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Income Tax Query II

Shefali Bajpai (Article Assitant & CA Final Student) (1148 Points)

28 December 2008

Can the expenditure incurred by an assessee to remove an encumbrance be allowed as a deduction u/s 48, in the following cases:-

Ø where the mortgage was created by the assessee himself;

Ø where the mortgage was created by the previous owner.

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4 Replies

CA. Rajeev Aggarwal (Chartered Accountant) (3424 Points)
Replied 28 December 2008

RM. ARUNACHALAM v CIT (SC)

Facts – Mr. D purchased the house for Rs.10L, and took a loan of Rs.8L by mortgage it. Mr. D died and his son Mr. E inherited the property. Mr. E discharges the loan of Rs.8L and clears the mortgage of property. Mr. E sold the property for Rs.30L, and for computing the capital gains he take the COA as Rs.18L. AO is of the view that the cost to the previous owner is Rs.10L

Held - After the death of Mr. D his legal heir inherits only the mortgagor’s interest in the property. By discharging the mortgage debt his heir acquires the interest of the mortgagee in the property. The said payment is therefore regarded as COA. (Logically it should be treated as COI and not COA)

V.S.M.R. JAGDISH CHANDRAN v CIT (SC) and ROSHANBABU MOHAMMED HUSSEIN MERCHANT

Facts – Mr. A purchased the house for Rs.14L, and took a loan of Rs.9L by mortgage it. At the time of selling the property he cleared the mortgage debt and paid Rs.9L. He argues that the said payment should be treated as COI to the property.

Held - This was not the case where the property has been acquired from a previous owner as was the case of RM. ARUNCHALAM v CIT. Since in the present case the mortgage was created by the assessee himself, thus there will be no tax treatment of this payment and the same can’t be said COA or COI.

Hence Expenditure incurred by assessee to remove encumbrance created by assessee himself on property which was acquired by assessee without any encumbrance is not allowed deduction u/s 48.