ITA 4964\/Mum\/2013
\nIN THE INCOME TAX APPELLATE TRIBUNAL
\nMUMBAI BENCH \u201cC\u201d, MUMBAI
\nBEFORE SHRI G.S.PANNU VICE PRESEDENT,(AS THIRD MEMBER)
\nSHRI D. KARUNAKAR RAO, ACCOUNTANT MEMBER, AND
\nSHRI AMIT SHUKLA, JUDICIAL MEMBER,
\nSH. PAWAN SINGH JUDICIAL MEMBER AND
\nSHRI RAJESH KUMAR ACCOUNTANT MEMBER
\nITA No. 4964\/Mum\/2013
\n(Assessment year : 2010-11)
\nPerfect Thread Mills Ltd
\n201, Millenium Plaza
\nBehind Sakinaka Telephone
\nExchange, Andheri Kurla
\nRoad, Andheri (E), Mumbai-
\n72
\nPAN: AAACP6449E
\nvs DCIT, 8(2), Mumbai
\nAPPELLANT RESPONDEDNT
\nAppellant by Shri Sunil Hirawat
\nRespondent by Shri Awungshi Gimson, CIT-DR
\nDate of hearing 21-08-2019
\nDate of pronouncement 05-09-2019
\nORDER UNDER SECTION 255(4) OF THE INCOME TAX ACT, 1961
\nThis appeal was initially heard on 29-07-2015. The Hon\u2019ble Members,
\nwho constituted the bench, have passed the following dissenting orders:-
\nPER P. KARUNAKARA RAO, AM:
\nThis appeal filed by the assessee on 1.7.2013 is against the order of the CIT(A)-
\n17, Mumbai dated 29.4.2013 for the assessment year 2010-2011. In this appeal,
\nassessee raised the following grounds which read as under:
\n2
\nITA 4964\/Mum\/2013
\n“1. On the facts and in the circumstances of the case, the Ld CIT (A) has erred in
\nupholding the order passed by the Ld DCJT, which is bad in law and against justice
\nand liable to be quashed.
\n2.(a) On the facts and in the circumstances of the case and in law, the Ld CIT (A)
\nhas erred in upholding the order passed by the Ld ACIT, who has erred in
\ndisallowing the deduction of Rs. I,48,24,633\/- being claimed as expenses while
\ndetermined the capital gain.
\n(b) The Ld CIT (A) has failed to appreciate the fact that the sale of land area
\nwas effected by Kotak Mahindra Bank Ltd (KMBL) and out of the sales
\nconsideration received by them they had deducted the said amount towards
\nprincipal amount of loans as the bank had existing overriding title on the company’s
\nassets.
\n(c) The Ld CIT (A) has failed to appreciate the judicial pronouncement of
\nHon’be Calcutta High Court in the case of Gopee Nath Paul & Sons vs. Deputy CIT
\n[2005] 278 ITR 240 where it was held that on the sale of firm’s business as a going
\nconcern the amount paid to banks to have the charge lifted was treated the
\nexpenses in relation to transfer. ”
\n2. Briefly stated relevant facts of the case are that the assessee is a
\nmanufacturer of cotton \/ polyster sewing and industrial threads and also
\nengaged in processing of cotton yarn. Assessee is in this business for a long
\ntime and filed the return of income for the year under consideration declaring the
\ntotal loss of Rs. 64,93,9277-. After completing the scrutiny assessment u\/s
\n143(3) of the Act, the total income is determined at Rs. 49,25,990\/-. In the
\nassessment, AO made adjustment to the claim relating to capital gains and
\nmade addition of Rs. 2,14,50,679\/-. This is the point of contention before the
\nRevenue Authorities as well as in Tribunal. The facts relating to this issue are
\ngiven in the following paragraph.
\n3. Assessee took a corporate term loan of Rs. 306 lakhs from M\/s. Kotak
\nMahindra Bank Ltd (KMBL) during the Financial Year 2008-2009 relevant to the
\nassessment year 2009-2010. The loan was repayable in 36 monthly installments
\nand the assessee complied with the repayment schedule and repaid the loan till
\nJuly 2009. However, assessee became a defaulter from August 2009 onwards.
\n3
\nITA 4964\/Mum\/2013
\nThe bank (KMBL) classified the company’s account as NPA (Non-performing
\nAsset) on 21.11.2009. In this regard, a notice was served on 30.11.2009 as per
\nthe provisions of section 13(2) of Securitization and Reconstruction of Financial
\nAssets of Security Interest Act (SARFAESI) on the assessee company and its
\npersonal guarantors viz Mr. H.S. Bapna and Mrs. Urmila Bapna. The total
\noutstanding liabilities at that point of time is 3,40,61,488\/-. On 7.1.2010, the bank
\ntook over possession of the factory land of the assessee admeasuring 6,883.517
\nsq mts. Land was sub-divided into 7 plots and 6 of these sub-plots were sold by
\nthe bank in March, 2010. The bank received directly the consideration
\namounting to Rs. 2,18,00,262\/-. The bank adjusted the said realization against
\nthe loan of the assessee ie a sum of Rs. 1,48,24,633\/- was adjusted against the
\nprincipal segment of the loan. Rs. 69,75,629\/- was adjusted against the interest
\nsegment of this loan. Assessee claimed this interest liability as an allowable
\nexpenditure in the accounts of the assessee. Accordingly, the net amount of Rs.
\n1,48,24,633\/-, which was appropriated towards principal segment of the loan
\nwas shown in the computation of capital gains arising of those 6 plots of land.
\nHowever, the said amount was claimed as deductible u\/s 48 of the Act along
\nwith the indexed cost of acquisition and improvements (Rs. 3,43,583;- and other
\nincidental expenses of Rs. 6000 relating to sales). The manner of computation
\ngiven by the assessee in the return of income is extracted as under:
\nLong Term Capital Gains:
\nTotal amount of sale consideration received by
\nM\/s. Kotak Mahindra Bank Ltd against principal amount of
\nLoan out of sale proceeds of company’s land taken possession
\nby them under SARFAESI ACT Rs. 2,18,00,262\/-
\nLess Acquisition Improvements
\n(i) Cost of land –
\nYear of acquisition \/ improvements 1981-82 2006-2007
\n4
\nITA 4964\/Mum\/2013
\nCost of acquisition \/ improvements 47,201\/- 37,178\/-
\nIndex of year of acquisition \/ improvements 100\/- 519\/-
\nIndex for AY 2009-2010 632\/- 632\/-
\nIndexed Cost (Rs.) 2,89,310\/- 45f273\/- 3,43,583\/-
\n(ii) Incidental Expenses for above sale 6 000\/-
\n(iii) Amount adjusted by Kotak Mahindra
\nBank Ltd against principal amount of
\nLoan out of sale proceeds of company’s
\nLand taken possession by them under
\nSARFAESI ACT 148.24.633\/- 1,51,74,218\/-
\nLong Term Capital Gains 66,26,046’\/-
\n4. In the assessment, AO issued a show cause notice proposing to tax the said
\nclaim of deduction amounting to Rs. 1,48,24,633\/- as capital gains. In the reply,
\ndated 21.11.2012 and 23.11.2012, assessee submitted the KMBL has overriding
\ntitle on the mortgaged asset (the said factory land), the bank invoked the
\nSARFAESI Act and took possession of the said land. Eventually, the bank sold
\nthe said land and transferred the same to the buyers with any participation of the
\nassessee and received sale proceeds directly to the account of the bank.
\nAssessee has no role to play in all these events. In principle, the bank has
\nbecome the owner of the land. Therefore, it is the case of the “diversion of
\nincome at source by overriding the title”. Since, the assessee has lost the title as
\nwell as has never received the sale proceeds to his account, the sale proceeds
\nare not taxable in the hands of the assessee. It is a case of diversion of income
\nat source. Therefore, in the aforementioned computation, assessee reflected the
\nsame as an allowable deduction. Regarding Rs. 69,75,629\/-, it is the case of the
\nassessee that since the assessee claimed interest payable to the bank as
\ndeduction in past, to that extent the same is offered now as taxable portion.
\nHowever, the Assessing Officer analyzed the provisions of section 48 of the Act
\nand held that the claim is not sustainable in law as the gains arose on the sale of
\n5
\nITA 4964\/Mum\/2013
\nthe factory land of the assessee. AO also mentioned that the assessee received
\nthe sale consideration on sale of the said 6 plots of land. He also mentioned that
\nwhat is allowable u\/s 48(i) of the Act is only expenditure incurred wholly and
\nexclusively in connection with such transfer, and not the expenditure of this type.
\nWithout much discussion in para 7.8 of the assessment order, AO rejected the
\nassessee’s contention that it is a case of “diversion of income at source by
\noverriding the title”. Contents of para 7.10 of the assessment order are extracted
\nas under:
\n\u201c7,10. Accordingly, the bank has recovered its dues, and the liability of the
\nassessee was reduced by an amount of sale consideration received by the bank on
\nbehalf of the company. Therefore, the assessee has actually repaid its loan to the
\nbank by selling the land and, therefore, cannot be considered as allowable
\nexpenditure within the meaning of section 48(1) of the Act.”
\n4.1. Accordingly, the amount of Rs. 1,48,24,633\/- was added back to the total
\nincome of the assessee. Aggrieved with the said addition made by the AO,
\nassessee carried the matter in appeal before the first appellate authority.
\n5. During the proceedings before the first appellate authority, assessee agitated
\nagainst the said addition and made a written submission vide letter dated
\n26.4.2013, the contents of which are extracted in para 5.2 of the CIT (A)’s order.
\nIn the said submissions, assessee narrated the facts of the case and submitted
\nthat the assessee created charge on the asset in favour of the bank in
\nconnection with the loan of Rs. 306 lakhs. The bank invoked the SARFAESI Act
\nand took possession of the land. Considering the powers conferred to the bank
\nby the said SARFAESI Act vide the provisions of section 13(4), the bank sold the
\nproperty and realised the proceeds directly without any involvement of the
\n6
\nITA 4964\/Mum\/2013
\nassessee. Assessee relied on the judgment of the Calcutta High Court in the
\ncase of Gopee Nath Paul & Sons vs. Deputy CIT [2005] 278 ITR 240, which is
\nrelevant for the proposition that “the expenditure incurred for perfection of title
\nnecessary for effecting sale \/ transfer is an allowable expenditure”. This is the
\ncase, where the liabilities of the bank were cleared by the sale proceeds of the
\nassets. It was considered as an expenditure incurred wholly and exclusively in
\nconnection with the transfer. Assessee also relied on the view of the Andhra
\nPradesh High Court in such cases. Further, assessee relied on the judgment of
\nthe Apex Court in the case of R.M. Arunchalam Etc vs. CIT [1997] 227 ITR 222
\n(SC) to support its case. Thus, the assessee submitted that AO failed to the fact
\nthat there was a pre-existing overriding title in favour of the bank by virtue of joint
\nequitable mortgage created on 5.2.2009 on immovable properties of the
\nassessee. On considering the above written submissions of the assessee, CIT
\n(A) did not go with the said submission. The arguments relating to “diversion of
\nincome by overriding title” was also not entertained. Relying on the judgment of
\nthe Hon’ble Supreme Court in the case of CIT vs. Attili N Rao [2001] 252 ITR
\n880 (SC), as well as the judgment of the Allahabad High Court in the case of CIT
\nvs. Sharad Sharma (2008) 305 ITR 24 (All), CIT (A) opined that it a case of
\napplication of income and not diversion of income by overriding charges.
\nEventually, CIT (A) is of the opinion that the assessee is not entitled to
\ndeduction. CIT (A) also rejected the assessee’s argument that it is a case of
\nexplaining in connection with the transfer of the asset \/ perfection of the title
\nbefore the sale of transaction. He also discussed in para 5.5, the applicability of
\n7
\nITA 4964\/Mum\/2013
\nthe provisions of section 45(5)(b) and 45(5)(c) of the Act. CIT (A) also rejected
\nadopting the cost of acquisition of the asset as on 1.4.1981 in view of the fact
\nthat the assessee became the owner of the land only after the date. Further, on
\nthe application of the provisions of section 47(xii) of the Act, the CIT (A) is of the
\nopinion that the assessee-company is not managed by the worker’s cooperative.
\nTherefore, the same is outside the scope of the said provisions. Accordingly, CIT
\n(A) dismissed the appeal of the assessee. Aggrieved with the said decision of
\nthe CIT (A), assessee is in appeal before the Tribunal.
\n6. During the proceedings before us, Ld Counsel for the assessee filed
\nwritten submissions and the same are extracted as follows:
\n“3.9. The principles of diversion of income by overriding title were explained by the Hon’ble
\nSupreme Court in the case of Sitaldas Tirathdas (41 ITR 367) by referring to the judgment of
\nHon ‘ble Privy Council in the case of Raja Bejoy Singh Dudhuria vs. CIT (1 ITR 135) and P.C.
\nMullick (6 ITR 206) with the following observations.
\n“In our opinion, the true test is whether the amount sought to be deducted, in truth, never
\nreached the assessee as his income. Obligations, no doubt, there are in every case, but it is the
\nnature of the obligation which is the decisive fact. There is a difference between an amount
\nwhich a person obliged to apply out of his income and an amount which by the nature of the
\nobligation cannot be said to be a part of the income of the assessee. Where by the obligation
\nincome is diverted before it reaches the assessee, it is deductible; but where the income is
\nrequired to be applied to discharge an obligation after such income reaches the assesse, the
\nsame consequence, in law, does not follow. It is the first kind of payment which can truly be
\nexcused and not the second. The second payment is merely an obligation to pay another a
\nportion of one’s own income, which has been received and is since applied. The first is a case in
\nwhich the income never reaches the assessee, who even if he were to collect it, does so, not as
\npart of his income, but for and on behalf of the person to whom it is payable “.
\n3.10 The honourable Calcutta High Court held in the case of Gopinath Paul and Sons vs.
\nD.C.I.T. (278ITR 24O)
\n5. Section 48(1), as it stood in 1992-93, while providing for computation of capital gains
\npermitted in clause (i) deduction of the “expenditure incurred wholly and exclusively in
\nconnection with such transfer”. The expression ‘in connection with such transfer’ is wider than
\nthe expression ‘[or the transfer’. Any amount the payment of which is absolutely necessary to
\neffect the transfer will be an expenditure covered by clause (i) of section 48(1). In other words, if
\nwithout removing any encumbrance, sale or transfer could not be effected, the amount paid for
\nremoving that encumbrance will fall under clause (i).
\n5.1 From the facts as disclosed above, it appears that the amount was received out of the sale of
\nassets of both the firms under orders of this Court subject to meeting of the liability of the
\nAllahabad Bank since confirmed only upon prior payment. Inasmuch as, unless this liability was
\nmet, the transferee could not derive any title. In other words, the sale consideration receivable by
\nthe assessee was less the liability of the Allahabad Bank. Thus, meeting this liability of one of the
\nfirms, when the entire assets were being sold, was an absolute necessity to effect the transfer.
\nIn other words, it was an encumbrance without removing which the sale or transfer could not be
\neffected and the amount spent for removing this encumbrance would definitely attract clause (i)
\nof section 48(1).
\n5.2 From the Assessment Order (page 37 of the paper book), it appears that earlier the
\nassessee used to conduct its business under the name and style of Gobindo Sheet Metal Works
\n& Foundry. CIT (Appeals) at pages 43-44 of the paper book have found that the short-term
\ncapital gain arising out of the sale of the assets pertaining to the erstwhile business of the
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\nITA 4964\/Mum\/2013
\nappellant in the name and style of Gobindo Sheet Metal Works & Foundry and on the sale of the
\nfactory and assets of the erstwhile business through public auction, the total consideration
\nreceived was Rs.3,66,24,005. From the details of the expenses and liabilities claimed, it was
\nseen that an amount of Rs,27,85,523 had been shown as payable to the Allahabad Bank.
\nHowever, the CIT (Appeals) found that there was no pre-condition that the appellant could not
\nsell its assets without settling the dues of the Allahabad Bank and even if it was, it would be a
\ncase of application of the income.
\n5.3 As discussed above, in this case the sale could not be effected without meeting the liability,
\nas it appears from the different orders passed by this Court in the latter suit wherefrom it is
\napparent that the former suit was transferred to this Court and was ultimately settled between the
\nparties through Lok Ada\/at.
