D D CHITTARANJAN Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is an individual. During the previous year relevant to the asst. yr. 1974-75, the assessee sold two properties bearing door Nos. 52 and 53, Lalbagh Road, Bangalore, for a total consideration of Rs. 85,000. In the course of the assessment proceedings, the assessee claimed that a sum of Rs. 40,000 paid to one Moosa Haji Ahmed as per the terms of the compromise decree in O.S. No. 109 of 1970, City Civil Judge, Bangalore, dt. 10th Oct., 1972, in respect of the property at No. 24, Cunningham Road, Bangalore, Rs. 15,000 each towards purchase price of the properties sold by the assessee and Rs. 15,000 towards cost of improvement, stamp duty, legal expenses, etc., should be deducted from the sum of Rs. 85,000. Thus, according to the stand of the assessee, on the sale of the properties for Rs. 85,000, no amount could be assessed as income relatable to capital gains. However, the ITO took the view that the sum of Rs. 40,000 paid by the assessee in respect of the property at No. 24, Cunningham Road, Bangalore, did not form part of the cost of acquisition of the properties sold by the assessee and hence not deductible. Further, out of a sum of Rs. 15,000 claimed as deduction by way of cost of improvement, the ITO disallowed Rs. 3,119 as having been incurred by the wife of the assessee and, determining the cost of acquisition of the properties sold by the assessee at Rs. 30,000, brought to tax an aggregate capital gain of Rs. 43,119 (Rs. 85,000 minus Rs. 41,881). On appeal by the assessee before the AAC, she took the view that the deductions claimed by the assessee in computing the capital gains referable to the sale of properties at Nos. 52 and 53, Lalbagh Road, Bangalore, by the assessee were not admissible and, in that view, the appeal was dismissed. On further appeal by the assessee before the Tribunal, it went into the factual details relating to the acquisition of the properties sold by the assessee as well as the property belonging to the wife of the assessee and finally found that the authorities below were right in subjecting the capital gain of Rs. 43,119 to tax treatment. Under s. 256(1) of the IT Act, 1961 (hereinafter referred to as"the Act"), at the instance of the assessee, the following questions of law have been referred to this Court for its opinion :

(2.) BEFORE proceeding to answer the questions so referred, it would be necessary to notice briefly the factual backdrop relating to the acquisition of the properties sold by the assessee, viz., door Nos. 52 and 53, Lalbagh Road, Bangalore. One V. Ramalingam had, among others, two daughters, Sumathi and Sivakami, and three sons, Viswanathan, Amarnath and Swaminathan. Sumathi is the wife of the assessee. Ramalingam executed a will on 10th Sept., 1942, and later he died on 18th Feb., 1943. Under that will, the wife of the assessee, Sumathi, was given the property at No. 24, Cunningham Road, Bangalore. Swaminathan and Amarnath, respectively, were given the properties bearing old door Nos. 9A and 9B corresponding to door Nos. 52 and 53, Lalbagh Road, Bangalore. The other son, Viswanathan, was not given any property at all under the will of Ramalingam. Viswanathan, who, under the will of his father, Ramalingam, did not have any interest in any of the properties, purported to mortgage the property at No. 24, Cunningham Road, Bangalore, which belonged to Sumathi, the wife of the assessee, under the will of her father, Ramalingam, to one Mrs. Kathleen Margaret Spears. Later, on 23rd July, 1957, Viswanathan purported to act as the power of attorney of Sumathi, the wife of the assessee, and sold the property at No. 24, Cunningham Road, Bangalore, to one Moosa Haji Ahmed for Rs. 28,000 with an agreement for reconveyance and, under the terms of the agreement executed on 15th June, 1961, it was provided that Viswanathan, as the power of attorney holder of his sister, Sumathi, would be entitled to purchase the property at No. 24, Cunningham Road, Bangalore, within six years from that date on payment of a consideration of Rs. 33,000. While matters stood thus, on 17th May, 1966, Swaminathan who, under the will of his father, Ramalingam, became entitled to the property at No. 52, Lalbagh Road, Bangalore, sold it to Abdul Razack with an agreement for reconveyance within a period of three years from 17th June, 1969. Likewise, Amarnath, who was entitled to the property at No. 53, Lalbagh Road, Bangalore, under the will of his father, Ramalingam, sold that property to one Mir Abdul Subhan with an agreement for reconveyance on the same terms as in the case of Swaminathan. The wife of the assessee, Sumathi, filed a suit in the Court of the City Civil Judge, Bangalore, in O. S. No. 109 of 1970 with reference to the property at No. 24, Cunningham Road, Bangalore, impleading Moosa Haji Ahmed, Mrs. Kathleen Margaret Spears, Viswanathan and Sivakami for a declaration that the power dt. 6th May, 1957 given by her in favour of her brother, Viswanathan, was not valid and not binding on her and the mortgage dt. 1st April, 1952, and the sale dt. 23rd July, 1957, executed by Viswanathan were forged documents not binding on her. Besides, Sumathi had also prayed for the relief by way of recovery of possession and mesne profits. On 10th Oct., 1972, the suit was decreed in terms of a compromise in the following terms: (1) Moosa Haji Ahmed to whom the property at Cunningham Road was sold was to hand over vacant possession to Sumathi together with all documents on or before 1st Oct., 1973; (2) Moosa Haji Ahmed was also to execute a sale deed in Sumathi's favour; (3) In consideration of the above, Sumathi was to pay Rs. 40,000 to Moosa Haji Ahmed at the time of registration before 1st Oct., 1973; and (4) If Moosa Haji Ahmed failed to execute the deed before 1st Oct., 1973, Sumathi was to deposit Rs. 40,000 in the Court and call upon Moosa Haji Ahmed to execute the sale deed. Meanwhile, both Swaminathan and Amarnath were unable to repurchase the properties at Nos. 52 and 53, Lalbagh Road, Bangalore, from Abdul Razack and Mir Abdul Subhan in accordance with the terms of the agreements for reconveyance and the assessee, at the request of Swaminathan and Amarnath, repurchased the properties from Abdul Razack and Mir Abdul Subhan for Rs. 15,000 each and, in turn, entered into agreements to reconvey the properties to Swaminathan and Amarnath on or before 17th June, 1972, on the latter paying him Rs. 15,000 each, which was the amount paid by the assessee to Abdul Razack and Mir Abdul Subhan, a sum of Rs. 1,000 towards arrears of corporation tax and a further sum of one-half of the amount that was to be paid by the assessee to Moosa Haji Ahmed for obtaining a reconveyance of the property at No. 24, Cunningham Road, Bangalore. With reference to the agreements for reconveyance of the properties so entered into by the assessee with Swaminathan and Amarnath, suits in O.S. Nos. 318 and 319 of 1972 respectively were instituted by them before the City Civil Judge, Bangalore, to enforce the terms of the agreements for reconveyance, but those suits were, however, dismissed on 10th Jan., 1978. During the pendency of those suits, on 25th June, 1973, the assessee sold the property at No. 53, Lalbagh Road, Bangalore, to Flight Lt. A. Rehman for Rs. 45,000 and, on 31st July, 1973, he sold the property at No. 52, Lalbagh Road, Bangalore, to Hajria Begum for Rs. 40,000 aggregating to Rs. 85,000. It is in the aforesaid factual background that the claim of the assessee for deduction of the amounts as claimed by him in the course of the assessment proceedings has to be considered.