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capital gain

Kapil (CA Practice) (120 Points)

29 April 2010

Please solve this problem.

X had taken a loan under registered mortgage deed dated 16-07-00 against the house, which was purchased by him on 26-03-81 for Rs.5 lakhs. The said property was inherited by his son `A' under will who for obtaining a clear title thereof had paid the outstanding amount of loan on 12-02-03 of Rs.15 lakhs. The said house property was sold by `A' on 16-03-03 for Rs.50 lakhs. State with reasons the amount chargeable to capital gains for A.Y. 2003-04 (Cost Inflation Index 447).

Note – Cost Inflation Index 447 had been erroneously printed as Cost of Index Rs.447 in the question paper.

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2 Replies

Amir (Learner) (4016 Points)
Replied 30 April 2010

Dear Kapil Sir,

One thing is sure that "Charges paid on redemption of mortgage created by previous owner are deductible"

Now next question arises that in which capacity this amount should be deducted.

There are different opinions that these expenses should be deducted as "Cost of acquisition" or "Expenses on Transfer"

It cannot be treated as "Cost of Improvement" since the courts have settled the issue that improvement should be related to "asset" & not to its "title"

So I am not sure with the computation part but if I have to put my money then I would say that "the amount of 15 Lakhs will be deducted but without any indexation.


		Inflation Index		Amount
Sales				5,000,000
Less ICOA -	500,000	4.47	2,235,000
Mortgage cgharges	1,500,000		1,500,000	3,735,000
LTCG				1,265,000

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Max Payne (employed) (2569 Points)
Replied 30 April 2010

Hi Amir bhai,

I found these 2 cases....

I also feel that indexation will not be allowed from 1981...

In Arunachalam (RM) v CIT (1997) 227 ITR 222 (SC), it was held that where the previous owner has mortgaged the property during his lifetime and the assessee, after inheriting the same, has discharged the mortgage debt, the amount paid by him for the purpose of clearing off the mortgage shall be regarded as cost of acquisition under Section 48 read with Section 55(2) of the Act.

However, when the mortgage is created by the owner after he has acquired the property, the clearing off debt by him prior to transfer of property would not entitle him to claim deduction under Section 48 of the Act because in such a case he did not acquire any interest in the property subsequent to his acquiring the same [Jagadish Chandran v CIT, (1997) 227 ITR 240 (SC)]