\n5.4 But from the facts as discussed above, we are of the view that the orders passed by this
\nCourt directing the sale of the assets of the two firms and its confirmation thereof are staring on
\nthe face of the inference drawn by the CIT (Appeals). Thus, we are of the view that the liability
\nmet by the assessee towards the dues of the Allahabad Bank was an expenditure incurred
\nwholly and exclusively in connection with the transfer.
\n3.11 From the facts relating to the assessee’s case explained in Para No. 3.1 to 3.5, it is quite
\nmanifest that once Kotak Mahindra Bank Ltd. invoked powers u\/s.l3(4) of the Securitisation and
\nReconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI),
\nthe title over Plot No.P\/1, P\/2f P\/3A, P\/3B and P\/4 was automatically divested from the assessee
\ncompany and vested in Kotak Mahindra Bank Ltd. on 07.01.2010. Further, when the plots were
\nsold by the bank in March, 2010, the sale deeds were executed between the buyer and the bank
\nand the entire consideration received from buyer was appropriated towards the outstanding
\nliability of the bank. The assessee was not at all involved in either the sale of plots or the
\nexecution of sale deeds. Therefore, the sale proceeds to the extent of amount appropriated
\ntowards loan never reached the assessee as its income and was diverted towards discharge of
\nbank’s obligation.
\n3.12 As regards reliance placed by the Cl. T.{A). while rejecting the assessee’s claim upon the
\njudgements of the honourable Supreme Court in the case of Cl. T. vs. Attili N. Rao (252 ITR 880)
\nand the honourable Allahabad High Court in the case of CL T. vs. Sharad Sharma (305 ITR 24),
\nit is submitted that these judgements are not applicable to the facts of the assessee’s case.
\n3.13 In the case of CI.T. vs. Attili N. Rao, the assessee was carrying on abkari business. He
\nmortgaged his immovable property to the Excise Department of Andhra Pradesh to secure
\npayment of kist He could not pay the kist Therefore, the excise department sold the immovable
\nproperty by way of public auction, deducted its dues towards kist and interest and paid the
\nbalance amount to the assessee. There was no court order for auction of the property and
\nappropriation of proceeds towards kist and interest. It was simply a case of recovery of mortgage
\nassets by its auction to recover government dues under the provisions of Andhra Pradesh State
\nExcise Act. There was no divesting of title from the assessee and vesting thereof with the State
\nExcise Department. On these facts, the honourable Supreme Court held that the capital gain
\nwas to be computed on the full price realized as reduced by the admitted deduction. The
\npayment made to the Central Excise Department towards kist and interest was not a deductible
\nexpenditure.
\n3.14 In the case of CI. T. vs. Sharad Sharma, M\/s. Shanker Traders took loan from bank against
\nmortgage of house property belonging to the partner, Shri Sharad Sharma. The bank enforced
\nthe recovery of loan against M\/s. Shanker Traders. Under agreement with the bank, the house
\nwas auctioned by the assessee and after payment of bank loan of Rs.1,50,000\/-, the remaining
\namount was received by the assessee. It was simply a case of sale of mortgage property and
\nrecovery of outstanding loan of the bank. There was no divesting of ownership of house from
\nassessee and vesting thereof with the bank. On these facts, the honourable High Court held that
\nit was not a case of diversion of income by overriding title but application of income towards
\nrepayment of bank loan. In 3 case of inheritance\/acquisition along with the mortgage perfecting
\nhis title by getting mortgage discharged, the assessee would be entitled to get the deduction of
\nthe mortgage debt but where the charge is created by the assessee himself, it cannot be said
\nthat the amount of mortgage debt out of the sale proceeds be deductible while calculating the
\ncapital gains.
\n3.15 The ratio of the aforesaid judgements is not applicable because in the assessee’s case,
\nKotak Mahindra Bank Ltd. took possession of 6 plots under SARFAESI Act, 2002. The land was
\ndivested from the assessee and vested with Kotak Mahindra Bank Ltd. After taking possession,
\nthe bank converted these plots into 7 plots. Further, when the plots were sold by the bank in
\nMarch, 2010, the sale deeds were executed between the buyer and the bank and the entire
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\nITA 4964\/Mum\/2013
\nconsideration received from buyer was appropriated towards the outstanding liability of the bank.
\nThe assessee was not at all involved in either the sale of plots or the execution of sale deeds.
\n3.16 In view of the above, we request your honour to allow the assessee’s claim and exclude
\nthe principal amount of Rs.1,48,24,633\/- appropriated by Kotak Mahindra Bank Ltd. towards its
\ndues while computing Logn-term Capital Gains.”
\n7. Further, Ld Counsel for the assessee also submitted that the SARFAESI Act,
\n2002 takes away all the rights of the possession including right to sale the
\nsecured property of the assessee. In this regard, Ld Counsel for the assessee
\nbrought our attention to the provisions of section 13 relating to “Enforcement of
\nSecurity Interest” and submitted that vide clause (a) of sub-section 4 of section
\n13, bank has right to transfer by way of lease, assignment or sale for realising
\nthe secured asset. Further, bringing our attention to sub-section (6) of section
\n13, Ld Counsel for the assessee read out such transfer of secured asset by the
\nbank shall have the effect as if the transfer was made by the owner of the
\nsecured asset.
\n8. On the other hand, Ld DR relied heavily on the order of the AO and the CIT
\n(A). Elaborating the same, Shri S.K. Mahapatra, Ld DR for the Revenue
\nsubmitted that if the case of the assessee is considered as diversion of income
\nby overriding the title”, the situation may become that the every loan defaulter of
\nthe financial institutions such as Banks shall not make any payment of taxes u\/s
\n48 of the Act on the gains arose on transfer of the capital asset, given as
\nsecurity, which is eventually sold by the Banks. Further, he mentioned that it is a
\ncase of application of income as assessee’s loans are eventually squared up
\nwith the bank. Further, replying to the Ld DR, Ld Counsel for the assessee
\nsubmitted that it is a case where the agreements to transfer the secured assets
\nwere signed by the bank and the transferees never made TDS while making
\n10
\nITA 4964\/Mum\/2013
\npayments to the bank. No liability on account of stamp duty was also incurred by
\nthe assessee. However, Ld DR has nothing to say on the fact that the assessee
\nlost all the rights in the property on becoming a defaulter. The title is therefore
\nnot perfect. Referring to the AO’s erroneous assumption of the fact given in para
\n7.8 of his order, Ld DR mentioned that the proceeds were not received by the
\nassessee and they are received by the Bank. In principle the assessee lost the
\ncapital asset and now, in addition, the assessee needs to pay taxes too if the
\nsale proceeds are subjected to tax.
\nDecision of the Tribunal:
\n9. We have heard both the parties on this issue and perused the orders of the
\nRevenue Authorities, the paper book, written submissions filed before us.
\nUndisputed facts in this case include (a) the secured asset in question is a
\nfactory land mortgaged to the bank; (b) Considering the undisputed default of
\nthe assessee in making the payments of installments, the assessee’s account
\nwas declared as NPA by the bank; (c) the bank invoked the provisions of the
\nSARFAESI Act, 2002 on the assets mortgaged to the bank; (d) Thus, there is no
\ndispute on the fact that the said land in question is not free from encumbrance.
\nThe ownership title of the land is not perfect; (e) Under the SARFAESI Act, when
\nthe bank takes possession of the secured land, the bank gets the \u2018right to
\ntransfer’ by way of sale for the purpose of realizing the secured asset vide
\nsection 13(4)(a) of the Act. Thus, the assessee lost the right on the said property
\nsecured to the bank as the assessee is declared as ‘defaulter’ under the said
\nAct. The Bank acted as a transferor in the said transfer transaction in matters of
\n11
\nITA 4964\/Mum\/2013
\nexecuting the transfer deeds and registration deeds. The Bank got the superior
\nrights on the property and assessee had no say in the matter in view of its
\nundisputed default and the provisions of SARFAESI ACT. Further, it is also an
\nundisputed fact that the transferee of the impugned property made the payment
\nto the bank directly no amount was received by the assessee on account of the
\nimpugned sale transactions. Thus, we shall now under take to discuss various
\nfacets of the doctrines of (i) Over riding Title, (2) Application of Income; and (3)
\nDiversion of Income (Dol) in the following paragraphs.
\n10. Doctrine of Over-riding title: this doctrine visualises the situation that, to
\nstart with, a property is actually owned by the assessee with proper ownership
\ntitle. However, in the course of time when the same is secured\/mortgaged with
\nthe creditor, the said title undergoes change by virtue of process of law or legal
\nprovisions and the creditor or the Bank gets the ‘overriding title’. In the past, the
\nBanks may knock the legal forums for getting such overriding title before the
\nsale\/auction. However, with the legislation of the SARFAESI ACT, 2002, such
\nlegal requirements are dispensed with and the creditor gets the over-riding title
\nsubjected to conditions discussed in the following paragraphs. Therefore, we
\nnow proceed to examine the said legislation as follows.
\n10.1 Provisions of section 13 of the SARFAESI ACT are relevant the same
\nrelating INFORCEMENT OF SECURIT INTEREST read as follows, –
\ni. SEC J.3. Enforcement of security interest
\n(2)…..,
\n(3)……
\n(3A). …….
\n(4) In case the borrower fails to discharge his liability in full within the period specified in subsection
\n(2), the secured creditor may take recourse to one or more of the following measures to
\nrecover his secured debt, namely:–
\n(a) take possession of the secured assets of the borrower including the right to transfer by way of
\nlease, assignment or sale for realising the secured asset;
\n12
\nITA 4964\/Mum\/2013
\n(b) take over the management of the business of the borrower including the right to transfer by
\nway of lease, assignment or sale for realising the secured asset: PROVIDED that the right to
\ntransfer by way of lease, assignment or sale shall be exercised only where the substantial part of
\nthe business of the borrower is held as security for the debt:
\nPROVIDED FURTHER that where the management of whole of the business or part of the
\nbusiness is severable, the secured creditor shall take over the management of such business of
\nthe borrower which is relatable to the security for the debt.
\n(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the
\npossession of which has been taken over by the secured creditor;
\n(d) require at any time by notice in writing, any person who has acquired any of the secured
\nassets from the borrower and from whom any money is due or may become due to the borrower,
\nto pay the secured creditor, so much of the money as is sufficient to pay the secured debt.
\n(5) Any payment made by any person referred to in clause (d) of sub-section (4) to the secured
\ncreditor shall give such person a valid discharge as if he has made payment to the borrower.
\n10.2 Interpretation of the above provisions: The provisions of section 13 of the
\nSARFAESl ACT, 2002 provides for enforcement of security interest. According
\nto the said provisions, in case the “borrower (of loan) fails to discharge his
\nliabilities in full’ to the secured creditor\/Bank, the same may take to following
\nrecourses to recover the dues, namely, rt take possession of the secured
\nassets of the borrower including the right to transfer by way of lease,
\nassignment or sale for realising the secured asset; or (b) take over the
\nmanagement of the business of the borrower including the right to transfer by
\nway of lease, assignment or sale for realising the secured asset” or (c) appoint
\nany person (hereafter referred to as the manager), to manage the secured
\nassets the possession of which has been taken over by the secured creditor (d)
\nrequire at any time by notice in writing, any person who has acquired any of
\nthe secured assets from the borrower and from whom any money is due or may
\nbecome due to the borrower, to pay the secured creditor, so much of the
\nmoney as is sufficient to pay the secured debt”. There are conditions specified
\nsection 13(4)(a) of the Act are relevant for the cases of takeover of the
\nmanagement of the business of the borrower’. Of course, the provisions of this
\nclause (b) are irrelevant to the facts of the present case, where only the secured
\n13
\nITA 4964\/Mum\/2013
\nassets of the borrower is taken possession of as per the provisions of the said
\nclause (a). We shall elaborate the provisions of the said clause (a) as under;
\n10.3 The above provisions of section 13(4)(a) of the Act explains the various
\nrights available to the bank when it takes over the possession of the secured
\nasset of the borrower. To elaborate the said clause (a), the same is extracted
\nas follows,-
\n\u201c13(4) In case the borrower fails to discharge his liability in full within the period specified
\nin sub-section (2), the secured creditor may take recourse to one or more of the following
\nmeasures to recover his secured debt, namely:–
\n(a) take possession of the secured assets of the borrower including the right to transfer by
\nway of lease, assignment or sate for realising the secured asset;…………… ”
\n10.4 The Bank is empowered by the said Act to take possession of the secured
\nassets of the borrower. This right to take possession includes the Right to
\ntransfer’. This right to transfer includes various modes of transfer. The said Act
\nempowers the Bank to transfer the asset by way of sale of the secured
\nasset. However, the Bank is under statutory obligation to fulfil certain obligations
\nand one such obligation relates to establishing the fact of ‘borrower’s fa\/lure to
\ndischarge his liability in ft\/\/\/’as mentioned in subsection (4) of section 13 of the
\nSARFAESI ACT, 2002. In other words, the bank assumes the right to take
\npossession, right to transfer, right to sale for realising the secured asset on
\nestablishing the “borrower’s failure to discharge his liability’. Of course, there are
\nadministrative and legal procedures to be followed by the Bank involving the
\nprinciples of natural justice such as issuing the notices, declaring in books the
\nsaid unrealised liabilities as NPAs and consequent write-off etc. Of course, the
\nassessee-borrower has certain rights and can question the initiatives of the Bank
\nto take possession of the secured asset.
\n10.5 However, in the instant case, the borrower gave in the said rights and has
\nnot questioned the bank’s initiatives to sell the secured property in any legal
\n14
\nITA 4964\/Mum\/2013
\nforums. In other words, on the facts of the borrower’s failure to discharge the
\nliability to the lender-bank, the assessee’s title of ownership is subjected to the
\nrights of the Bank, conferred by the said SARFAESI ACT. Thus, the provisions
\nof the said Act provides to the lender-bank the ‘over riding title’ on the secured
\nproperty. This is done by the process as per the provisions of law ie the
\nSARFAESI ACT, 2002. These are the ingredients of the doctrine of overriding
\ntitle.
\n10.6 Prior to the legislation of the SARFAESI ACT, 2002: It is not out of place to
\nmention that in the period prior to the said Act, the lender banks are under
\nobligation to get such over-riding title on such secured or mortgaged assets from
\nthe courts through the process of judgmental law. In other words, in cases of
\nlitigation, the Bank needs to obtain the orders from the Courts or DRT, as the
\ncase may be, before initiating the \u2018act of transfer’ of the secured assets of the
\nborrower for realising the liabilities.
\n11. In the instant case, the bank intimated the borrower’s failure to discharge
\nits liabilities in full as the ‘principles of justice’ and they are in tune with the
\nprovisions of the SARFAESI ACT. Borrower has not objected to the same
\nand the same is evident from the fact that it did not start any litigation in any
\ncourt of law against the steps of the lender-Bank. Thus, in effect, the
\nassessee subjected its rights on the ownership title of the said property to the
\nBank. The Bank took possession of the same and sub-divided the lands
\nbefore the same are transferred to the buyers in the open market. It is also
\n15
\nITA 4964\/Mum\/2013
\nrelevant to mention that the assessee was not signatory to the sale deeds and
\nit is the bank which transferred the property to the buyers. This fact cements
\nthe Bank’s undisputed fact of overriding title over the property. Assessee has
\nnot played any role, whatsoever, in the sale transactions of the secured\/
\npossessed land by the lender-Bank. Therefore, we are of the opinion, this
\nis undoubtedly a case of the overriding title. Thus, having dealt with the
\ndoctrine of ‘over-riding title’ till now, we shall now take up the other limb ie
\ndoctrine of ‘diversion of income’ (DOI).
\n12. The provisions of the said clause (a) to section 13(4), extracted above,
\nexpressly mention that the bank has the right to take possession of the asset
\nof the borrower, the assessee. This right to take possession includes right to
\ntransfer also. The said transfer can be affected by way of sale. These are the
\nundisputed facts in the present case. When the right to take possession, right
\nto transfer, right to sale are with the bank, nothing is left with the assessee,
\nthe borrower, except the weak ownership title on the said asset. Thus, the
\nownership title is overridden by the Bank’s power conferred by SARFAESI
\nAct. In that sense of the mater, we find the legal provisions are very clear
\nthat the bank has got overriding title on the asset. This SARFAESI Act
\nsecures \/ guarantees the rights of the transferee, who purchases the assets
\nfrom the banks.
