Partnership Firm not entitled to Tax Deduction on LTCG u/s 48(i) of Income Tax Act for Mortgaging Property as Collateral Security: ITAT [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that a partnership firm is not entitled to the tax deduction on Long-term capital gain (LTCG) under Section 48(i) of the Income Tax Act, 1961 for mortgaging property as collateral securities.

The assessee is a partnership firm and has not filed its return of income for the reasons that it did not have taxable income. The assessee’s case was re-opened after duly recording the reasons for re-opening under Section 147 of the Income Tax Act vide notice under Section 148 of the Income Tax Act and notice under Section 142(1) was issued and served on the assessee.

The assessee has challenged the computation of the capital gain on the sale of the property at Rs. 10,03,53,900/- for which the assessee has claimed a deduction for the cost of improvement & alleged that the diverted amount at source by overriding title never reached the assessee and further had claimed indexed cost and cost of the transfer.

The Authorized Representative contended that properties that were sold were given as collateral securities for loans to Bank of India by the assessee firm and that the assessee undertook to sell the properties with a view to fetch better sale consideration and that the sale proceeds of Rs. 6.50 crore was directly paid to the bank.

It was submitted that the assessee firm did not receive any of the sale consideration and the same is evident from the sale deed enclosed in the paper book and there was no profit in the said sale.

It was further stated that SARFAESI Act was invoked on the assessee by way of which the bank had taken symbolic possession and the bank had overriding title to the said flat by way of provision of SARFAESI Act and that Rs 6,50,00,000/- was the diversion of funds by such overriding title and that the same should not be taxed in the hands of the assessee.

The Departmental Representative submitted that the assessee has failed to furnish any details of the works contract, purchases of raw materials, and other evidence in support of its claim.

In the case of Roshanbabu Mohhomad Hussein Merchant Vs CIT [2005] it was held that the assessee was not entitled to deduction under Section 48(i) of the Income Tax Act for repayment of the mortgage debt which was incurred subsequent to the acquisition of the property and not for the purpose of acquisition.

The Two member bench comprising of O.P. Kant (Accountant member) and Kavitha Rajagopal (Judicial member) remand the issue to the file of the Assessing Officer for the limited purpose of verifying the expenses claimed by the assessee and the assessee is directed to furnish all the documentary evidences pertaining to the expenses incurred in support of its claim.

Thus, the appeal filed by the assessee was partly allowed for statistical purposes.

To Read the full text of the Order CLICK HERE

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