V.S.M.R. JAGDISHCHANDRAN (DEAD) BY LRS versus COMMISSIONER OF INCOME TAX, MADRAS

Citation: [1997] SUPP. 2 S.C.R. 83 · Decided: 09-07-1997 · Supreme Court of India · Bench: S.C. AGRAWAL · Disposal: Dismissed

Judgment (excerpt)

-~ . 
V.S.M.R. JAGDISHCHANDRAN (DEAD) BY LRs. 
A 
v. 
COMMISSIONER OF INCOME TAX, MADRAS 
JULY 9, 1997 
B 
[S.C. AGRAWAL AND D.P. WADHWA, .TJ.] 
Income tax : 
Capital Gai11s-<:omputatio11 of-Ded11ction1-'Cost of acquisition' or 
'cost of improvement' of capital asset-Where the mmtgage was created by C 
the assessee, mmtgage debt discharged by the asses see out of the sale proceeds 
of the enrnmbered immovable propeny-Held, not deductible from capital 
gains either as cost of acquisitio11 or as cost of improvement. 
Income Tax Act : 
Sections 45, 48 & 256(2 )-Reference-Questirm raised in assessee's 
application-Held, Assessee's applicaiio11 did not raise arguable question of 
law and High Cowt 1ightly rejected that applicatio11. 
D 
The assessee sold a house, subject to encumbrance and other plots E 
and Revenue computed the capital gains. The assessee challenged the said 
computation contending that the debts in respect of which the mortgage 
had been executed were discharged by the buyer out of the sale proceeds, 
and that the debts should be considered as increase in cost of acquisition 
of the properties and that in any event the debts may be created as F 
improvement to the properties or as the cost of obtaining clear title to the 
properties. The AAC, however, upheld the contention of the assessee that 
there was an overriding title of the creditors in respect of the sale proceeds 
and there was diversion at source on the basis of such overriding title and 
the assessee was not liable to be charged under the capital gains in respect G 
of the sale of properties. Tribunal held that the clearing of the mortgage 
debt could neither be treated as 'cost of acquisition' nor as 'cost of 
improvement' made by the assessee. The Tribunal, therefore, held that the 
deduction of the capital gains was not justified and declined to refer the 
question to the High Court. The assessee therefore filed an application 
under section 256(2) of the Act, which has been rejected hy the High Court. H 
83 
A 
B 
84 
SUPREME COURT REPORTS (1997) SUPP. 2 S.C.R. 
Dismissing the appeal, this Court 
HELD : The assessee failed to raise any arguable question oflaw and 
the said question was rightly rejected by the High Court. [86-D] 
Ambat Echkutty Menon v. CIT, (1978) 111 ITR 880, overruled. 
Commissioner of Income Tax v. V. Indira, (1979) 119 ITR 837 and S. 
Va/liammai v. CIT, (1981) 127 ITR 713, referred to. 
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4385 of 1997. 
C 
From the Judgment and Order dated 25.7.83 of the Madras High 
Court in T.C.P. No. 145 of 1983. 
Ms Baby Krishna for the Appellant. 
G.C Sharma, B.K. Prasad, B.S. Ahuja and C. Radha Krishna for the 
D Respondent. 
The Judgment of the Court was delivered by 
S. C. AGRAWAL, J. Special leave granted. 
E 
This appeal by the assessee is directed against the order dated July 
25, 1984 passed by Madras High Court in T.C. No. 145 of 1983 wherein 
the High Court on an application filed under Section 256(2) of the Act 
declined to direct the Tribunal to state a case and refer the following 
questi~ns of law to the High Court :-
F 
111. Whether the Tribunal was right in holding that the levy of the 
capital gains of Rs. 68,400 is proper under the facts and cir-
cumstances of the case ? 
G 
2. Whether the Tribunal was right in holding that mortgage debts 
does not constitute diversion at source ? 
3. Whether the debts discharged by the applicant on the properties 
cannot be said to enhance the cost of acquisition ?" 
The assessee sold a house property No. 22, Chairman Muthurama 
Iyer Road, Madurai for a sum of Rs. 90,000 subject to incumbrance in the 
H assessment year 1975-76 and for the same assessment year he sold plot Nos. 
; ..
V.S.M.R. JAGDISHCHANDRAN v. C.l.T. MADRAS [S.C. AGRAWAL,J.] 85 
1, 3 and half of plot No. 4 in T.S. No. 831/1 for a sum of Rs. 12,600. The A 
Income Tax Officer computed the capital gains in respect of the said 
properties at Rs. 68,400. The assessee questioned the computation of 
capital gains before the Appellate Assistant Commissioner and contended 
that the debts in respect of which mortgage had been executed were 
discharged by the buyer himself out of the sale proceeds, that the debts B 
should be considered as increase in cost of acquisition of the properties 
and that in any event the debts may be treated as improvement to the 
property or as the cost of obtaining clear title to the property. The 
Appellate Assistant Commissioner rejected the said 

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