\n16
\nITA 4964\/Mum\/2013
\n13. Doctrine of Diversion of Income: We have also gone through the
\nvarious decisions cited by both the parties relating to the diversion of
\nincome (DOI) versus application of income (Aol). In matters relating to
\nclaim of deduction for property are not deductible as the case of DOI by ORT.
\nIt is the case there is no process of law involved and the Government never got
\nan absolute overriding title. There is dispute over the sale of land, and assessee
\nnever objected to the said sale in any court of law. In this case, AP Government
\nacted on the concessions of the assessee and it never got any overriding title on
\nthe land by way of any judgment from any Court\/Tribunal. Para 13 of the said
\nHigh Court’s judgment is relevant.
\n19. Therefore, the legal proposition of law is that when the sale proceeds of
\nmortgaged property are paid to the creditor of the assessee, the same are not
\ndeductible in computing the capital gains on the said property. Therefore, the
\npayments made by the buyers of the property to the creditors directly does not
\nmake in any difference so long as there is never a overriding title over the
\nmortgaged property. The underlying rationale of the same, in our opinion, is that,
\nin all the above cases, the creditor\/ Bank\/Government never got the overriding
\ntitle on the said property either by way of process of law or by an act of law such
\nas the SARFAESI ACT, which provides for unfettered powers over the property
\nto the creditor\/Banks. Mere making payment by the buyer directly to the
\ncreditors without routing through the bank accounts of the land owner, does not
\ngrant any right for making claim of deduction. No claim of deduction is allowed
\n17
\nITA 4964\/Mum\/2013
\nunless the creditor gets the overriding title and payments are directly paid to the
\ncreditors without routing through the owner’s accounts. Otherwise, it will be a
\ncase of ‘application of income’ only and not deductible. Therefore, the Hon’ble
\ncourts have rightly held against the assessees in the said cases. As such, there
\nare not judgmental law involving the sale of secured property, which are
\nmortgaged under the provisions of the SARFAESI ACT. In our opinion, the only
\nobjection of the DRs for Revenue is that it may become a tax planning device for
\nsome tax payers, (ie to become a defaulter of taxes, allow the properties to be
\nsold by the Banks \/ creditors and avoid paying capital gains tax on the sale
\nproceeds), is not sustainable in law. It is commonsensical to think that no
\nassessee wilfully wants to lose their properties for tax reasons.
\n20. Therefore, the provisions of section 13 of the said SARFAESI ACT, 2002
\nmakes all the difference for such transaction of sale of the mortgaged properties
\nthese days. Diversion of income by overriding title has two clear limbs required
\nfor the assessees to fulfil when they successfully want to claim
\ndeduction\/exemption of capital gains. These two limbs are interlinked and both
\nthe limbs are required to be fulfilled before any taxpayer claiming
\ndeduction\/exemption.
\n21. It is relevant to mention here that procedurally, most of the sale transactions
\nof the mortgaged properties by the Banks prior to the year 2002, are executed
\nwith the active involvement of the assessee, who is often a signatory to the said
\nsale transactions of the said properties and therefore, the creditors\/Banks per
\n$e, do not have the power either to sign on the transfer deeds and to register
\n18
\nITA 4964\/Mum\/2013
\nthem in the names of the transferees. Thus, the creditors\/Banks are never the
\ntransferors.
\n22. Therefore, considering the above settle legal propositions by virtue of the
\njudgmental laws and also in view of the binding statutory provisions of section 13
\nof the SARFAESI ACT, 2002, and on the facts of this case (ie Bank got the
\noverriding title and the payments are directly received by the bank from the
\nbuyer of the secured properties with they were first credited to the accounts of
\nthe assessee), we are of the opinion in principle, the doctrine of ‘diversion of
\nincome by overriding title’ applies to the facts of the present case. Therefore, the
\nclaim of deduction is sustainable in law. Accordingly, the grounds raised by the
\nassessee are allowed.
\n23. In the result, the appeal of the assessee is allowed.
\nOrder pronounced in the open court on September, 2015.
\nxxxx sd\/-
\n(AMIT SHUKLA) (D. KARUNAKARA RAO)
\nJUDICIAL MEMBER ACCOUNTANT MEMBER
\nMumbai; .9.2015
\nPER AMIT SHUKLA, JM:
\nI have gone through the order proposed by my learned Brother in this appeal and have also
\ndiscussed the issue with him. However, I am unable to persuade myself to subscribe to the
\nview proposed by my learned Brother and also unable to agree with the conclusion arrived
\nat on the issue involved. I, therefore, consider it appropriate to express my view and
\nconclusion on the issue by way of passing a separate order.
\n2. So far as the facts of the case and arguments put forth by the parties, as discussed in the
\ndraft order, there is not much dispute. However, to put succinctly, the relevant facts qua the
\n19
\nITA 4964\/Mum\/2013
\nissue involved are that, the assessee company had a taken a corporate term loan of Rs. 3.06
\ncrores from Kotak Mahindra Bank Ltd. during the relevant financial year 2008-09 for its
\nbusiness purpose, which was repayable in 36 monthly installments. The said loan was
\nsecured by mortgaging a part of assessee’s factory land. The interest paid on such loan was
\notherwise allowed to the assessee or was allowable u\/s 36(l)(iii) r.w.s. 43B. Since, assessee
\ndue to cash losses and liquidity constraints could not pay the installments, therefore, the
\nKotak Mahindra Bank Ltd. classified the assessee’s account as Non-performing Asset
\n(NPA) and initiated the recovery proceedings u\/s 13(2) of the Securitization And
\nReconstruction of Financial Assets and Enforcement of Security Interest Act, 2000,
\n(SARFAESI Act) on the assessee company and personal guarantors. The Bank took
\npossession of the mortgaged part of the factory land on 07.01.2010, which was divided into
\n7 plots, out of which 6 plots were sold in March, 2010 for a total sale consideration of Rs.
\n2,18,00,262\/- and was appropriated by the Bank in the following manner :-
\nTowards interest dues :- Rs. 69,75,629\/-
\nTowards principal amount :- Rs. 1, 48,24, 633\/-
\nRs. 2,18,00,262\/-
\nThe assessee had duly shown the sale proceeds from the mortgaged asset in its books of
\naccount and also offered the income as ‘Long-term capital gain’ as per the computation of
\nincome, incorporated at page 3 of the Draft order.
\n3. However, the main bone of contention was the claim of amount adjusted by the Bank
\nagainst the principal amount of loan of Rs. 1,48,24,633\/- (out of the sale proceeds) as
\ndeduction u\/s 48(i) as cost by the assessee in the computation of LTCG, being ‘expenditure
\nincurred wholly and exclusively in connection with such transfer’. The assessee’s claim was
\nbased on the principle that, act of the Bank taking possession of the land under SARFAESI
\nAct, constitutes “diversion of income by overriding title”. This claim had been denied by
\n20
\nITA 4964\/Mum\/2013
\nthe AO on the ground that it cannot be reckoned as expenditure u\/s 48(i) to be allowed as
\ncost of acquisition as it was an application of income. In the first appellate proceedings, Ld.
\nCIT(A) too has rejected the assessee’s contention for the claim for deduction mainly relying
\nupon the decision of Supreme Court in the case of CIT vs. Attili N. Rao [2001] 252 ITR
\n880; and Allahabad High Court in CIT vs Sharad Sharma [2008] 305 ITR 24 (All.) and held
\nthat there is no diversion of income by overriding title .
\n4. The contention made by the Ld. Counsel and Id. DR has been elaborately dealt with in
\nthe draft order of the Ld. Brother, which are not being reiterated. The core argument of Ld.
\nCounsel had been that, by virtue of statutory provisions of section 13 of SARFAESI Act,
\nthere is a clear cut overriding title on the mortgaged property in favour of the bank and the
\nincome realized by the bank and appropriated from the sale of such property directly,
\namounts to diversion of income and, therefore, the said principal amount cannot be held to
\nbe taxable in the hands of the assessee and or is allowable as deduction. He also submitted
\nthat, in wake of the SARFAESI Act, the earlier judicial decisions will no longer be
\napplicable. At the time of hearing, following decisions were referred and relied upon, some
\nof them will be discussed herein later in this order:-
\nST.
\nNo.
\nCases relied upon
\nCitation
\n1
\nSitaladas Tirathdas
\n41ITR 367 (SC)
\n2
\nCIT vs. Attili N Rao
\n252 ITR 880 (SC)
\n3
\nMotilal Chahadamilal Jain vs CIT
\n190 ITR 1 (SC)
\n4
\nCIT vs Mathubhai C Patel
\n238 ITR 403 (SC)
\n5
\nCIT vs Roshanbabu Mohd. Hussein Merc
\n275 ITR 231 (Bom)
\n6
\nCIT vs Sharad Sharma
\n305 ITR 24 (All)
\n21
\nITA 4964\/Mum\/2013
\n7
\nRaja Bejoy Singh Dudhania
\n1 ITR 135 (PC)
\n8
\nGopinath Paul and Sons vs DCIT
\n278 ITR 240 (Cal)
\n9
\nAddl. CIT vs Glad Investment vt Ltd.
\n22 ITD 227 (DEL)
\n5. Now on these facts, and background the main issue involved here in this
\nappeal are :-
\nFirstly, whether the principal amount of loan of Rs. 1,48,24,6733\/- can be allowed
\nas deduction u\/s 48(i) while computing the LTCG from sale consideration of
\nmortgaged asset appropriated by Kotak Mahindra Bank, after taking possession of
\nthe said secured asset under the SARFAESI Act 2002, on the ground that there was
\n“diversion of source\/ income by overriding title;”
\nSecondly, whether the entire sums recovered from sale proceeds of the mortgaged
\nassets and appropriated by the Bank towards ‘Security interest’ under section 13 of
\nthe SARFAESI Act will not fall within the charging provisions of Income Tax Act
\nin the hands of the assessee on the principle of “Diversion of income by overriding
\ntitle”;
\nLastly, whether by virtue of SARFAESI Act, the judicial pronouncements and the
\ndecisions available on the issue prior to the commencement of the said act will not
\nbe applicable, in as much as the provisions of the said Act provides for taking over
\nthe possession of the land to secure its security interest and hence overriding title
\ngets vested with the Bank and consequently income gets diverted.
\n6. First of all, on the first issue, undisputedly the assessee had taken a business term loan
\nafter creating a voluntarily incurred mortgage debt in favour of the Bank under a legally
\nbinding covenant under which the assessee was obliged to discharge the mortgage debt. It is
\na trite law that once the assessee himself has created the mortgage, he would not be entitle
\n22
\nITA 4964\/Mum\/2013
\nto any deduction under section 48, either as a cost of acquisition or cost of improvement or
\nany kind of expenditure incurred wholly and exclusively in connection with such transfer of
\ncapital asset. This proposition of law has been well settled by the Hon’ble Apex Court in
\ntwo cases; R M Arunachalam vs CIT (1997) 227 ITR 222; and VSMR Jagdish
\nChandran vs CIT (1997) 227 ITR 240. A clear distinction has been drawn by the Apex
\nCourt that, where the previous owner had created a mortgage on the property in question
\nand the assessee had inherited the said property along with the mortgage, in that event the
\nassessee would be entitled to the deduction of the amount spent in getting mortgage
\ndischarged as cost of acquisition u\/s 48. However, where the assessee himself has created
\nthe mortgage, then the same consequence will not follow and he would not be entitled for
\ndeduction. The relevant observation of the Hon’ble Court in R M Arunachalam (supra)
\nlaying down this proposition reads as under :-
\nIn taking the view that in a case where the property has been mortgaged by the previous owner
\nduring his lifetime and the assessee, after inheriting the same, has discharged the mortgage
\ndebt, the amount paid by him for the purpose of clearing off the mortgage is not deductible for
\nthe purpose of computation of capital gains, the Kerala High Court has failed to note that in a
\nmortgage there is transfer of an interest in the property by the mortgagor in favour of the
\nmortgagee and where the previous owner has mortgaged the property during his lifetime, which
\nis subsisting at the time of his death, then after his death his heir only inherits the mortgagor’s
\ninterest in the property. By discharging the mortgage debt his heir who has inherited the
\nproperty acquires the interest of the mortgagee in the property. As a result of such payment
\nmade for the purpose of clearing off the mortgage the interest of the mortgagee in the property
\nhas been acquired by the heir. The said payment has, therefore, to be regarded as ‘cost of
\nacquisition’ under section 48 read with section 55(2) of the Act. The position is, however,
\n23
\nITA 4964\/Mum\/2013
\ndifferent where the mortgage is created by the owner after he has acquired the property. The
\nclearing off of the mortgage is created by the owner after he has acquired the property. The
\nclearing off of the mortgage debt by him prior to transfer of the property would not entitle
\nhim to claim deduction under section 48 of the Act because in such a case he did not acquire
\nany interest in property subsequent to his acquiring the same. In CIT u. Daksha Ramanlal
\n[1992] 197 ITR 123, the Gujarat High Court has rightly held that the payment made by a
\nperson for the purpose of clearing off the mortgage created by the previous owner is to be
\ntreated as cost of acquisition of the interest of the mortgage in the property and is deductible
\nunder section 48 of the Act”. (P. 239) (emphasis added)
\nThus, the income applied in liquidation of a voluntarily incurred mortgaged debt is
\ndefinitely exigible to tax, although the application may be under a legally binding covenant
\nentered into by the recipient of the income or under a charge created by the debtor on his
\nproperty. Hence, in my opinion, the assessee will not get the deduction of the principal
\namount of loan u\/s 48, as the mortgage debt was created by the assessee itself, to which
\nassessee was obliged to discharge. Any discharge of debt is nothing but application of
\nincome.
\n7, Now the moot question is, whether there is a ‘diversion of income by overriding title’ and
\nhence the entire sale proceeds appropriated by the Bank towards its security interest is
\nexigible or chargeable to tax in the hands of the assessee or not.
\n8. This principle of “diversion of income by overriding title” has been applied and tested
\nfrom earlier times under the Indian Income Tax Law and the concept has been well
\nestablished that, where an obligatory charge is imposed by the testator; or by law upon
\nsome property; or charge is otherwise involuntarily created; then the sum so charged
\nmust be excluded from the income of the person in enjoyment of the property. In other
\n24
\nITA 4964\/Mum\/2013
\nwords, where income is not applied but ‘diverted by an ‘overriding title’ from the
\nassessee who would have otherwise have received it, it cannot be considered as the
\nincome of the assessee at all. Where the obligation effectively slices away part of the
\ncorpus of the right of the assessee to receive the entire income, it would be a case of
\n‘diversion of income’. But the biggest rider in applying this principle and most
\ndeterminative factor in deciding such situations as stressed by the Hon’ble Supreme
\nCourt in several cases from time to time is the nature and effect of the assessee’s
\nobligation in regard to the amount in question, Hon’ble Apex Court in the case of CIT
\nvs. Sitaldas Tirathdas, [1961] 41 ITR 367, laid down the following test with regard to
\n‘diversion of income by overriding title’ in the following manner :-
\n“In our opinion, the true test is whether the amount sought to be deducted, in truth,
\nnever reached the assessee as his income. Obligations, no doubt, there are in every
\ncase, but it is the nature of the obligation which is the decisive fact. There is a
\ndifference between an amount which a person is obliged to apply out of his
\nincome and an amount which by the nature of the obligation cannot be said to be
\na part of the income of the assessee. Where by the obligation income is diverted
\nbefore it reaches the assessee, it is deductible; but where the income is required to
\nbe applied to discharge an obligation after such income reaches the assessee, the
\nsame consequence, in law, does not follow, ft is the first kind of payment which can
\ntruly be excused and not the second. The second payment is merely an obligation to
\npay another a portion of one’s own income, which has been received and is since
\napplied. The first is a case in which the income never reaches the assessee, who
\neven if he were to collect it, does so, not as part of his income, but for and on behalf
\nof the person to whom it is payable”, (emphasis added)
\n9. Thus, the true tests in deciding the “diversion of income by overriding title” lies in the
\nnature of the ‘obligation’ which is the most decisive factor. If the assessee all throughout
\nhad an obligation to discharge his liability out of his income, then under all
\ncircumstances it would remain his obligation and the liability to discharge would be an
\napplication of income. There cannot be a two different limb of a same obligation; in the
\nfirst place, there would be an obligation of the assessee to discharge his liability out of
\nhis own income and second, the obligation will get shifted because the title has been
\n25
\nITA 4964\/Mum\/2013
\npassed to another person to discharge the liability of the assessee or on his behalf which
\nstill exists before the income reaches to the assessee. Under both the situations it is an
\nobligation of the assessee and any discharge of obligation is nothing but application of
\nincome and assessee would not be entitled either to claim deduction or claim the amount
\nas exempt. This principle was again reiterated by the Hon’ble Supreme Court in the case
\nof CIT vs. Sunil J Kinariwala [2O03] 259 ITR 1O, wherein the Hon’ble Apex Court
\nreiterated that the nature and effect of the assessee’s obligation in regard to the amount
\nin question is very crucial and determinative factor, whether there is diversion of income
\nor not. Hence, in all such cases, the nature of obligation is to be examined.
