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PETITIONER: V.S.M.R. JAGADISHCHANDRAN (DEAD) BY L.RS,

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, MADRAS

DATE OF JUDGMENT:       09/07/1997

BENCH: S.C. AARAWAL, D.P. WADHWA

ACT:

HEADNOTE:

JUDGMENT:                      J U D G M E N T S      S. C. AGRAWAL, J,:      Special leave granted.      This appeal  by the  assessee is  directed against  the order dated July 25, 1984 passed by the 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  questions of law  to the High court:-      "1. Whether  the Tribunal was right      in holding  that the  levy  of  the      capital gains  of Rs.  68,400/-  is      proper  under     the   facts   and      circumstances of the case ?      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 house  property No.    22,  Chariman Muthurma Iyer  Road ,  Madurai for  a sum   of  Rs. 90,000/- subject to  incumbrance in  the assessment  year 1975-76 and for the same  assessment year he sold plot No, 1, 3 and half of plot  No. 4  in T.S.  No. 831/1 for a sum of Rs. 12,600/- The 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 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  acquisition of the properties and that in any event the  debts may  be treated  as   the cost of obtaining clear title  to the  property.   The  Appellate    Assistant Commissioner   rejected the  said contention.   He, however,

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upheld the  contention of  the assessee  that there  was  an overriding title  of the  creditors in  respect of  the sale proceeds end,   therefore, there was  diversion at source on their basis  of such overriding title  and  the assessee was not liable  to charge  under the capital gains in respect of he sale   gains   of  Rs. 68,400/- as computed by the Income Tax officer.   The  Tribunal,  following the decision of the Kerala High court  in Ambat Echukutty Menon  v. commissioner of Income  Tax, (1978)  111 ITE 880, and the decision of the madras High  Court in  commissioner of  Income  Tax.  v.  V. Indira, (1979)  119 ITR  837, held  that clearing    of  the mortgage  debt   could  neither   be  treated   as  cost  of acquisition’ nor  as an  ’cost of  improvement’ made  by the assessee.    The  Tribunal,    therefore,    held  that  the deduction of the capital gains was  not justified. Since the Tribunal declined  to refer  to the High court  the question referred to  above, the  assessee filed an application under section 256  (2) of the Act before the High Court  which has been rejected  by the  impugned order.  The High  Court  has relied upon the decision of the Full Bench of the High Court in s.  Valliammai &  Anr.    V.  Commissioner of Income Tax, (1981) 127  ITR 713,  and has  held  that by discharging the mortgage debt  subsisting on  the  property  which  was  the subject matter  of a  sale,   the  assessee  was  no  either improving or  perfecting his title or improving the property in  any   manner  and,   therefore,  the   amount  paid  for discharging the morlgage debt cannot  be taken to be for the cost  of acquisition  as contended by the  assessee.      In Civil  Appeals  Nos. 6098-6101 of 1983 filed against the judgment  of the Full Bench of  the Madras High Court in S. Valliammai  & Anr.  V. Commissioner of Income Tax (supra) we have   examined the correctness of the view of the Kerala High Court   in  ambat Echukutty  Menon V.  commissioner  of Income Tax   (supra)  and have held  that the said  decision does not  lay down   the  correct law in so far  as it holds that where  the previous  owner had  mortgaged the  property during   his life  time  the clearing  off the mortgage debt by his   successor   can  neither   be treated  as ’Costs of acquisition’ nor  as ’costs  of improvement’  made   by  the assessee. It  has   been held  that  where  a  mortgage  was created by  the previous  owner during his time and the same was subsisting  on the  date of  his death,   the  successor obtains only the mortgagor’s interest in the property and by discharging the mortgage debt he    acquires the mortgagee’s interest in  the property  and,  therefore, the amount  paid to clear off the mortgage  is the cost of acquisition of the mortgagee’s   interest in  the property which is  deductible as cost  of acquisition  under   section  48 of the Act,  In the present  case , we find that the mortgage was cleated by the   assessee himself.   It  is   not   a case   where  the property   had been   mortgaged  by the  previous  owner and the   assessee had  acquired only   the  mortgagee   by  the previous owner  and the  assessee had    acquired  only  the mortgagor’s  interest  in  the  property  mortgaged  and  by clearing the  same   he had  acquired   the interest  of the mortgagee in the said property.  The  question raised by the assessee in  the application   submitted    under    Section 256(2)   of the Act  do not,  therefore,  raise any arguable question   of law  and the  said   application   was rightly rejected by  the High  Court,   In the  circumstances,  even though we  are unable to agree  with the reasons given in to impugned order,  we are in agreement  with the order  of the High Court   dismissing  the application    filed  by    the assessee under  section 256(2) of the Act.      The appeal  is, therefore,  dismissed.   No order as to

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costs.