My mortgaged property was auctioned and the department kept what I owed it out of the proceeds. Do I pay capital gains on the whole price or only on what reached me?
On the whole price. The Supreme Court allowed the Revenue's appeal and set aside the High Court and the Tribunal. What the State sold at the auction was the immovable property belonging to the assessee, so the price realised belonged to him. Out of that price the State deducted the dues owed to it and paid over the balance. The capital gain is therefore computed on the full price realised, less the admitted deductions. The Tribunal's view - that the sale price had two components and that the part answering the mortgage debt reached the Government by overriding title and never reached the assessee - was held to be wrong.
Decided by the Supreme Court (Supreme Court of India; S.P. Bharucha and Brijesh Kumar, JJ) on 2001-10-11, reported as [2001] 252 ITR 880 (SC); AIR 2002 SC 388; (2001) 171 CTR (SC) 188; JT 2001 (10) SC 412; (2003) 9 SCC 658; [2001] 119 Taxman 1030. It bears on section 48, section 45 of the Income Tax Act 1961, in Capital Gains matters.
This is the short Supreme Court authority that disposes of the recurring argument that a mortgage debt cleared out of sale proceeds should come off the consideration for capital gains. It matters because the argument is intuitively attractive and had persuaded both the Tribunal and the Andhra Pradesh High Court, on the reasoning that the mortgage created an interest in the property in the mortgagee so that only the assessee's residual interest was sold. The Court rejects that analysis at its root: ownership, not the encumbrance, decides whose property was sold and whose price it is. What follows is that discharging your own mortgage out of the proceeds is an application of the sale price, not a diversion of it by overriding title, and the whole price is the full value of the consideration. The distinction to keep in mind is between a charge the assessee himself created to secure his own debt, which is what this case decides, and an obligation attaching to the property independently of him.
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The assessee carried on abkari business. In the financial year 1970-71 he mortgaged immovable property of his own at Waltair to the Excise Department of the State of Andhra Pradesh, as security for amounts of kits due by him to the State. In the year relevant to assessment year 1982-83 the State sold that property by public auction, without the intervention of the court, to realise its dues. Rs.5,62,980 was realised. The State deducted Rs.1,29,020 due to it towards kits and interest and paid the balance to the assessee. The Revenue assessed capital gain of Rs.3,70,970 by reference to the cost at which the assessee had acquired the property. The assessee contended that the Rs.1,29,020 owed to the State had to be deducted from the auction proceeds before computing the gain, putting it at Rs.85,130. The Income-tax Officer and the appellate authority rejected that, but the Tribunal accepted it, holding that the sale price had two components - the price ascribable to the assessee's interest and the arrears of debt and interest due to the State - and that, there being a clear charge or mortgage over the property, the latter never reached the assessee's hands but reached the Government by overriding title. On a reference the Andhra Pradesh High Court, reported at [1998] 233 ITR 10, answered the questions against the Revenue except one which it held did not arise. The Revenue appealed by certificate. The assessee was served but did not appear.
The appeal was allowed and the judgment and order under appeal set aside, with no order as to costs. The Tribunal and the High Court were in error. What the State sold at the auction was the immovable property belonging to the assessee, and the price realised therefore belonged to him. Out of that price the State deducted its dues towards kits and interest due from the assessee and paid over the balance to him. The capital gain the assessee made was on immovable property that belonged to him, so it is on the full price realised, less the admitted deductions, that the capital gain and the tax on it have to be computed. The first question, whether the amount realised by the sale of the assessee's interest in the property was only Rs.4,33,960, was answered in the negative and in favour of the Revenue. The Court held that the other questions did not arise for consideration.
The reasoning is short and turns on ownership. The High Court had proceeded on the footing that the mortgage created an interest in the property in favour of the State, so that on sale the value had to be reduced to the extent of that interest; the Tribunal had gone further and treated the portion answering the debt as never having reached the assessee, reaching the Government by overriding title instead. The Supreme Court rejected both steps. The property auctioned was the assessee's property, not some fraction of it representing a residual interest, and the price fetched at the auction was accordingly his. Since the whole price was his, the discharge of his own debt to the State out of that price was a payment made on his behalf from money belonging to him. The mortgagee's remedy over the property does not convert the sale into a sale of something less than the property, nor does it divert the proceeds before they become the owner's. The capital gain being a gain on the property that belonged to him, the computation must start from the full price realised, subject only to the deductions admissible in law.