\n10. If we apply the above principle of law, then here in this case, there cannot be denying
\nfact that all throughout the obligation was upon the assessee to discharge its debt liability
\nand to clear the charge on the mortgaged property. This can be gauged by following
\nfacts; the business loan was taken by the assessee for its own business purpose and
\nliability to repay the loan\/debt was on the assessee; interest paid\/payable was
\nclaimed\/allowable as deduction of expenses incurred for the business purpose in
\ncomputation of total income; assessee was under the legally binding covenant to repay
\nthe loan along with the interest; property was mortgaged to the Bank to secure the
\ndebt\/loan by the assessee; liability to free the charge on mortgage land was upon the
\nassessee; Had the loan and interest been waived off by the bank, then assessee would
\nhave shown this as its income u\/s 41(1); further, if the assessee would have paid back
\nthe entire loan, then the mortgaged property would have got vested back to assessee.
\nThus, the obligation was always upon the assessee and it would not be shifted to the
\n26
\nITA 4964\/Mum\/2013
\nbank merely because the bank took possession of the land to enforce and realise its
\nsecured interest.
\n11. At the time of hearing catena of judicial decisions were cited from the side of both
\nthe parties in this regard (as cited above) and some of them were also filed before us in a
\nseparate compilation. Other than the case laws discussed above, the most relevant
\ndecisions on the issue involved and cited before us are being discussed here under :-
\n(i) CIT vs Attili N. Rao [2001] 252 ITR 880 (SC) :-
\nHere in this case question of law referred to before the Hon*ble Apex Court were as
\nunder :-
\n“Whether on the facts and in the circumstances of the case and in law, the Appellate
\nTribunal was correct in holding that the amount realised by the sale of the
\nassessee’s interest in the property was only Rs. 4,33,960 i.e., Rs. 5,62,980 minus Rs.
\n1,29,020 ?
\nWhether on the facts and in the circumstances of the case and in law, the Appellate
\nTribunal was correct in holding that the amount realised under the charge or
\nmortgage by the Government by public auction does not partake of the character of
\n‘full value of consideration’ envisaged under section 48 of the Income-tax Act ?
\nWhether on the facts and in the circumstances of the case and in law, the Appellate
\nTribunal was Justified in holding that the amount payable by the assessee in
\ndischarge of the mortgage debt to the Government on the sale of property was an
\nexpenditure incurred towards the cost of acquisition of the capital asset and
\ndeductible under section 48 of the Income-tax Act” ?
\nThe relevant facts of the case were as under :-
\n“The assessment year with which we are concerned is the assessment year 1982-83.
\nThe assesses carried on abkari business. In the course of the financial year 1970-71
\nhe mortgaged to the Excise Department of the State of Andhra Pradesh immovable
\nproperty belonging to him at Waltair, He did so to provide security for the amounts
\nof “kits” which were due by him to the State. The State, in the assessment year with
\nwhich we are concerned, sold the immovable property by public auction, without the
\nintervention of the court, to realise its dues. A sum of Rs. 5,62,980 was realised at
\nthe auction. Thereabout, the State deducted the amount of Rs. 1,29,020 due to it
\ntowards “kits” and interest and paid over the balance to the assessee”.
\n27
\nITA 4964\/Mum\/2013
\nOn these facts their Lordships answered the question in the following manner :-
\n“8, We are of the view that the Tribunal and the High Court were in error. What
\nwas sold by the State at the auction was the immovable property that belonged to the
\nassessee. The price that was realised therefore belonged to the assessee. From out
\nof that price, the State deducted its dues towards “\/cists” and interest due from the
\nassessee and paid over the balance to him. The capital gain that the assessee made
\nwas on the immovable property that belonged to him. Therefore, it is on the full
\nprice realised (less admitted deductions) that the capital gain and the tax thereon
\nhas to be computed”.
\nFrom the above proposition, it is amply clear that no such deduction of the dues
\nrealized by a creditor from the sale of immovable property of the assessee is allowable from
\nthe computation of capital gain in such cases and circumstances.
\n(ii) Decision of Bombay High Court in CIT vs Roshanbabu Mohammed
\nHussein Merchant, [2005] 275 ITR 231 (Bom)
\nIn this case, the question of law admitted by the Hon’ble Jurisdictional High
\nCourt read as under :-
\n“Whether the repayment of the mortgage debt created by the assessee, is an
\nexpenditure incurred in connection with the transfer of mortgaged asset
\nallowable under section 48(i) of the Income Tax Act”.\u201d
\nFacts of the case were as under :-
\nDuring the relevant year, the assessee, after obtaining permission from the bank,
\nsold a part of the aforesaid land for a consideration of Rs. 3,92,000 and deposited
\nthe entire amount of Rs. 3,92,000 with the State Bank of Saurashtra towards
\ndischarge of the debt. The assessee claimed that the long term capital gain arising
\non sale of the above land was exempt from capital gains tax. The assessing officer
\ncompleted the assessment under section 143(3) of the Income Tax Act by rejecting
\nthe contention of the assessee and taxed the same. On appeal, the CJT(A) upheld the
\ncontention of the assessee. On further appeal filed by the revenue, the Tribunal
\nupheld the order ofCIT(A) on the ground that firstly, the sale proceeds were diverted
\nby an overriding title in favour of the bank and the sale proceeds did not reach the
\nassessee and secondly, the amount paid by the assessee to discharge the debt was an
\nexpenditure incurred by the assessee for removing the encumbrance which was
\n28
\nITA 4964\/Mum\/2013
\nabsolutely essential to effectively transfer the plot and, therefore, the same was
\ndeductible under section 48 of the Income Tax Act. Challenging the said order, the
\npresent appeal is filed by the revenue. In Tax Appeal No. 603 of 2000, the Tribunal
\ntook contrary view and held that the amount paid to discharge the debt was neither
\ndiverted by overriding title nor such expenditure can be regarded as an expenditure
\nincurred in connection with transfer.
\nThe Hon’ble High Court after discussing the proposition of law reiterated by Hon’ble
\nApex Court in the case of R.M. Arunchalam (supra); VSMR Jagdishchandran vs CIT
\n[supra] and CIT vs Attli N. Rao, held as under :-
\n” 14. From the aforesaid decisions of the Apex Court, it is clear that there is a
\ndistinction between the obligation to discharge the mortgage debt created by the
\nprevious owner and the obligation to discharge the mortgage debt created by the
\nassessee himself. Where the property acquired by the assessee is subject to the
\nmortgage created by the previous owner, the assessee acquires absolute interest in
\nthat property only after the interest created in the property in favour of the
\nmortgagee is transferred to the assessee that is after the discharge of mortgage debt.
\nIn such a case, the expenditure incurred by the assessee to discharge the mortgage
\ndebt created by the previous owner to acquire absolute interest in the property is
\ntreated as ‘cost of acquisition’ and is deductible from the full value of consideration
\nreceived by the assessee on transfer of that property. However, where the assessee
\nacquires a property which is unencumbered, then, the assessee gets absolute interest
\nin that property on acquisition. When the assessee transfers that property, the
\nassessee is liable for capital gains tax on the full value (less admitted deductions)
\nrealised, even if an encumbrance is created by the assessee himself on that property
\nand the assessee is under an obligation to remove that encumbrance for effectively
\ntransferring the property. In other words, the expenditure incurred by the assessee
\nto remove the encumbrance created by the assessee himself on the property which
\nwas acquired by the assessee without any encumbrance is not allowable deduction
\nunder section 48 of the Income Tax Act.
\n15. It is true that in none of the aforesaid cases, the Apex Court has specifically held
\nthat repayment of the mortgage debt created by the assessee himself is not an
\n29
\nITA 4964\/Mum\/2013
\nexpenditure incurred for effectively transferring the property. However, it is
\nimplicitly held by the Apex Court that the expenditure incurred to remove the
\nencumbrance created by the assessee himself on a property on which the assessee
\nhad absolute interest is not an expenditure incurred for effectively transferring the
\nproperty as contemplated under section 48 of the Income Tax Act. It is not in dispute
\nthat in both the appeals which are before us, the property on which the
\nencumbrance was created by the assessee was acquired by the assessee free from
\nencumbrances. Therefore, in the light of the decisions of the Apex Court referred to
\nhereinabove, it must be held that the assessee is not entitled to the deduction of the
\nexpenditure incurred to remove the encumbrance created by the assessee himself.
\n16. The contention that the assessee has not received a pie front the transfer and
\nthe entire sale proceeds realised on transfer of the mortgaged asset has been
\nappropriated towards discharge of mortgage is also without any merit. As held by
\nthe Apex Court, when the property belonging to the assessee is sold in discharge
\nof the mortgage created by the assessee himself, then, irrespective of the amount
\nactually received by the assessee, the capital gain has to be computed on the full
\nprice realised (less admissible deduction) on transfer of the asset. To illustrate,
\nsuppose the assessee mortgages its capital asset and obtains loan of Rs. 1 lakh from
\na bank. Thereafter, if the assessee transfers the said capital asset with the consent of
\nthe bank for Rs. 1 lakh and pays the entire amount of Rs. 1 lakh to the bank to
\ndischarge the mortgage created by the assessee, then it is not open to the assessee to
\ncontend that the capital gains tax is not leviable on transfer of the property because
\nthe assessee has not received a pie on transfer of that capital asset, (emphasis
\nadded)\u201d
\n17. As regards the decisions of this court in the case of Shakuntala Kantilal (supra)
\nfollowed in the case of Abrar Alvi (supra) and the decisions of the Kerala High
\nCourt in the case of Smt. Thressiamma Abraham (supra) which are strongly relied
\nupon by the counsel for the assessee, we are of the opinion that the said decisions
\nare no longer good law in the light of the subsequent decisions of the Apex Court
\nreferred to hereinabove.
\n18. For all the aforesaid reasons, we answer question set out at para 2 in the
\nnegative, i.e., in favour of the revenue and against the assessee.
\n30
\nITA 4964\/Mum\/2013
\nFrom the law as discussed and decided by the Hon’ble Jurisdictional High
\ncourt it is absolutely clear that, firstly, when the assessee himself has created a
\nmortgaged charge, then no deduction is allowable for discharging the charge
\nor encumbrance created by the assessee on mortgaged asset; and secondly,
\nwhen the property is sold for discharge of such a mortgaged debt, then
\nwhether the amount has been actually realized by the assessee or not is
\nimmaterial and the whole of the amount of sale realised is to taxed as capital
\ngain in the hands of the assessee. This is evident from the highlighted portion
\nof the judgment and clinches the issue before hand.
\n(Hi) CIT vs Sharad Sharma, [2008] 305 ITR 24 (Allahabad) :-
\nThe question of law referred to the Hon’ble High Court for opinion was as
\nunder :-
\n“Whether on the facts and circumstances of the case, the Tribunal was justified in
\nholding that there was an overriding charge against the sale proceeds of property
\nand the assessee was not liable for capital gains in respect ofKs. 1,50,000paid to
\nbank in discharge of loan taken by M\/s Shanker Traders?”
\nThe Hon’ble Court again after reiterating the similar decisions of Hon’ble
\nSupreme Court as discussed herein above, decided the question in favour of
\nthe revenue as under : –
\n“The question with regard to diversion of income on account of overriding title was
\nnot decided by the Apex Court in the case of RM. Arunachalam (supra) on the
\nground that the said question had not been raised either before ‘he Tribunal or the
\nHigh Court, However, in the present case we find that this question had been raised
\nand the Tribunal had taken a view that the Bank had an over-riding title over the
\nproperty sold. The reasoning given by the Tribunal with regard to over-riding
\ncharge over the sale income is not correct for the reason as the assesses had himself
\ncreated the mortgage by taking a loan from the Bank and the said property had been
\nsecured for repayment of loan. It is not a case where the assesses had inherited the
\nproperty or had acquired the property along with charge but in fact had himself
\ncreated the charge over the property. In a case of inheritance\/acquisition along with
\nthe mortgage, perfecting his title by getting mortgage discharged, the assesses
\nwould be entitled to get the deduction of the mortgage debt but where the charge is
\ncreated by the assessee himself, it cannot be said that the amount of mortgage debt
\nout of the sale proceeds be deductible while calculating the capital gains. The
\npresent one is a case of application of income by the assessee.
\nFurther the Apex Court dealing with the issue of diversion of income by
\noverriding title in the case of Commissioner of Income-Tax v. Sunil J. Kinariwala
\nreported in 2003 (259) ITR 10 held as follows;
\n31
\nITA 4964\/Mum\/2013
\nIt may be pointed out that under the scheme of the Act, it is the total income of
\nan assessee, computed under the provisions of the Act, that is assessable to
\nincome -tax So much of the income which an assessee is not entitled to receive
\nby virtue of an overriding title created in favour of a third party would get
\ndiverted at source and the same cannot be added in computing the total
\nincome of the assessee. The principle is simple enough but more often than
\nnot, as in the instant case, the question arises as to what is the criteria to
\ndetermine, when does the income attributable to an assessee get diverted by
\noverriding title’? The determinative factor, in our view, is the nature and
\neffect of the assessee’s obligation in regard to the amount in question. When
\na third person becomes entitled to receive the amount under an obligation of
\nan assessee even before he could lay a claim to receive it as his income, there
\nwould be a diversion of income by overriding title; but when after receipt of
\nthe income by the assessee, the same is passed on to a third person in
\ndischarge of the obligation of the asses see, it will be a case of application
\nof income by the assessee and not of diversion of income by overriding
\ntitle.
\nIn view of the discussion made above we find that in the present case the assessee
\nwas not entitled to the deduction as claimed on account of discharge of mortgage
\ndebt of Rs. 95,000\/- to the Bank. In fact the entire amount of sale consideration had
\nbeen received by the assessee and thereafter part of it applied for discharge of the
\nmortgage debt. It was thus a case of application of income received, (emphasis
\nadded).\u201d
\n12. Thus, from the proposition of law and ratios as culled out from the above decisions,
\nit is absolutely clear that if the borrower assessee has created a mortgaged debt by itself
\nand if for discharge of its debt liability, the mortgaged property has been taken over or
\ntaken into possession by the secured creditor\/ lender to realize the loan \/ debt amount
\ndirectly, then neither the deduction of loan amount is allowed u\/s 48 nor it is a case of
\n‘diversion of income by overriding title’. The amount appropriated by the Bank after
\ndisposing of the mortgaged property of the assessee is thus, purely an application of
\nincome.
\n13. A very different proposition has been canvassed by the Ld. Counsel before us,
\nsuperseding the law propounded and settled by the Hon’ble Apex Court and High Courts
\nas stated above that, now by virtue of commencement of SARFAESI Act 2002, all such
\ndecisions and law laid down by the Hon’ble Courts on this subject will not be applicable,
\n32
\nITA 4964\/Mum\/2013
\nas in wake of the provisions of the said Act, assessee is completely precluded from the
\ntitle of the land, as now the Bank \/ financial institutions for realizing its secured interest
\nor debt has got all the powers and right to acquire the title on the mortgaged assets,
\nwhich amounts to ‘diversion of income by overriding title’. The distinction between the
\nposition prior to commencement of the SARFAESI Act and after the commencement,
\nmade by the Ld. Counsel can be summarized in brief as under :-
\n(i) Prior to the Act, no such method of recovery of overdue or NPA was prescribed,
\nwhereas now the Act prescribes three rights\/ mode of recovery of NPA viz.,
\nsecuritization; asset reconstruction and enforcement of security without the intervention
\nof the Court;
\n(ii) Prior to the Act, lender could recover its debt from borrower either by filing a
\nmonetary suit for recovery or summary suit u\/s 37 of the CPC or foreclosure of
\nmortgage. Now the bank\/ secured creditor is vested with various kind of rights for either
\ntaking over the possession of the securities\/secured asset of the borrower or can transfer
\nby way of lease\/assignment of sale. It also has right to take over the management of the
\nbusiness of the borrower or can appoint a Manager to manage the asset possession of
\nwhich has been taken;
\n(iii) Earlier all the options of recovery required intervention of the Courts inasmuch as
\nCivil Suit had to be filed for obtaining the decree in favour of the lender and the Court
\ncan adjudicate the amount due and pass the final award whereas, now no intervention of
\nthe Court is required and rights have been vested to the bank\/secured creditors itself.
