Madras H.C : It was the submission of the learned counsel for the assessee that the words “full value of the consideration received or accruing” found in Expln. 5 to s. 54E

High Court Of Madras

CIT vs. N.M.A. Mohammed Haniffa

Section 54E

Asst. Year 1979-80

R. Jayasimha Babu & Mrs. A. Subbulakshmy, JJ.

Tax Case No. 1029 of 1988

6th October, 1999

Counsel Appeared

C.V. Rajan, for the Applicant : T.N. Seetharaman, for the Respondent

JUDGMENT

R. JAYASIMHA BABU, J. :

It was the submission of the learned counsel for the assessee that the words “full value of the consideration received or accruing” found in Expln. 5 to s. 54E of the IT Act, mean only the actual amount received by the transferor of the capital asset, and would not include that part of the total consideration for the transfer, which is applied for the discharge of debts, more particularly debts secured by mortgage of the property transferred. Counsel contended that s. 54E of the IT Act is a beneficial provision intended to confer an advantage on the assessee and must be liberally construed so as to advance that object. It was also the submission of counsel that the method of calculation of capital gain under other provisions of the Act would have no bearing on the meaning to be assigned to the term ‘net consideration’ for which a special definition has been provided in Expln. 5 to s. 54E of the IT Act.

2. These arguments were advanced in the backdrop of the admitted factual position that the assessee had during the asst. yr. 1979-80, transferred immovable property for a total consideration of Rs. 15,15,000, and that the property at the time of the transfer was subject to a mortgage in favour of the State Bank of India, and further that the amount then due to the mortgagee, being a sum of Rs. 3,68,000 was paid by the vendee, that sum having been adjusted against the total consideration for the property. The assessee deposited a sum of Rs. 5,20,000 from the net consideration, which was received by him in a fixed deposit with the State Bank of India, claiming the benefit of the exemption under s. 54E(1) of the IT Act, more particularly, Expln. (1)(a)(vi), which exempts for the deposits made for a period not less than three years with the State Bank of India of the capital gains received or accruing to an assessee on transfer of capital assets. The assessee claimed that the amount so deposited by him should be, for the purpose of determining the proportion referred to in s. 54E(1)(b) of the Act considered along with the actual amount received by him, as the total consideration for the sale minus the amount paid to the mortgagee directly by the vendee. That claim of the assessee did not find acceptance by the ITO. The appeal against that order of the ITO also did not succeed. On further appeal to the Tribunal, the assessee’s argument found acceptance with the Tribunal, which held in favour of the assessee. The Revenue is now before us, questioning the correctness of the Tribunal’s view.

3. Sec. 54 of the Act is part of Chapter IV and s. E deals with the capital gains on transfer of capital assets in certain cases, where such gain is not to be charged to tax. The section opens with the words “Where the capital gain arises from the transfer of a capital asset………” Sec. 54E(1)(a) provides that if the cost of the new asset acquired by utilising the capital gain arising from the transfer of the long-term capital asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under s. 45 of the Act, and by sub-cl. (b) the extent of the exemption is made proportionate to the amount invested in the new asset, such proportion being calculated with reference to the total capital gain obtained on the transfer of the asset. ‘Net consideration’ is defined in Expln. 5, which reads as follows :

Explanation 5.—”Net consideration, in relation to the transfer of a capital asset, means the full value of consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.

4. The subject-matter of s. 54E of the Act is the extent, to which the capital gain arising from the transfer of a capital asset is to be exempted if one or more of the specified assets referred to in that section is acquired out of the proceeds of the sale of the original asset. From the total consideration received for the transfer, any expenditure incurred wholly and exclusively, in connection with such transfer is required to be deducted. No other deduction or reduction is permissible under Expln. 5. Though the term ‘net consideration’ is used, the Explanation makes it clear that the starting point for the calculation is the full value of the consideration received or accruing as the result of the transfer of the capital asset. As the expenditure incurred in connection with such transfer is not to be regarded as a capital gain, that amount is allowed to be deducted from the full value of the consideration.

5. The emphasis placed in the Explanation on the term ‘full value of the consideration’ clearly indicates that what is required to be taken note of, is the total consideration received for the transfer. In this context, the term ‘total’ and ‘full value’ would have the same meaning. The consideration may be received or it may accrue as a result of the transfer. The word ‘receive’ does not necessarily connote the actual receipt of the cash into the hands of the assessee-transferor. The discharge of the transferor’s liability can, in this context, also be regarded as a receipt by the transferor to the extent to which part of the consideration is retained by the transferee for such discharge.

6. The amount applied for such discharge is an amount, which comes out of the full value of the consideration and such amount is not a permissible deduction under Expln. 5. If the transferor, instead of receiving the full value himself and thereafter discharging the mortgage to which the property had been made subject, allows the transferee to retain and apply part of the total consideration to effect such discharge, such discharge by the vendee is on behalf of the vendor and the payment of money to the mortgagee is from out of the moneys payable by the vendee to the vendor. The amount so applied for discharge of the mortgage forms part of the total consideration irrespective of whether the vendee or the vendor discharges the mortgage.

The fact that s. 54E of the Act confers a benefit on the assessee by enabling him to avoid the payment of tax on the capital gains, by using the capital gain for investment in the specified asset, does not in anyway, alter the extent of the capital gain. Sec. 54E is not concerned with the computation of the capital gain, but with its application and if applied for acquiring assets specified therein the assessee may claim exemption from tax to the extent provided in the section.

The arguments advanced for the assessee are interesting, but is not possible for us to accept the submissions made by the learned counsel for the assessee. Though assessee had been successful in persuading the Tribunal to accept that view, the Tribunal was in error in taking the view that it did. It has been held by the Supreme Court in the case of Rm. Arunachalam vs. CIT (1997) 141 CTR (SC) 348 : (1997) 227 ITR 222 (SC) : TC S22.2360, that the clearing of the mortgage debt by an assessee prior to the transfer of the property, would not entitle him to a deduction under s. 48 of the Act. What is relevant is the cost of the acquisition and the total consideration for the transfer effected by the assessee. We, therefore, answer the question referred to us, viz., “Whether, on the facts and in the circumstances of the case, the amounts paid in discharge of mortgage debts in respect of the properties sold, should be excluded in arriving at the net consideration eligible for relief under s. 54E of the IT Act, 1961 ?”

in favour of the Revenue and against the assessee. No costs.

[Citation : 247 ITR 66]

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