What was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised therefore belonged to the assessee.
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Handle my notice → Ask a CA on WhatsAppOn the whole price. The Supreme Court allowed the Revenue's appeal and set aside the High Court and the Tribunal. What the State sold at the auction was the immovable property belonging to the assessee, so the price realised belonged to him. Out of that price the State deducted the dues owed to it and paid over the balance. The capital gain is therefore computed on the full price realised, less the admitted deductions. The Tribunal's view - that the sale price had two components and that the part answering the mortgage debt reached the Government by overriding title and never reached the assessee - was held to be wrong. This was decided by the Supreme Court (Supreme Court of India; S.P. Bharucha and Brijesh Kumar, JJ) and bears on section 48, section 45 of the Income Tax Act 1961. It is reported as [2001] 252 ITR 880 (SC); AIR 2002 SC 388; (2001) 171 CTR (SC) 188; JT 2001 (10) SC 412; (2003) 9 SCC 658; [2001] 119 Taxman 1030. This is the short Supreme Court authority that disposes of the recurring argument that a mortgage debt cleared out of sale proceeds should come off the consideration for capital gains. It matters because the argument is intuitively attractive and had persuaded both the Tribunal and the Andhra Pradesh High Court, on the reasoning that the mortgage created an interest in the property in the mortgagee so that only the assessee's residual interest was sold. The Court rejects that analysis at its root: ownership, not the encumbrance, decides whose property was sold and whose price it is. What follows is that discharging your own mortgage out of the proceeds is an application of the sale price, not a diversion of it by overriding title, and the whole price is the full value of the consideration. The distinction to keep in mind is between a charge the assessee himself created to secure his own debt, which is what this case decides, and an obligation attaching to the property independently of him. If it applies to you, the first step is this: Compute capital gains on the gross sale price where the encumbrance secured your own debt, and do not net off the amount paid to the mortgagee even where the buyer or the creditor pays it directly.
The assessee carried on abkari business. In the financial year 1970-71 he mortgaged immovable property of his own at Waltair to the Excise Department of the State of Andhra Pradesh, as security for amounts of kits due by him to the State. In the year relevant to assessment year 1982-83 the State sold that property by public auction, without the intervention of the court, to realise its dues. Rs.5,62,980 was realised. The State deducted Rs.1,29,020 due to it towards kits and interest and paid the balance to the assessee. The Revenue assessed capital gain of Rs.3,70,970 by reference to the cost at which the assessee had acquired the property. The assessee contended that the Rs.1,29,020 owed to the State had to be deducted from the auction proceeds before computing the gain, putting it at Rs.85,130. The Income-tax Officer and the appellate authority rejected that, but the Tribunal accepted it, holding that the sale price had two components - the price ascribable to the assessee's interest and the arrears of debt and interest due to the State - and that, there being a clear charge or mortgage over the property, the latter never reached the assessee's hands but reached the Government by overriding title. On a reference the Andhra Pradesh High Court, reported at [1998] 233 ITR 10, answered the questions against the Revenue except one which it held did not arise. The Revenue appealed by certificate. The assessee was served but did not appear. The matter was decided on 2001-10-11 by the Supreme Court (Supreme Court of India; S.P. Bharucha and Brijesh Kumar, JJ). On those facts the Supreme Court held as follows. The appeal was allowed and the judgment and order under appeal set aside, with no order as to costs. The Tribunal and the High Court were in error. What the State sold at the auction was the immovable property belonging to the assessee, and the price realised therefore belonged to him. Out of that price the State deducted its dues towards kits and interest due from the assessee and paid over the balance to him. The capital gain the assessee made was on immovable property that belonged to him, so it is on the full price realised, less the admitted deductions, that the capital gain and the tax on it have to be computed. The first question, whether the amount realised by the sale of the assessee's interest in the property was only Rs.4,33,960, was answered in the negative and in favour of the Revenue. The Court held that the other questions did not arise for consideration.