\n(iv) The Court earlier use to appoint Receiver to take possession of the secure assets,
\nsell it and appropriate the proceeds towards payment of lender’s dues and now under the
\nAct after taking over the possession of the secured assets, the secured creditor can
\ntransfer the secure assets by way of lease, assignment or sale in its own right in the
\ncapacity of a transferor and not on behalf of the borrower. Secure creditor issues sale
\ncertificate to the transferor and the borrower is not required to execute the document,
\nrelating to transfer.
\n33
\nITA 4964\/Mum\/2013
\n(v) Lastly, earlier the Civil suit for recovery could be filed by the lender if the
\nborrowers have defaulted any payments of dues, whereas now section 13 of the
\nAct has given a huge powers to the lenders and if notice has been issued, the
\nborrower cannot sale, lease or transfer the asset.
\n14. However, such a distinction as made by the Id. Counsel above are purely superficial
\nand will not make any difference to the legal proposition as discussed in the foregoing
\nparagraphs. Much emphasis has been laid on Section 13 of the SARFAESI Act by the
\nLd. Counsel before us, in support of his contention that now in view of this section all
\nthe earlier law propounded will not be applicable. In my humble opinion, such a
\nproposition and argument of the Ld. Counsel cannot be appreciated at all, firstly, the
\nSARFAESI Act merely prescribes a speedy mode and rights for recovery of the debts \/
\nNPA by the Banks and it is not a mode or instrument to acquire the property albeit Bank
\ntakes over only the “security interest” on the asset to recover the outstanding Joan
\nliability of the borrower. The Bank assumes the role of an agent or steps into the shoes
\nof the borrower while disposing off the assets, which earlier was very cumbersome and
\ntime consuming through the process of Civil Courts under section 37 of Civil Procedure
\nCode; Secondly, even the civil courts restrict the rights of the owner over the mortgaged
\nasset or appoint court receiver to take over the possession of the secured assets and sell
\nor lease the property to realize the debts of the lender or award decree in favour of the
\nlender over the mortgaged asset to realize\/ recover the debts; lastly, there is no takeover
\nof obligation of the assessee by the Bank, because the loan is taken against mortgage of
\nproperty, which means there is an obligation on the borrower assessee to repay the said
\nJoan along with all the interest and other costs. The title of such security interest, that is,
\nmortgaged asset flows from the borrower to the lender or consequent buyer with the sole
\nintent of discharging the obligation of the borrower which comprise of outstanding loan
\namount along with accrued interest thereon.
\n15. Now let us examine the relevant provision of SARFAESI Act.
\nThe preamble of Act envisages: –
\n“An Act to regulate securitisation and reconstruction of financial assets and enforcement of
\nsecurity interest and for matters connected therewith or incidental thereto.
\nThus, this Act has been enacted by the Parliament to regulate the securitization and
\nreconstruction of financial assets and to enforce the “security interest” and not for
\nacquisition of the property or the title thereof. Before analyzing section 13, first of all
\ncertain definition illustrated in various clauses of Section 2 of the Act which are self
\nexplanatory are very relevant to understand the law as envisaged in Section 13, which are
\nreproduced as under:-
\n(f) “Borrower” means any person who has been granted financial assistance by any bank or
\nfinancial institution or who has given any guarantee or created any mortgage or pledge as
\nsecurity for the financial assistance granted by any bank or financial institution and includes a
\nperson who becomes borrower of a securitisation company or reconstruction company
\nconsequent upon acquisition by it of any rights or interest of any bank or financial institution in
\nrelation to such financial assistance;
\n(j) “default” means non-payment of any principal debt or interest thereon or any other
\namount payable by a borrower to any secured creditor consequent upon which the account of
\n34
\nITA 4964\/Mum\/2013
\nsuch borrower is classified as non-performing asset in the books of account of the secured
\ncreditor;
\n(I) “financial asset” means any loan or advance granted or any debentures or bonds
\nsubscribed or any guarantees given or letters of credit established or any other credit facility
\nextended by any bank or financial institution; (I) “financial asset” means debt or receivables
\nand includes- (i) a claim to any debt or receivables or part thereof, whether secured or
\nunsecured; or (ii) any debt or receivables secured by, mortgage of, or charge on, immovable
\nproperty; or (Hi) a mortgage, charge, hypothecation or pledge of movable property; or (iv) any
\nright or interest in the security, whether full or part underlying such debt or receivables; or (v)
\nany beneficial interest in property, whether movable or immovable, or in such debt, receivables,
\nwhether such interest is existing, future, accruing, conditional or contingent; or (vi) any
\nfinancial assistance;
\n(m) “financial institution” means\u2014
\n(i) a public financial institution within the meaning of section 4A of the Companies Act, 1956 (1
\nof 1956);
\n(ii) any institution specified by the Central Government under sub-clause (ii) of clause (h) of
\nsection 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of
\n1993);
\n(Hi) the International Finance Corporation established under the International Finance
\nCorporation (Status, Immunities and Privileges) Act, 1958 (42 of 1958);
\n(iv) any other institution or non-banking financial company as defined in clause (f) of section
\n45-1 of the Reserve Bank of India Act, 1934 (2 of 1934), which the Central Government may, by
\nnotification, specify as financial institution for the purposes of this Act;
\n(o) “non-performing asset” means an asset or account of a borrower, which has been
\nclassified by a bank or financial institution as sub-standard, doubtful or loss asset,\u2014 (a) in case
\nsuch bank or financial institution is administered or regulated by any authority or body
\nestablished, constituted or appointed by any law for the time being in force, in accordance with
\nthe directions or guidelines relating to assets classifications issued by such authority or body;
\n(b) in any other case, in accordance with the directions or guidelines relating to assets
\nclassifications issued by the Reserve Bank;
\n(zb) “Security agreement”, means an agreement, instrument or any other document or
\narrangement under which security interest is created in favour of the secured creditor including
\nthe creation of mortgage by deposit of title deeds with the secured creditor;
\n(zc) “Secured assets” means the property on which security interest is created;
\n(zd) “Secured creditor” means any bank or financial institution or any consortium or group of
\nbanks or financial institutions and includes\u2014
\n(i) debenture trustee appointed by any bank or financial institution; or
\n(ii) securitisation company or reconstruction company, whether acting as such or managing a
\ntrust set up by such securitisation company or reconstruction company for the securitisation or
\nreconstruction, as the case may be; or
\n(Hi) any other trustee holding securities on behalf of a bank or financial institution, in whose
\nfavour security interest is created for due repayment by any borrower of any financial
\nassistance;
\n(ze) “Secured debt” means a debt which is secured by any security interest:
\n(zf) “Security interest” means right, title and interest of any kind whatsoever upon property,
\ncreated in favour of any secured creditor and includes any mortgage, charge, hypothecation,
\nassignment other than those specified in section 31;
\nNow in light of these definitions let us examine Section 13 which envisages the
\nenforcement of security interest. The section 13
\n35
\nITA 4964\/Mum\/2013
\nreads as under :-
\n(1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property
\nAct, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be
\nenforced,
\n|j without the intervention of court or tribunal, by such creditor in
\n1 accordance with the provisions of this Act.
\n(2) Where any borrower, who is under a liability to a secured creditor under a security
\nagreement, makes any default in repayment of secured debt or any installment thereof, and his
\naccount in respect of such debt is classified by the secured creditor as non-performing asset,
\nthen, the secured creditor may require the borrower by notice in writing to discharge in full his
\nliabilities to the secured creditor within sixty days from the date of notice failing which the
\nsecured creditor shall be entitled to exercise all or any of the rights under subsection (4).
\n(3) The notice referred to in sub-section (2) shall give details of the amount payable by the
\nborrower and the secured assets intended to be enforced by the secured creditor in the event of
\nnon-payment of secured debts by the borrower. (3A) If, on receipt of the notice under subsection
\n(2), the borrower makes any representation or raises any objection, the secured
\ncreditor shall consider such representation or objection and if the secured creditor comes to the
\nconclusion that such representation or objection is not acceptable or tenable, he shall
\ncommunicate within one week of receipt of such representation or objection the reasons for
\nnon-acceptance of the representation or objection to the borrower: PROVIDED that the
\nreasons so communicated or the likely action of the secured creditor at the stage of
\ncommunication of reasons shall not confer any right upon the borrower to prefer an application
\nto the Debts Recovery Tribunal under section 17 or the Court of District Judge under section
\n17A.
\n(4) In case the borrower fails to discharge his liability in full within the period specified in subsection
\n(2), the secured creditor may take recourse to one or more of the following measures to
\nrecover his secured debt, namely:–
\n(a) take possession of the secured assets of the borrower including the right to transfer by way
\nof lease, assignment or sale for realising the secured asset;
\n(b) take over the management of the business of the borrower including the right to transfer by
\nway of lease, assignment or sale for realising the secured asset: PROVIDED that the right to
\ntransfer by way of lease, assignment or sale shall be exercised only where the substantial part
\nof the business of the borrower is held as security for the debt: PROVIDED FURTHER that
\nwhere the management of whole of the business or part of the business is severable, the secured
\ncreditor shall take over the management of such business of the borrower which is relatable to
\nthe security for the debt.
\n(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the
\npossession of which has been taken over by the secured creditor; (d) require at any time by
\nnotice in writing, any person who has acquired any of the secured assets from the borrower and
\nfrom whom any
\nmoney is due or may become due to the borrower, to pay the secured creditor, so much of the
\nmoney as is sufficient to pay the secured debt.
\n(5) Any payment made by any person referred to in clause (d) of sub-section (4) to the secured
\ncreditor shall give such person a valid discharge as if he has made payment to the borrower.
\n(6) Any transfer of secured asset after taking possession thereof or takeover of management
\nunder sub-section (4), by the secured creditor or by the manager on behalf of the secured
\ncreditor shall vest in the transferee all rights in, or in relation to, the secured asset transferred
\nas if the transfer had been made by the owner of such secured asset,
\n36
\nITA 4964\/Mum\/2013
\n(7) Where any action has been taken against a borrower under the provisions of sub-section
\n(4), all costs, charges and expenses which, in the opinion of the secured creditor, have been
\nproperly incurred by him or any expenses incidental thereto, shall be recoverable from the
\nborrower and the money which is received by the secured creditor shall, in the absence of any
\ncontract to the contrary, be held by him in trust, to be applied, firstly, in payment of such costs,
\ncharges and expenses and secondly, in discharge of the dues of the secured creditor and the
\nresidue of the money so received shall be paid to the person entitled thereto in accordance with
\nhis rights and interests.
\n(8) If the dues of the secured creditor together with all costs, charges and expenses incurred by
\nhim are tendered to the secured creditor at any time before the date fixed for sale or transfer,
\nthe secured asset shall not be sold or transferred by the secured creditor, and no further step
\nshall be taken by him for transfer or sale of that secured asset.
\n(9) In the case of financing of a financial asset by more than one secured creditors or joint
\nfinancing of a financial asset by secured creditors, no secured creditor shall be entitled to
\nexercise any or all of the rights conferred on him under or pursuant to sub-section (4) unless
\nexercise of such right is agreed upon by the secured creditors representing not less than threefourth
\nin value of the amoux* outstanding as on a record date and such action shall be binding
\non
\nall the secured creditors: PROVIDED that in the case of a company in liquidation, the amount
\nrealised from the sale of secured assets shall be distributed in accordance with the provisions
\nof section 529A of the Companies Act, 1956 (I of 1956): PROVIDED FURTHER that in the
\ncase of a company being wound up on or after the commencement of this Act, the secured
\ncreditor of such company, who opts to realise his security instead of relinquishing his security
\nand proving his debt under proviso to sub-section (1) of section 529 of the Companies Act,
\n1956 (1 of 1956), may retain the sale proceeds of his secured assets after depositing the
\nworkmen’s dues with the liquidator in accordance with the provisions of section 529A of that
\nAct: PROVIDED ALSO that the liquidator referred to in the second proviso shall intimate the
\nsecured creditors the workmen’s dues in accordance with the provisions of section 529A of the
\nCompanies Act, 1956 (1 of 1956) and in case such workmen’s dues cannot be ascertained, the
\nliquidator shall intimate the estimated amount of workmen’s dues under that section to the
\nsecured creditor and in such case the secured creditor may retain the sale proceeds of the
\nsecured assets after depositing the amount of such estimated dues with the liquidator:
\nPROVIDED ALSO that in case the secured creditor deposits the estimated amount of
\nworkmen’s dues, such creditor shall be liable to pay the balance of the workmen’s dues or
\nentitled to receive the excess amount, if any, deposited by the secured creditor with the
\nliquidator: PROVIDED ALSO that the secured creditor shall furnish an liquidator to pay the
\nbalance of the workmen’s dues, if any. Explanation : For the purposes of this subsection,- (a)
\n“record date” means the date agreed upon by the secured creditors representing not less than
\nthree-fourth in value of the amount outstanding on such date; (b) “amount outstanding”shall
\ninclude principal, interest and any other dues payable by the borrower to the secured creditor
\nin respect of secured asset as per the books of account of the secured creditor.
\n(10) Where dues of the secured creditor are not fully satisfied with the sale proceeds of the
\nsecured assets, the secured creditor may file an application in the form and manner as may be
\nprescribed to the Debts Recovery Tribunal having jurisdiction or a competent court, as the case
\nmay be, for recovery of the balance amount from the borrower.
\n(11) Without prejudice to the rights conferred on the secured creditor under or by this section,
\nthe secured creditor shall be entitled to proceed against the guarantors or sell the pledged
\nassets without first taking any of the measures specified in clauses (a) to (d) of subsection (4) in
\nrelation to the secured assets under this Act.
\n37
\nITA 4964\/Mum\/2013
\n(12) The rights of a secured creditor under this Act may be exercised by one or more of his
\nofficers authorised in this behalf in such manner as may be prescribed.
\n(13) No borrower shall, after receipt of notice referred to in subsection (2), transfer by way of
\nsale, lease or otherwise (other than in \/ the ordinary course of his business) any of his
\nsecured assetsreferred to in the notice, without prior written consent of the secured creditor.
\n16 From the conjoint reading of above provisions relevant key points for the purpose
\nof our adjudication are as under ;-
\n(i) Now for the enforcement of security interest, no intervention of court or
\nTribunal is required by the secured creditors as Banks have been given sufficient powers
\nto enforce its security interest.
\n(ii) If the borrower who is liable or obliged under a ‘Security Agreement’ to make the
\npayment to the secured creditor, makes any default in repayment of secured debt and his
\naccount has been classified as NPA, then Secured Creditor may issue notice under subsection
\n(2) to the borrower to discharge his full liabilities, in a certain time bound
\nmanner as mentioned in the notice. The borrower can raise objections against the notice
\nwhich the secured creditor has to consider and dispose off in writing setting out the
\nreasons.
\n(iii) In case the borrower fails to discharge his liability in full within the period and in
\nterms of notice, then, the secured creditor may take recourse to various measures as
\nillustrated in the various clauses to sub-section 4 of section 13, to recover his secured
\ndebt only. The secured creditor has to take recourse u\/s 14(1) of the Chief Metropolitan
\nMagistrate or District Magistrate to take over the possession of the property. Thus, the
\ncrucial focus of sub-section (4) is that powers and measures is “to recover the secured
\ndebt” only and not over and above. In other words the title in some of the cases is passed
\nfor securing the debt and realizing the same. Shift in title is not shift on obligations of
\nthe borrower albeit obligation of the borrower is being discharged by the lender.
