The Jaipur bench of Income Tax Appellate Tribunal (ITAT) has held that the amount paid for the discharge of mortgage interest has to be considered as the cost of acquisition for the purpose of determining the capital gain tax liability.
In the instant case, the Assessee, an individual filed his return of income. During the assessment proceedings, the Assessing Officer noted that assessee did not disclose the capital gain arose out of the sale of a flat which amounted to 94 lakhs.
Assessee responded that the said flat was given by his late father at his will and the same was kept as collateral security in PNB in respect of loan taken by a company directed by both the father and son.
The assessee also added that since the company was unable to meet the loan dues, then the bank decided to sell the flat for recovery of outstanding dues. The buyer has paid the entire amount to Punjab National Bank and the assessee doesn’t have any capital gain on sale of said property.
Not satisfied with the submission made by Assessee, AO made the addition to his income as long-term capital gain which is challenged before CIT (A) by the assessee. The assessee relied on a various decision and submitted that the said flat was inherited along with the mortgage debt, then the dues are recovered by the bank itself from a buyer shall be allowed as the deduction from the total consideration while computing the capital gain under section 45 and 48 of the IT Act.
However appellate authority rejected the appeal and later assessee approached the Tribunal.
The revenue contended that as per the will, the liability to discharge the debt was on the brother of the assessee, then even if the assessee has paid the said amount that cannot be allowed as deduction or cost of acquisition of the property in question.
The ITAT bench including Judicial Member Vijay Pal Rao and accountant member Vikram Singh Yadav heard the rival submission and perused the documents and cases cited by both the parties, thereafter bench pressed the decision of Gujarat High Court in the case of CIT vs.Daksha Ramanlal 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.
Finally, the bench observed that “when the assessee has received nothing from the sale consideration of the property in question, then the question of any capital gain in the hands of the assessee does not arise. Accordingly, following the decision of Hon’ble Supreme Court in the case of R.M. Arunachalam vs. CIT (supra), the amount for the discharge of mortgage interest has to be considered as the cost of acquisition and accordingly the net consideration on sale of the flat in question will be Nil”.