The reasoning is short and turns on ownership. The High Court had proceeded on the footing that the mortgage created an interest in the property in favour of the State, so that on sale the value had to be reduced to the extent of that interest; the Tribunal had gone further and treated the portion answering the debt as never having reached the assessee, reaching the Government by overriding title instead. The Supreme Court rejected both steps. The property auctioned was the assessee's property, not some fraction of it representing a residual interest, and the price fetched at the auction was accordingly his. Since the whole price was his, the discharge of his own debt to the State out of that price was a payment made on his behalf from money belonging to him. The mortgagee's remedy over the property does not convert the sale into a sale of something less than the property, nor does it divert the proceeds before they become the owner's. The capital gain being a gain on the property that belonged to him, the computation must start from the full price realised, subject only to the deductions admissible in law. In the words reproduced by the source cited on this page: "What was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised therefore belonged to the assessee."
It was decided by the Supreme Court on 2001-10-11 and is reported as [2001] 252 ITR 880 (SC); AIR 2002 SC 388; (2001) 171 CTR (SC) 188; JT 2001 (10) SC 412; (2003) 9 SCC 658; [2001] 119 Taxman 1030. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 48, section 45, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was allowed and the judgment and order under appeal set aside, with no order as to costs. The Tribunal and the High Court were in error. What the State sold at the auction was the immovable property belonging to the assessee, and the price realised therefore belonged to him. Out of that price the State deducted its dues towards kits and interest due from the assessee and paid over the balance to him. The capital gain the assessee made was on immovable property that belonged to him, so it is on the full price realised, less the admitted deductions, that the capital gain and the tax on it have to be computed. The first question, whether the amount realised by the sale of the assessee's interest in the property was only Rs.4,33,960, was answered in the negative and in favour of the Revenue. The Court held that the other questions did not arise for consideration. It arises in Capital Gains matters, on section 48, section 45 of the Income Tax Act 1961, and was decided by Supreme Court of India; S.P. Bharucha and Brijesh Kumar, JJ. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Reserve the overriding title argument for a genuine case where the amount never became yours at all; a debt of your own that is settled from the proceeds is application, not diversion. Look instead at what section 48 does allow - the cost of acquisition, the cost of improvement and expenditure wholly and exclusively in connection with the transfer - and place any expenditure you can properly bring under those heads. Where a recovery auction is expected, plan for the tax on the full price; the cash reaching you will be less than the amount you are taxed on.
Still good law. A Supreme Court judgment of 11 October 2001 reported at [2001] 252 ITR 880. No citator check for later authority was possible; only the judgment text was before me. It should be read knowing that the assessee did not appear, so the contrary argument was not developed before the Court. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The order is brief and the figures in it do not tie. Paragraph 4 gives the auction realisation as Rs.5,62,980 while paragraph 5 gives it as Rs.5,57,980, and the difference between the Revenue's capital gain of Rs.3,70,970 and the assessee's Rs.85,130 is Rs.2,85,840, not the Rs.1,29,020 said to have been deducted by the State. The cost of acquisition is nowhere stated, so the computation cannot be checked. The Court does not say what the admitted deductions were. The assessee did not appear, so the judgment records no argument for him and does not engage with the authorities on diversion by overriding title; a reader should treat it as deciding the narrow point that a mortgage created by the owner to secure his own debt does not reduce the consideration, and should not read it as settling cases where an obligation attaches to the property independently of the assessee. Questions 2, 3 and 4 as framed were held not to arise and are undecided. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed and the judgment and order under appeal set aside, with no order as to costs. The Tribunal and the High Court were in error. What the State sold at the auction was the immovable property belonging to the assessee, and the price realised therefore belonged to him. Out of that price the State deducted its dues towards kits and interest due from the assessee and paid over the balance to him. The capital gain the assessee made was on immovable property that belonged to him, so it is on the full price realised, less the admitted deductions, that the capital gain and the tax on it have to be computed. The first question, whether the amount realised by the sale of the assessee's interest in the property was only Rs.4,33,960, was answered in the negative and in favour of the Revenue. The Court held that the other questions did not arise for consideration.
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