\n(iv) The measures as illustrated in various clauses of the subsection (4) are purely
\nmechanism to secure the debts like, taking possession of the secured asset (mortgaged
\nasset) including the right to transfer; take over the management of the business of the
\nborrower, appoint any person to manage the secured assets; to give time to person who
\nhas acquired the secured assets from the borrower for recovery of money; Thus, all these
\nmodes and measures are purely for realization of secured debts, which otherwise
\nborrower was obliged to pay. In other words, all these powers and measures are to
\nfacilitate the recovery of debt due from the borrower which earlier was cumbersome and
\nlong drawn process through civil courts.
\n(v) Sub-section 7, provides that all the costs, charges and expenses, etc shall be
\nrecoverable by the borrower or adjusted first from the money realization. If there is
\ncomplete passing of the title, then there is no question of recovery of costs. This itself
\ngoes to show that secured creditor is realizing its secured debt and nothing beyond.
\n(vi) Sub-section 8 lays down a very important point that, if the dues of the secured
\ncreditor along with the costs are tendered to the secured creditors, then no step shall be
\n17. Thus, the powers had been vested to Banks\/ Secured Creditors to recover only the
\nsecured debts from the borrower, that is, the title or right on mortgaged asset (secured
\nasset) assumed by the Bank is solely for securing and realizing its debts, which
\n38
\nITA 4964\/Mum\/2013
\notherwise was the obligation of the buyer. The bank only act as legally authorised agents
\nto recover their money, which the borrower has failed to do so. From the scope of
\nsection 13 and powers and mode of recovery as enumerated in sub-section (4) read with
\nother provisions, one thing is amply evident that, powers and right has been given to the
\nBank to recover its secured debt in various forms. The title over the secured asset is
\npassed to the Bank only and only to extent of secured debt and not beyond it. In this
\ncontext, Ld. Counsel’s argument can be negated by following illustration:-
\n‘A’ (as a borrower) has borrowed a sum of Rs. 1 crore from Bank ‘B’ (Lender) after
\nmortgaging a property or asset worth Rs. 2 crores. ‘A’ could only pay back Rs. 50 lakhs
\non principal amount and interest accrued thereof of Rs. 25 lakhs. Thereafter ‘A’ commits
\ndefault in repayment of balance principal amount of Rs. 50 lakhs and some interest
\naccrued thereon, say Rs. 10 lakhs. ‘B’ initiates proceedings under SARFAESI Act and
\nissues notice u\/s 13(2) of Act. ‘A’ is unable to comply with terms of the notice within 60
\ndays. (B’ makes a requisition in terms of section 14 for acquiring the property and sells it
\nto the outsiders for Rs. 2 crores (on actual value) and from the sale proceeds recovers a
\nsum of Rs. 50 lakhs plus interest of Rs. 10 lakhs, i.e. the amount of secured debt due.
\nThen, the moot point is, whether (B’ is entitled to appropriate all the money of Rs. 2
\ncrores; or the secured interest \/debt due of Rs.60 lakhs; or the balance sum of Rs. 1.40
\ncrores is to be paid back to the assessee as this was not part of secured interest or debt
\ndue. No where the SARFAESI Act, provides that the ‘B’ is entitled to appropriate all,
\nalbeit only to the extent of balance secured debt of Rs. 60 lakhs.
\nIf the contention of the Ld. Counsel is accepted, then the logical proposition would be
\nthat, to the extent of Rs. 60 lakhs there was a ‘diversion of Income by overriding title’
\nand for the balance money of Rs. 1.40 crores, there was no such diversion and the title
\nbelonged to the assessee. This would, in my humble opinion would not be correct
\nproposition, because, the title on the and passes to the bank only to fulfill the obligation
\n39
\nITA 4964\/Mum\/2013
\nof the assessee and enable the Bank to recover its own due money\/debt. There would be
\nno deviation of the aforesaid principles, even in the case where the amount realized by
\nsale of mortgaged asset has been appropriated whole as the debt due is more or same as in
\nthe present case. It cannot be principally held or accepted that, whenever on the sale of
\nmortgaged asset the debt amount realized is the same or less then there would be an
\noverriding title of the mortgage asset to the bank and therefore, the whole of the amount
\nrealized should not be considered in the hands of the borrower and in cases the amount
\nrealized is more on sale of mortgaged asset, the excess of the amount or income will belong
\nto the assessee. Here in this case, the Ld. Counsel had tried to contend before us that all the
\namount has been appropriated by the bank after taking over the possession of the mortgaged
\nproperty and, therefore, such an income which has not come to the assessee and
\nappropriated directly at source by the bank, amounts to ‘diversion of income by overriding
\ntitle’. Such a contention of the Counsel has to be out rightly rejected, because if for instance,
\nhad the bank realized excess amount from sale of mortgaged asset, then whether the excess
\namount too would have been appropriated by the Bank or whether the assessee would have
\ngiven up its claim of excess amount in favour of the bank. The answer will be negative.
\nUnder the SARFAESI Act also the bank can only enforce its secure debts and not beyond
\nthat. Therefore, the contention raised by the Ld. Counsel has no legs to stand.
\n18. As per the accounting entry, in the books of account of the borrower assessee, the loan
\namount from the liability side stands reduced and the asset stands disposed off for the
\ndischarge of liability shown in the balance sheet and accordingly, the relevant entries are
\nmade in the books of account. This precisely the assessee has also done in its books of
\naccount, which is a correct and fair manner. Therefore, the sales of asset reflected in the
\nbooks were rightly shown under the head “capital gain” and income was computed under
\n40
\nITA 4964\/Mum\/2013
\n“‘Lone Term Caprtal Gain”. Had there been a case of “diversion of the Income by source or
\nby overriding title”, then the whole of the amount on sale of assets would not have entered
\ninto the charging provisions of the Income Tax Act, at all, that is, would not have been even
\nentered the computation of total income. But here the assessee had duly disclosed the sale
\nconsideration of the mortgaged asset not only in the books of account but also shown it as
\nits income as LTCG in the computation of income, albeit claimed a wrong deduction of
\nprincipal amount as cost of acquisition. The assessee now cannot plead otherwise. Even if
\nwe go by the proposition that entries in the books of account are not relevant for deciding
\nthe taxability of income, then also the fundamental aspect that permeates in this case is that,
\nthe liability\/debt was entered in the books of account and duly reflected in the audited
\nbalance sheet and all throughout the obligation to discharge its self created liability\/debt
\nwas upon the assessee which remained its obligation till the end. Hence, such a discharge of
\nliability\/debt even under the action taken by lender under the SARFAES1 Act was nothing
\nbut application of income.
\n19. To conclude, under the SARFAESI Act the Bank merely gets a statutory enforceable
\npower\/right to sell and dispose off the security interest, the obligation of payment of which
\nwas on the borrower and the borrower has not done or played his part of covenant to
\ndischarge his obligation on the outstanding loan. In all such cases, the income on sale of
\nsecured asset by the secured creditor for its secured interest accrues or belongs to the
\nborrower assessee and here the income has been applied by the lending bank holding the
\nfirst charge on such income for specific discharge of obligation of the assessee as per the
\nlegal covenant agreed in a contract between the lender and the borrower. There can be no
\ndiversion of income simply because now the contract between the parties is enforced
\nthrough the SARFAESI Act. The Act merely gives more power to the lender banks to
\n41
\nITA 4964\/Mum\/2013
\nenforce the contract between the parties and safeguard the security interest of the Bank,
\nwhich was earlier done through mechanism of long drawn process under CPC through
\nCiviJ Courts.
\n20. Hence, in my humble opinion there is no material difference in the position of
\nlaw with the enactment of SARFAES1 Act, so as to come to a different conclusion
\nthat law applicable prior to the commencement of the Act will no longer
\nwill be applicable. Therefore, the legal proposition as upheld by the Hon*bJe
\nSupreme Court and High Court will still hold the ground in such cases. Accordingly,
\nthe claim of deduction of the principal amount of Rs. 1,48,24,633\/- made by the
\nassessee on the principle of ‘diversion by overriding title’ cannot be upheld and same
\nis denied to the assessee, because it is neither a case of diversion of income nor a
\ncase for claim of deduction while computing the capital gain, albeit, it’s purely a
\ncase of an application of income as it was the assessee’s obligation to pay its
\ndebt. Thus, the ground raised by the assessee is dismissed.
\nIn the result, the appeal of the assessee is dismissed.
\nSd\/-
\n(AMIT SHUKLA)
\nJUDICIAL MEMBER
\nMumbai, Date : 23rd October, 2015
\nREFERENCE UNDER SECTION 255(4) OF INCOME TAX ACT
\n2. In the backdrop of the divergent views taken by Hon\u2019ble Accountant
\nMember and Hon\u2019ble Judicial Member, who constituted the Bench, a reference
\n42
\nITA 4964\/Mum\/2013
\nwas made to the Hon\u2019ble President, vide reference dated 27-08-2015 to
\nnominate a Third Member to answer the following questions:-
\n“(i) Whether, on the facts and circumstances of the case, the assessee
\nwas justified in claiming the deduction of Rs.1,48,24,633\/- out of full value
\nof consideration arising from the transfer of mortgaged capital asset by
\nthe Kotak Mahindra Bank, which took over the possession of the said
\nasset under the provisions of the SARFAESI Act, 2002.
\n(ii) Whether, on the facts and circumstances of the case, the entire sale
\nconsideration, which is received by the Kotak Mahindra Bank from the
\ntransfer of mortgaged assets under the provisions of section 13 of the
\nSARFAESI Act, will not be chargeable to Income tax in the hands of the
\nassessee on the principle of “diversion of income by overriding title”.
\n3. The Hon\u2019ble President was pleased to nominate Hon\u2019ble Accountant
\nMember as a Third Member to decide the above questions, vide his order
\ndated 12-05-2019. The Hon\u2019ble Third Member vide his order dated 10-
\n05-2019 has decided the issues in the following manner:-
\nPER G.S.PANNU, VICE PRESIDENT:
\n\u201cThe following points of difference have been referred to me by the Hon\u2019ble
\nPresident under Section 255(4) of the Income-tax Act, 1961 (in short \u2018the Act\u2019) :<\/p>\n
\u201c(i) Whether, on the facts and circumstances of the case, the assessee was justified
\nin claiming the deduction of Rs.1,48,24,633\/- out of full value of consideration arising from the transfer of mortgaged capital asset by the Kotak Mahindra Bank, which took
\nover the possession of the said asset under the provisions of the SARFAESI Act, 2002.
\n(ii) Whether, on the facts and circumstances of the case, the entire sale
\nconsideration, which is received by the Kotak Mahindra Bank from the transfer of
\nmortgaged assets under the provisions of section 13 of the SARFAESI Act, will not be
\nchargeable to Income tax in the hands of the assessee on the principle of \u201cdiversion of
\nincome by overriding title\u201d.
\n2. Briefly put, the relevant facts are that the assessee is a company
\nincorporated under the Companies Act, 1956 and, is inter-alia, engaged in the
\nbusiness of manufacture of cotton \/ polyester sewing and industrial threads and
\nalso engaged in the processing of cotton yarn. It filed its return of income
\ndeclaring a loss of
\n`
\n64,93,927\/-. In the return of income so filed, the assessee
\nclaimed deduction of
\n`
\n1,48,24,633\/- from its income computed under the head
\nCapital Gains. The facts in this regard are that the assessee took a corporate loan
\nof
\n`
\n306 lakhs from M\/s. Kotak Mahindra Bank Ltd. (\u2018KMBL\u2019) during the financial
\nyear 2008-09 relevant to Assessment Year 2009-10 for its business. The said loan
\nwas repayable in 36 monthly instalments. From August 2009 onwards assessee
\ndefaulted in repayment of loan, and KMBL classified assessee\u2019s account as a Non-
\nPerforming Asset (\u2018NPA\u2019) on 21.11.2009. In this regard, a notice was served on
\n30.11.2009 as per the provisions of Section 13(2) of the Securitisation and
\nReconstruction of Financial Assets of Security Interest Act, 2002 (in short
\n\u2018SARFAESI Act\u2019) on the assessee company and its personal guarantors, viz. Mr. H.
\nS. Bapna and Mrs. Urmila Bapna. The total outstanding liability to KMBL at that
\npoint of time was
\n`
\n3,40,61,488\/-. On 07.01.2010, KMBL took over possession of
\nthe factory land of the assessee admeasuring 6,883.517 sq. mtrs. which was subdivided
\ninto 7 plots and 6 of these sub-plots were sold by KMBL in March, 2010.
\n44
\nITA 4964\/Mum\/2013
\nKMBL directly received the consideration amounting to
\n`
\n2,18,00,262\/- and
\nadjusted the said realisation against the outstanding loan of the assessee, i.e. a
\nsum of
\n`
\n1,48,24,633\/- was adjusted against the principal component of the loan
\nand
\n`
\n69,75,629\/- was adjusted against the interest component of the loan. While
\ncomputing the Capital Gain under the Act, assessee treated the entire amount of
\nRs.2,18,00,262\/- received by the bank on sale of plots as sale consideration;
\nhowever, the amount of
\n`
\n1,48,24,633\/- which was apportioned against the
\nprincipal component of the loan was claimed as deduction under Section 48 of
\nthe Act alongwith the indexed cost of acquisition and improvements (
\n`
\n3,43,583\/-
\nand other incidental expenses of
\n`
\n6000\/- relating to sales). The Assessing Officer
\ndisallowed the above claim of the assessee and made an addition of
\n`
\n1,48,24,633\/- while computing the income under the head \u2018Capital Gains\u2019. On
\nfurther appeal by the assessee, the CIT(A) upheld the order of the Assessing
\nOfficer. Aggrieved by the same, assessee preferred further appeal before the
\nTribunal.
\n3. When the matter came up before the Division Bench, the appellant
\ncontended that the consideration received by KMBL on sale of plots, to the
\nextent it was adjusted by KMBL towards principal component of the loan, never
\naccrued to the assessee and was in the nature of \u2018diversion of income by
\noverriding title\u2019 and, therefore, the same should be allowed as deduction while
\ncomputing the income under the head Capital Gains. The learned Accountant
\nMember concurred with the submissions advanced on behalf of the assessee on
\nthis issue and ordered deletion of addition made on this account. In deleting the
\naddition, the learned Accountant Member observed that the property was
\nmortgaged with KMBL and on default by the assessee in repayment of loan, the
\n45
\nITA 4964\/Mum\/2013
\nproperty automatically vested with KMBL as per Section 13 of the SARFAESI.
\nFurther, KMBL got overriding title and the payments were directly received by
\nKMBL on account of transfer of secured assets. Thus, the doctrine of \u2018diversion of
\nincome by overriding title\u2019 applied to the facts of the present case. On the other
\nhand, the learned Judicial Member passed an order sustaining the addition made
\nby the Assessing Officer on the ground that the charge on the property was
\ncreated by the assessee himself and thus, was in the nature of a voluntary
\ncharge. The doctrine of \u2018diversion of income by overriding title\u2019 is not applicable
\nin the case of voluntary charge, but is applicable only in the case of automatic \/
\ncompulsory charge. It was also noticed by the learned Judicial Member that if the
\nargument of the assessee is accepted, this modus operandi will be used as a tax
\nevasion method and every assessee will suo-moto create a charge on the
\nproperty and will default in making payment of loans, and eventually avoid tax on
\nCapital Gain resulting from transfer of asset whose proceeds are used to repay
\nthe loan liability. In view of this difference of opinion between the learned
\nJudicial Member and learned Accountant Member, the matter has been referred
\nto me for my opinion.
\n4. The questions to be answered by me in this order, as framed by the two
\nlearned Members of the Division Bench, and reproduced above, is whether
\nassessee was justified in making deduction of
\n`
\n1,48,24,633\/- from the full value of
\nconsideration of the property mortgaged with KMBL, which took over possession
\nof the said property as per provisions of SARFAESI Act; and, whether the entire
\nsale consideration received by KMBL on sale of asset will not be chargeable to tax
\nin the hands of the assessee on the principle of \u2018diversion of income by overriding
\ntitle\u2019.
\n46
\nITA 4964\/Mum\/2013
\n5. At the outset, I make it clear that as regards the facts which are relevant to
\ndecide the dispute, there is no difference between the learned Members
\nconstituting the Division Bench, and therefore the same are not being repeated
\nby me for the sake of brevity.
