasing the property from the mortgage amounts to acquisition of full title over the property. As held by the Supreme Court, what the appellant has achieved by discharging the mortgage debt is to get full title over the property, and so much so, the amount paid to discharge the liability should be treated as cost of acquisition for the purpose of computation of capital gains. We therefore allow the appeal by reversing the assessment confirmed in second appeal by the Tribunal with direction to the assessing officer to recompute the liability by granting exemption to mortgage debt discharged by the appellant as part of cost of acquisition eligible for deduction under S.48(2) of the Act.