I-T - Interest of mortgage of property is also inherited along with flat by virtue of transfer through WILL as assessee cannot inherit more than interest of testator: ITAT
By TIOL News Service
JAIPUR, DECEMBER 08, 2018: THE ISSUE IS - Whether interest of mortgage of the property is also inherited to assessee along with the flat by virtue of flat transfer through will as assessee cannot inherit more than the interest of the testator - YES IS THE VERDICT.
Facts of the case
The assessee an Individual, had filed her return of income for relevant AY. During assessment proceedings, the AO noted that the assessee did not disclose capital gain in respect of the sale of Flat, which was sold for a total consideration of Rs. 94,00,000/-. The assessee submitted before the AO that the flat was purchased by Shri Laxmi Narayan Bagla, the late father of the assessee for a consideration of Rs. 9,50,000/- and further expenditure of Rs. 45,250/- was incurred on transfer of the said flat in his name. The father of the assessee had mortgaged the flat as collateral security to Punjab National Bank (PNB) in respect of the loan taken by M/s. MPL Corporation Ltd, in which he and his sons were directors. The father of the assessee expired on 9th February, 1998 leaving his last Will and testament dated 16.10.1997 whereby he bequeathed the flat to the assessee. The assessee further explained that since M/s. MPL Corporation Ltd. was unable to clear the dues of PNB, the bank proposed to sell the flat for recovery of the outstanding dues and accordingly found a buyer for the flat. Thus M/s. MPL Corporation Ltd. and the assessee were forced to enter into one time settlement with the bank and to enter into agreement to sell her Flat. The buyer paid the entire sale consideration of Rs. 94,00,000/- to PNB.
Thus the assessee submitted that there was no capital gain on sale of the flat in the hands of the assessee. The AO did not accept the contention of the assessee and assessed the capital gain of Rs. 72,62,167/- as long term capital gain. On appeal, CIT(A) upheld the order of AO.
Tribunal held that,
++ the assessee inherited the flat by Will dated 16.10.1997 after the death of her father on 09.02.1998. Thus the Will dated 16.10.1997 was the last testimony of late Shri Laxmi Narayan Bagla whereby he bequeathed the said flat to the assessee. The assessee has inherited the flat along with the charge of mortgage debt. The assessee cannot inherit more than the interest of the testator i.e. the father of the assessee and hence once the interest of the father of the assessee was in the mortgaged property includes the interest of mortgage, then the interest of mortgage in the property was also inherited by the assessee along with the flat in question. The CIT (A) denied the benefit of payment of the mortgage debt or clearing of the mortgage debt on the ground that the debt was not the liability and responsibility of the assessee but was the responsibility of the brother of the assessee. This issue was considered by the Gujarat High Court in the case of CIT vs. Daksha Ramanlal. Tough there are decisions of other High Courts having divergent views on this issue, however, this issue was finally settled by the Supreme Court in the case of R.M. Arunachalam vs. CIT wherein the Apex Court has upheld the view of Gujarat High Court in the case of CIT vs. Daksha Ramanlal;
++ the Supreme Court has upheld the view that by discharging the mortgage debt, his heir has inherited the property acquires the interest of the mortgagee in the property. As a result of such payment made for the purpose of clearing of the mortgage the interest of the mortgagee in the property has been acquired by the heir. The payment has, therefore, to be regarded as cost of acquisition under section 48 read with section 55(2) of the IT Act. The Supreme Court has clarified the position, where the mortgage is created by the owner after he had acquired the property and, therefore, in such situation clearing of mortgage debt by him prior to transfer of property would not entitle him to claim deduction under section 48 because in such a case he did not acquire any interest in the property subsequent to his acquiring the same. Accordingly, it was found that the CIT (A) has committed an error in distinguishing these decisions relied upon by the assessee in support of the claim;
++ as regards the indexation cost of the flat is concerned, there is no dispute that the flat in question has been acquired by the assessee under the Will and, therefore, the provisions of section 49(1)(ii) provides that the cost of acquisition of the asset shall be deemed to be cost for which the previous owner of the property acquired it as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. The Explanation to section 49(1) further clarifies the term previous owner of the property in relation to any capital asset means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to clauses (i), (ii) and (iii) of sub section (1). Thus for the purpose of indexation, the cost of acquisition in the hands of the deceased father of the assessee has to be taken into consideration and not at the time of acquisition of the property by the assessee. Thus 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 Supreme Court in the case of R.M. Arunachalam vs. CIT, the amount for discharge of mortgage interest has to be considered as cost of acquisition and accordingly the net consideration on sale of the flat in question will be Nil. In the result, appeal of the assessee is allowed.
(See 2018-TIOL-2358-ITAT-MUM)