\n6. Before me, the learned representative attempted to support the order
\npassed by the learned Accountant Member. At the outset, it was argued that
\neven the learned Judicial Member has accepted the fact that because of the
\ndefault in payment of loan by the assessee to KMBL, the mortgaged property
\nvested with the bank. Once that is so, the consideration received on transfer of
\nsaid property never accrued to the assessee as the asset itself did not belong to
\nthe assessee. It was further contended that the property was sold by KMBL in its
\nown right and not as the agent of the assessee. There was no principal-agent
\nrelationship between KMBL and the assessee. My attention was drawn to clause
\nnos. 9, 11 and 12 of the notice issued by KMBL under Section 13(2) of the
\nSARFAESI Act dated 30.11.2009, possession notice by KMBL dated 07.01.2010
\nand the sale certificate by KMBL. In the possession notice dated 07.01.2010, it
\nwas pointed out that the assessee had expressed its inability to repay the loan
\nand KMBL has in clear terms stated that they have taken over the possession of
\nthe mortgaged property and assessee was asked not to deal with the said
\nproperty. Further, it was pointed out that as per sale certificate, the property
\nwas sold by the authorised officer on behalf of KMBL and not on behalf of the
\nassessee. According to him, this clearly shows that at the time of sale of asset,
\nthe same did not belong to the assessee but it was the property of the KMBL, and
\nKMBL sold the same on principal to principal basis and not as the agent of the
\nassessee. It was also pointed out that the learned Judicial Member on one hand
\naccepts the fact that the sale is by KMBL and on the other hand states it is on
\n47
\nITA 4964\/Mum\/2013
\nbehalf of the assessee. My attention was drawn to the provisions of Section
\n13(4) of the SARFAESI Act to state that on default by the borrower in repayment
\nof loan within the stipulated time, the property vests with the secured creditor
\nand the creditor obtains the right to sell the property in his own right.
\n7. Per contra, the learned DR contended that the computation of Capital
\nGains is to be made as per the scheme of the Act and not as per the SARFAESI
\nAct. The provisions of SARFAESI Act cannot override the provisions of the Act. He
\nfurther contented that the real owner of the property remains the assessee even
\nat the time of sale of the property by the secured creditor. He further argued
\nthat there is no change in position of law after the introduction of SARFAESI Act.
\nIt was further argued that if KMBL is treated as the real owner, KMBL should have
\npaid the capital gains tax, which is not the case. It was further argued that the
\nobject of SARFAESI Act is to facilitate the recovery and not to mitigate Capital
\nGains tax. My attention was also drawn to the provisions of Section 13(6) of the
\nSARFAESI Act which states that on transfer of asset by the secured creditor to the
\ntransferee, the transferee will get all right, title and interest in the said property
\nas if the transfer is made by the borrower. It was thus argued that the property
\nat the time of sale belonged to the assessee and thus, the sale of property by
\nKMBL was on behalf of the assessee and, therefore, the amount recovered by
\nKMBL shall not be allowed as deduction while computing Capital Gain in the
\nhands of the assessee.
\n8. The learned DR further argued that the contention of the assessee that
\nassessee lost ownership of the property at the time of vesting of property in
\nfavour of KMBL is incorrect as at the time of second transaction of property sale
\nby KMBL, the loan account of the assessee got settled, which was not so at the
\n48
\nITA 4964\/Mum\/2013
\ntime of vesting of the property in favour of KMBL and, therefore, the sale of
\nproperty by KMBL was on account of the assessee. The amount retained by
\nKMBL towards loan liability was merely an application of income by the assessee.
\nIn this regard, the learned DR relied on the decision of the Chennai Bench of the
\nTribunal in the case of Geetha Subrabamiam vs. ITO on ITA Nos. 427 &
\n428\/MDS\/2017 dated 27.04.2017. It was further argued that merely by taking
\nover possession of the assets of borrower under SARFAESI Act, the secured
\ncreditor does not acquire the ownership of the assets or becomes the owner of
\nthe assets. In this regard, he placed reliance on the decision of the Delhi Bench
\nof the Tribunal in the case of Rajasthan Petrosynthetics Ltd in ITA no.
\n1397\/Del\/2013 dated 22.08.2014. It was further argued that if KMBL would have
\nrealised any amount in excess of the amount of loan liability recoverable by
\nKMBL, the excess would have been returned by KMBL to the assessee. Thus, it
\ncannot be said that the ownership of the assets vested with KMBL only and asset
\nwas sold by KMBL on principal to principal basis and not as agent of the assessee.
\n9. I have carefully considered the rival submissions, perused the respective
\norders passed by the learned Judicial Member and learned Accountant Member
\nand the material placed on record. The two aspects which I find are relevant on
\nthe facts of the present case are that doctrine of \u2018diversion of income by
\noverriding title\u2019 and implication of SARFAESI Act on the doctrine of \u2018diversion of
\nincome by overriding title\u2019. Since the facts are not in dispute and are already
\ndealt with exhaustively in the respective orders passed by learned Accountant
\nMember and learned Judicial Member, the same are not discussed again for the
\nsake of brevity. Firstly, I shall deal with the doctrine of \u2018diversion of income by
\noverriding title\u2019 in cases wherein the mortgage has been created by the assessee
\nhimself. The Hon\u2019ble Supreme Court in the case of R M Arunachalam vs CIT
\n49
\nITA 4964\/Mum\/2013
\n[1997] 227 ITR 222 has discussed the above doctrine. The relevant para of the
\nsaid judgment is reproduced hereunder:
\n\u201cIn taking the view that in a case where the property has been mortgaged by
\nthe previous owner during his lifetime and the assessee, after inheriting the
\nsame, has discharged the mortgage debt, the amount paid by him for the
\npurpose of clearing off the mortgage is not deductible for the purpose of
\ncomputation of capital gains, the Kerala High Court has failed to note that in a
\nmortgage there is transfer of an interest in the property by the mortgagor in
\nfavour of mortgagee and where the previous owner has mortgaged the
\nproperty during his lifetime, which is subsisting at the time of his death, then
\nafter his death his heir only inherits the mortgagor’s interest in the property.
\nBy discharging the mortgage debt his heir who has inherited the property
\nacquires the interest of the mortgagee in the property. As a result of such
\npayment made for the purpose of clearing off the mortgage the interest of the
\nmortgagee in the property has been acquired by the heir. The said payment
\nhas, therefore, to be regarded as ‘cost of acquisition’ under section 48, read
\nwith section 55(2). The position is, however, different where the mortgage is
\ncreated by the owner after he has acquired the property. The clearing off the
\nmortgage debt by him prior to transfer of the property would not entitle him
\nto claim deduction under section 48 because in such a case he did not acquire
\nany interest in the property subsequent to his acquiring the same. In Daksha
\nRamanlal’s case (supra) the Gujarat High Court has rightly held that the
\npayment made by a person for the purpose of clearing off the mortgage
\ncreated by the previous owner is to be treated as cost of acquisition of the
\ninterest of the mortgagee in the property and is deductible under section 48.\u201d
\n(underlined for emphasis by me)
\n10. Further, in the case of CIT vs. Attilli N. Rao [2001] 252 ITR 880 (SC) the
\nquestion before the Hon’ble Supreme Court was as under:
\n\u201c1. Whether on the facts and in the circumstances of the case and in law, the
\nAppellate Tribunal was correct in holding that the amount realised by the sale
\nof the assessee’s interest in the property was only Rs. 4,33,960 i.e., Rs.
\n5,62,980 minus Rs. 1,29,020 ?
\n50
\nITA 4964\/Mum\/2013
\n2. Whether on the facts and in the circumstances of the case and in law, the
\nAppellate Tribunal was correct in holding that the amount realised under the
\ncharge or mortgage by the Government by public auction does not partake of
\nthe character of ‘full value of consideration’ envisaged under section 48 of the
\nIncome-tax Act ?
\n3. Whether on the facts and in the circumstances of the case and in law, the
\nAppellate Tribunal was justified in holding that the amount payable by the
\nassessee in discharge of the mortgage debt to the Government on the sale of
\nproperty was an expenditure incurred towards the cost of acquisition of the
\ncapital asset and deductible under section 48 of the Income-tax Act?
\n4. Whether on the facts and in the circumstances of the case and in law, the
\nAppellate Tribunal was correct in holding that the assessee was not vested
\nwith full interest in the property sold and capital gains be computed only with
\nreference to the price realised towards his interest with property ?\u201d
\n(underlined for emphasis by me)
\nWhile answering the above questions, the Hon’ble Supreme Court held as
\nunder:-
\n\u201c8. We are of the view that the Tribunal and the High Court were in error.
\nWhat was sold by the State at the auction was the immovable property that
\nbelonged to the assessee. The price that was realised therefore belonged to
\nthe assessee. From out of that price, the State deducted its dues towards
\n“kits” and interest due from the assessee and paid over the balance to him.
\nThe capital gain that the assessee made was on the immovable property
\nthat belonged to him. Therefore, it is on the full price realised (less admitted
\ndeductions) that the capital gain and the tax thereon has to be computed.\u201d
\n(underlined for emphasis by me)
\n11. Further, the Hon’ble Supreme Court in the case of CIT vs. Sitaldas
\nTirathdas [1961] 41 ITR 367 has laid down following test with regard to \u2018diversion
\n51
\nITA 4964\/Mum\/2013
\nof income by overriding title\u2019. The relevant para of the said judgment is
\nreproduced hereunder:-
\n\u201cIn our opinion, the true test is whether the amount sought to be deducted, in
\ntruth, never reached the assessee as his income. Obligations, no doubt, there
\nare in every case, but it is the nature of the obligation which is the decisive
\nfact. There is a difference between an amount which a person is obliged to
\napply out of his income and an amount which by the nature of the obligation
\ncannot be said to be a part of the income of the assessee. Where by the
\nobligation income is diverted before it reaches the assessee, it is deductible;
\nbut where the income is required to be applied to discharge an obligation
\nafter such income reaches the assessee, the same consequence, in law, does
\nnot follow. It is the first kind of payment which can truly be excused and not
\nthe second. The second payment is merely an obligation to pay another a
\nportion of one’s own income, which has been received and is since applied.
\nThe first is a case in which the income never reaches the assessee, who even if
\nhe were to collect it, does so, not as part of his income, but for and on behalf
\nof the person to whom it is payable.\u201d
\n(underlined for emphasis by me)
\n12. It is evident from the aforesaid rulings of the Hon’ble Supreme Court,
\nwhich have been relied by the learned Judicial Member, that when the charge on
\nthe property has been created by the assessee himself, he cannot claim
\ndeduction of the principal amount of the loan either as expenditure under
\nSection 48 of the Act or as \u2018diversion of income by overriding title\u2019. To this extent,
\nI concur with the view of the learned Judicial Member. In the case of Attilli N.
\nRao (supra), the Hon’ble Supreme Court, while arriving at the conclusion,
\nobserved that at the time when the property was sold, the property belonged to
\nthe assessee and, therefore, the sale consideration of the said property also
\nbelonged to the assessee and denied the deduction claimed by the assessee
\nfrom the full value of consideration received on sale of property. This aspect
\n52
\nITA 4964\/Mum\/2013
\nneeds to be analysed in the facts of the present case to decide whether the ratio
\nlaid down in the case of Attilli N. Rao (supra) still holds good.
\n13. In the case of Sitaldas Tirathdas (supra), the Hon’ble Supreme Court has
\nlaid down the test that it is the nature of obligation which is the decisive test.
\nOstensibly, there is a difference between the nature of an amount which an
\nassessee is obliged to apply out of his income and the amount which does not
\nreach the assessee\u2019s hands so as not to form part of the total income of the
\nassessee.
\n14. The learned representative for the assessee has also drawn my attention
\nto the provisions of Section 13 of the SARFAESI Act, which read as under:-
\n\u201cEnforcement of security interest.
\n13. (1) Notwithstanding anything contained in section 69 or section 69A of the
\nTransfer of Property Act, 1882 (4 of 1882), any security interest created in
\nfavour of any secured creditor may be enforced, without the intervention of
\nthe court or tribunal, by such creditor in accordance with the provisions of this
\nAct.
\n(2) Where any borrower, who is under a liability to a secured creditor under a
\nsecurity agreement, makes any default in repayment of secured debt or any
\ninstalment thereof, and his account in respect of such debt is classified by the
\nsecured creditor as non-performing asset, then, the secured creditor may
\nrequire the borrower by notice in writing to discharge in full his liabilities to
\nthe secured creditor within sixty days from the date of notice failing which the
\nsecured creditor shall be entitled to exercise all or any of the rights under subsection
\n(4) :
\n[Provided that\u2014
\n(i) the requirement of classification of secured debt as nonperforming
\nasset under this sub-section shall not apply to a
\nborrower who has raised funds through issue of debt
\nsecurities; and
\n53
\nITA 4964\/Mum\/2013
\n(ii) in the event of default, the debenture trustee shall be
\nentitled to enforce security interest in the same manner as
\nprovided under this section with such modifications as may
\nbe necessary and in accordance with the terms and
\nconditions of security documents executed in favour of the
\ndebenture trustee. ]
\n(3) The notice referred to in sub-section (2) shall give details of the amount
\npayable by the borrower and the secured assets intended to be enforced by
\nthe secured creditor in the event of non-payment of secured debts by the
\nborrower.
\n[(3A) If, on receipt of the notice under sub-section (2), the borrower makes any
\nrepresentation or raises any objection, the secured creditor shall consider such
\nrepresentation or objection and if the secured creditor comes to the conclusion
\nthat such representation or objection is not acceptable or tenable, he shall
\ncommunicate [within fifteen days] of receipt of such representation or
\nobjection the reasons for non-acceptance of the representation or objection to
\nthe borrower:
\nProvided that the reasons so communicated or the likely action of the secured
\ncreditor at the stage of communication of reasons shall not confer any right
\nupon the borrower to prefer an application to the Debts Recovery Tribunal
\nunder section 17 or the Court of District Judge under section 17A.]
\n(4) In case the borrower fails to discharge his liability in full within the period
\nspecified in sub-section (2), the secured creditor may take recourse to one or
\nmore of the following measures to recover his secured debt, namely :\u2014
\n(a) take possession of the secured assets of the borrower including the
\nright to transfer by way of lease, assignment or sale for realising
\nthe secured asset;
\n[(b) take over the management of the business of the borrower
\nincluding the right to transfer by way of lease, assignment or sale
\nfor realising the secured asset :
\nProvided that the right to transfer by way of lease, assignment or
\nsale shall be exercised only where the substantial part of the
\nbusiness of the borrower is held as security for the debt :
\nProvided further that where the management of whole of the
\nbusiness or part of the business is severable, the secured creditor
\n54
\nITA 4964\/Mum\/2013
\nshall take over the management of such business of the borrower
\nwhich is relatable to the security for the debt;]
\n(c) appoint any person (hereafter referred to as the manager), to
\nmanage the secured assets the possession of which has been taken
\nover by the secured creditor;
\n(d) require at any time by notice in writing, any person who has
\nacquired any of the secured assets from the borrower and from
\nwhom any money is due or may become due to the borrower, to
\npay the secured creditor, so much of the money as is sufficient to
\npay the secured debt.
\n(5) Any payment made by any person referred to in clause (d) of sub-section
\n(4) to the secured creditor shall give such person a valid discharge as if he has
\nmade payment to the borrower.
\n[(5A) Where the sale of an immovable property, for which a reserve price has
\nbeen specified, has been postponed for want of a bid of an amount not less
\nthan such reserve price, it shall be lawful for any officer of the secured
\ncreditor, if so authorised by the secured creditor in this behalf, to bid for the
\nimmovable property on behalf of the secured creditor at any subsequent sale.
\n(5B) Where the secured creditor, referred to in sub-section (5A), is declared to
\nbe the purchaser of the immovable property at any subsequent sale, the
\namount of the purchase price shall be adjusted towards the amount of the
\nclaim of the secured creditor for which the auction of enforcement of security
\ninterest is taken by the secured creditor, under sub-section (4) of section 13.
\n(5C) The provisions of section 9 of the Banking Regulation Act, 1949 (10 of
\n1949) shall, as far as may be, apply to the immovable property acquired by
\nsecured creditor under sub-section (5A).]
\n(6) Any transfer of secured asset after taking possession thereof or take over
\nof management under sub-section (4), by the secured creditor or by the
\nmanager on behalf of the secured creditor shall vest in the transferee all rights
\nin, or in relation to, the secured asset transferred as if the transfer had been
\nmade by the owner of such secured asset.
\n(7) Where any action has been taken against a borrower under the provisions
\nof sub-section (4), all costs, charges and expenses which, in the opinion of the
\nsecured creditor, have been properly incurred by him or any expenses
\nincidental thereto, shall be recoverable from the borrower and the money
\nwhich is received by the secured creditor shall, in the absence of any contract
\n55
\nITA 4964\/Mum\/2013
\nto the contrary, be held by him in trust, to be applied, firstly, in payment of
\nsuch costs, charges and expenses and secondly, in discharge of the dues of the
\nsecured creditor and the residue of the money so received shall be paid to the
\nperson entitled thereto in accordance with his rights and interests.
\n[ (8) Where the amount of dues of the secured creditor together with all costs,
\ncharges and expenses incurred by him is tendered to the secured creditor at
\nany time before the date of publication of notice for public auction or inviting
\nquotations or tender from public or private treaty for transfer by way of lease,
\nassignment or sale of the secured assets,\u2014
\n(i) the secured assets shall not be transferred by way of lease
\nassignment or sale by the secured creditor; and
\n(ii) in case, any step has been taken by the secured creditor for transfer
\nby way of lease or assignment or sale of the assets before tendering
\nof such amount under this sub-section, no further step shall be taken
\nby such secured creditor for transfer by way of lease or assignment
\nor sale of such secured assets. ]
\n(9) [Subject to the provisions of the Insolvency and Bankruptcy Code, 2016, in
\nthe case of] financing of a financial asset by more than one secured creditors
\nor joint financing of a financial asset by secured creditors, no secured creditor
\nshall be entitled to exercise any or all of the rights conferred on him under or
\npursuant to sub-section (4) unless exercise of such right is agreed upon by the
\nsecured creditors representing not less than [sixty per cent] in value of the
\namount outstanding as on a record date and such action shall be binding on
\nall the secured creditors :
\nProvided that in the case of a company in liquidation, the amount realised
\nfrom the sale of secured assets shall be distributed in accordance with the
\nprovisions of section 529A of the Companies Act, 1956 (1 of 1956) :
\nProvided further that in the case of a company being wound up on or after the
\ncommencement of this Act, the secured creditor of such company, who opts to
\nrealise his security instead of relinquishing his security and proving his debt
\nunder proviso to sub-section (1) of section 529 of the Companies Act, 1956 (1
\nof 1956), may retain the sale proceeds of his secured assets after depositing
\nthe workmen’s dues with the liquidator in accordance with the provisions of
\nsection 529A of that Act :
\nProvided also that the liquidator referred to in the second proviso shall
\nintimate the secured creditor the workmen’s dues in accordance with the
\n56
\nITA 4964\/Mum\/2013
\nprovisions of section 529A of the Companies Act, 1956 (1 of 1956) and in case
\nsuch workmen’s dues cannot be ascertained, the liquidator shall intimate the
\nestimated amount of workmen’s dues under that section to the secured
\ncreditor and in such case the secured creditor may retain the sale proceeds of
\nthe secured assets after depositing the amount of such estimated dues with
\nthe liquidator :
\nProvided also that in case the secured creditor deposits the estimated amount
\nof workmen’s dues, such creditor shall be liable to pay the balance of the
\nworkmen’s dues or entitled to receive the excess amount, if any, deposited by
\nthe secured creditor with the liquidator :
\nProvided also that the secured creditor shall furnish an undertaking to the
\nliquidator to pay the balance of the workmen’s dues, if any.
\nExplanation.\u2014For the purposes of this sub-section,\u2014
\n(a) “record date” means the date agreed upon by the secured
\ncreditors representing not less than [sixty per cent] in value of the
\namount outstanding on such date;
\n(b) “amount outstanding” shall include principal, interest and any
\nother dues payable by the borrower to the secured creditor in
\nrespect of secured asset as per the books of account of the
\nsecured creditor.
\n(10) Where dues of the secured creditor are not fully satisfied with the sale
\nproceeds of the secured assets, the secured creditor may file an application in
\nthe form and manner as may be prescribed to the Debts Recovery Tribunal
\nhaving jurisdiction or a competent court, as the case may be, for recovery of
\nthe balance amount from the borrower.
\n(11) Without prejudice to the rights conferred on the secured creditor under or
\nby this section, the secured creditor shall be entitled to proceed against the
\nguarantors or sell the pledged assets without first taking any of the measures
\nspecified in clauses (a) to (d) of sub-section (4) in relation to the secured assets
\nunder this Act.
\n(12) The rights of a secured creditor under this Act may be exercised by one or
\nmore of his officers authorised in this behalf in such manner as may be
\nprescribed.
\n(13) No borrower shall, after receipt of notice referred to in sub-section (2),
\ntransfer by way of sale, lease or otherwise (other than in the ordinary course
\n57
\nITA 4964\/Mum\/2013
\nof his business) any of his secured assets referred to in the notice, without
\nprior written consent of the secured creditor.\u201d
\nSub-section (2) of Section 13 of the SARFAESI Act provides that if the borrower
\ndefaults in repayment of loan or any instalment thereof and his account is
\nclassified as a Non-Performing Asset, then the secured creditor shall issue a
\nnotice requiring him to make the payment within sixty days, failing which the
\nsecured creditor shall exercise his rights conferred under Sub-section (4) of the
\nSARFAESI Act. Sub-section (4) of SARFAESI Act provides that if the borrower fails
\nto make payment within the time specified in the notice issued under Subsection
\n(2), the secured creditor shall have right to exercise various options
\nwhich, inter-alia, includes right to take possession of the secured asset and the
\nright to transfer by way of lease, assignment or sale for realising the secured
\nasset. Thus, Sub-section (4) of Section 13 of SARFAESI Act provides the secured
\ncreditor with the right to transfer the secured asset in order to realise the
\nsecured debt.
\n15. Further, on perusal of Sub-section (13) of Section 13 of SARFAESI Act, I find
\nthat once the borrower receives notice under Sub-section (2) of the SARFAESI
\nAct, his right to part with the property is restricted; and, the borrower cannot
\ntransfer the secured asset by way of sale, lease or otherwise without prior
\nwritten consent of the secured creditor.
\n16. Thus, in sum and substance, I find that once the borrower defaults in
\nrepayment of loan or instalment and the secured creditor issues the notice
\nspecified in Sub-section (2) of Section 13 of the SARFAESI Act, the right of the
\nborrower with respect to the secured asset gets restricted, and he is not allowed
\n58
\nITA 4964\/Mum\/2013
\nto part with the secured asset without the prior approval of the secured creditor.
\nFurther, on non-repayment of loan or instalment amount within the period
\nspecified in the notice issued under Sub-section (2) of Section 13 of the SARFAESI
\nAct, all the rights in the secured asset get vested with the secured creditor and
\nthe borrower has no right in the said asset. The borrower is not free to decide
\neven the way in which the secured asset shall be parted with. It is the sole
\ndiscretion of the secured creditor as to how the secured asset shall be dealt with.
\nThis right in favour of the secured creditor is created by virtue of SARFAESI Act;
\nand, this has been interpreted by the learned representative for the assessee to
\nsay that the mortgaged property vested with KMBL and, therefore, the property
\nwas sold by KMBL in its own right. In my considered opinion, the fall-out of noncompliance
\nenvisaged in Sub-section (2) of Section 13 of the SARFAESI Act
\nprovides the secured creditor all or any of the rights enumerated in Sub-section
\n(4) thereof. Clause (a) of Sub-section (4) of Section 13 of the SARFAESI Act is
\nbeing sought to be understood by the assessee to mean taking possession of the
\nsecured asset by KMBL as an owner per se. So however, in my considered
\nopinion, the reading of clause (a) of Sub-section (4) of Section 13 of the SARFAESI
\nAct does not justify the aforesaid interpretation. Sub-section (4) of Section 13 of
\nthe SARFAESI Act says \u201cIn case the borrower fails to discharge his liability
\n……………………. the secured creditor may take recourse ……………………… to
\nrecover his secured debt ………….\u201d. Furthermore, clause (a) of Sub-section (4) of
\nSection 13 of the SARFAESI Act, inter-alia, says \u201ctake possession of the secured
\nassets ………………. including the right to transfer ……………………. for realising the
\nsecured asset\u201d. Quite clearly, vesting of the secured asset with the secured
\ncreditor is prescribed by SARFAESI Act to enable the secured creditor \u201cto recover
\nhis secured debt\u201d including, inter-alia, empowering the secured creditor to take
\npossession and transfer by way of lease, assignment or sale the secured asset
\n59
\nITA 4964\/Mum\/2013
\n\u201cfor realising the secured asset\u201d. Therefore, in my considered opinion, the stand
\nof the assessee (on the strength of SARFAESI Act) that the mortgaged property
\nvested with KMBL and to say that the consideration received by KMBL on
\ntransfer of said property never accrued to the assessee as the asset did not
\nbelong to the assessee is untenable given the mandate of the SARFAESI Act.
\n17. I find that in the present case the assessee defaulted in repayment of loan
\nto KMBL and KMBL classified the account of the assessee as Non-Performing
\nAsset which is the precondition before issuing notice under Sub-section (2) of
\nSection 13 of the SARFAESI Act. The assessee was thus issued notice under Subsection
\n(2) of Section 13 of the SARFAESI Act dated 30.11.2009. The assessee
\nfailed to make payment to the secured creditor within the period specified in the
\nnotice issued under Sub-section (2) of Section 13 of the SARFAESI Act. Thus, by
\nvirtue of Sub-section (4) of Section 13 of the SARFAESI Act, KMBL was vested
\nwith the option to sell the secured asset, which is represented by plots, in the
\npresent case. KMBL invoked the SARFAESI Act and accordingly took possession
\nof the plots, sold them and recovered the amount of loan liability outstanding
\nfrom the assessee.
\n18. The situation can also be seen de hors the SARFAESI Act. The assessee in
\nthe present case availed mortgage loan from KMBL and, one of the condition was
\nthat if the assessee defaults in repayment of loan and interest, the mortgaged
\nproperty will be sold by KMBL to recover the outstanding loan and interest
\namount from the assessee. The assessee and KMBL, both were aware of this fact
\nat the time of advancing of loan by KMBL to the assessee; and, the assessee
\nvoluntarily chose to enter into such an arrangement wherein property owned by
\nit was mortgaged to the bank as security; admittedly, assessee agreed to the
\n60
\nITA 4964\/Mum\/2013
\ncondition of disposal of the property by KMBL in case of default in repayment of
\nloan by it. This arrangement, even without force of any law, was clear and
\nunambiguous. Thus, it was only a voluntary action on the part of the assessee to
\nenter into such an obligation and assessee was not compelled by law or any
\nother obligation beyond it\u2019s control to enter into such an arrangement. Once
\nthat is so, any action taken by KMBL to enforce it\u2019s right to recover the amount
\nwhich, in the present case, is right to sell the property to recover amount cannot
\nbe said to be transaction beyond the control of the assessee. Thus, the amount
\nrecovered by KMBL can by no stretch of imagination be treated as \u2018diversion of
\nincome by overriding title\u2019. The principle of \u2018diversion of income by overriding
\ntitle\u2019 applies when the transaction is beyond the control of the assessee due to
\nwhich assessee has to make commitment to either divert it\u2019s income or part with
\nincome earned by it in a particular manner. The principle of \u2018diversion of income
\nby overriding title\u2019 has been laid down by the courts to overcome the situation
\nwherein an assessee does not have a free hand on the amount earned by it or is
\nin fact not received by an assessee due to circumstances beyond it\u2019s control.
\nSuch principle would not be attracted in cases wherein assessee by his own past
\naction creates a future obligation for himself to utilize the amount in a particular
\nmanner. Thus, the claim of the assessee cannot be accepted in the facts of the
\npresent case.
\n19. Section 13 of the SARFAESI Act cannot come to the rescue of the assessee.
\nI find that at the time of entering into mortgage agreement assessee was well
\naware of the consequences of non-payment of loan amount which, inter-alia,
\nincluded procedure of recovery of amount and sale of mortgage asset by the
\nsecured creditor. It is not something new or some unforeseen event which
\nassessee was not aware of. Having complete knowledge of the consequences of
\n61
\nITA 4964\/Mum\/2013
\ndefault in repayment of loan, assessee still chose to enter into such an
\narrangement. So it is an action of the assessee, which has created the instant
\nobligation on itself. Insofar as the argument of the learned representative that
\nthe instant obligation was not voluntary and was mandated by the SARFAESI Act,
\nin my view, the same is quite misplaced inasmuch as it is only the voluntary act
\nof the assessee of entering into mortgage loan arrangement with KMBL and the
\nsubsequent default in repayment which has triggered Sub-section (13) of Section
\n13 of the SARFAESI Act placing restriction on the assessee to transfer the
\nmortgaged\/secured asset by way of sale, lease or otherwise without the prior
\nconsent of KMBL. Alternatively, I find that SARFAESI Act merely provides a
\nrecovery mechanism and nothing else. The SARFAESI Act cannot be interpreted
\nto mean that it has created right of \u2018diversion of income by overriding title\u2019.
\nWhile interpreting the law, due regard must be given to the intent and purpose
\nof the law. The purpose of SARFAESI Act, and which clearly emerges from the
\nphraseology of Section 13 of SARFAESI Act, is to effectuate and expedite the
\nrecovery of secured interest of the secured creditor and certainly not, so far as
\nthe present case is concerned, to reduce or to impair the provisions of the Act in
\ndetermination of income-tax liability of the assessee.
\n20. In my considered opinion, so far as the instant dispute is concerned, the
\nlegal position prevailing prior to SARFAESI Act is also germane even after the
\nenactment of SARFAESI Act. The law laid down by the Hon’ble Courts with
\nrespect to \u2018diversion of income by overriding title\u2019 and deduction to be claimed
\nunder Section 48 of the Act while computing the income from Capital Gains,
\nwhich are discussed by the ld. Judicial Member and also relied upon by the ld.
\nDR, are still good law, and is fully applicable in the instant case.
\n62
\nITA 4964\/Mum\/2013
\n21. In view of the above reasoning, I hold that in the present case there was
\nno diversion of sale proceeds by overriding title, but on the contrary, there is
\nonly a mere application of the sale proceeds realised on sale of plots towards the
\ndischarge of outstanding loan liability of the assessee. I also hold that assessee
\ncannot claim any part of such application as deduction for the purpose of
\ncomputing Capital Gain in terms of Section 48 of the Act.
\n22. I thus agree with the view taken by the learned Judicial Member that the
\nconsideration from sale of property to the extent of principal component of loan
\nadjusted by the bank cannot be treated as \u2018diversion of income by overriding title\u2019
\nand was thus not deductible from the total consideration accrued to the
\nassessee from sale of property.
\n23. In view of the foregoing discussion, the questions put forth before me are
\nanswered in negative, and against the assessee. The decision arrived at by
\nlearned Judicial Member is the correct view, and I concur with the view adopted
\nby the learned Judicial Member on this issue.
\n24. The Registry of the Tribunal is directed to list the appeal before the
\nDivision Bench for passing the final order in accordance with the majority view.
\nSd\/-
\n(G.S. PANNU)
\nVICE PRESIDENT
\nMumbai, Dated 10th May, 2019\u201d
\n63
\nITA 4964\/Mum\/2013
\nPer Pawan Singh, J.M
\n4. In accordance with the majority view, we hold that the grounds of
\nappeal raised by the assessee are dismissed.
\n3. In the result, appeal filed by the assessee is dismissed.
\nOrder pronounced in the open court on 05-09-2019.
\nSd\/- Sd\/-
\n(Rajesh Kumar ) (Pawan Singh)
\nACCOUNTANT MEMBER JUDICIALMEMBER
\nMumbai, Dt : 5th September, 2019
\nPk\/-
\nCopy to :
\n1. Appellant
\n2. Respondent
\n3. CIT(A)
\n4. CIT
\n5. DR
\n\/True copy\/ By order
\nAsstt. Registrar, ITAT, Mumbai<\/p>\n","protected":false},"excerpt":{"rendered":"
I thus agree with the view taken by the learned Judicial Member that the consideration from sale of property to the extent of principal component of loan adjusted by the bank cannot be treated as \u2018diversion of income by overriding title\u2019 and was thus not deductible from the total consideration accrued to the assessee from sale of property. In my considered opinion, so far as the instant dispute is concerned, the legal position prevailing prior to SARFAESI Act is also germane even after the enactment of SARFAESI Act<\/p>\n