Case on Capital Gains reinvested to repay mortgage by trust
[1998] 230 ITR 864 (BOM.)
HIGH COURT OF BOMBAY
Bafna Charitable Trust
v.
Commissioner of Income-tax
DR. B.P. SARAF AND DR. PRATIBHA UPASANI, JJ.
IT REFERENCE NO. 80 OF 1985
SEPTEMBER 24, 1997
JUDGMENT
Dr. B.P. Saraf, J.—By this reference under section 256(1) of the Income-tax Act, 1961 (for short "the Act"), the Income-tax Appellate Tribunal has referred the following questions of law to this court for opinion at the instance of the assessee:
"1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to exemption under section 11(1A) of the Income-tax Act, 1961, in respect of short-term capital gains of Rs. 1,51,040?
2. Whether, on the facts and in the circumstances of the case, the transaction of sale of the property coupled with the liability of Rs. 1,51,040 constituted a single transaction and, accordingly, the net consideration was only Rs. 2,11,040 within the meaning of section 11(1A) and the Explanation (iii) of the Income-tax Act, 1961?"
This reference pertains to the assessment year 1972-73, the previous year being the year ended on March 31, 1972. The material facts giving rise to this reference are as follows:
The assessee is a charitable trust. During the relevant assessment year, the assessee-trust sold its right to obtain the conveyance of certain immovable property, which was a capital asset, to a co-operative housing society for a sum of Rs. 3,62,340 and in that process, obtained capital gain of Rs. 1,51,040. The assessee thereafter advanced a sum of Rs. 2,10,000 to the purchaser and obtained an English mortgage of the plot of land so purchased by the co-operative society. The assessee claimed that it had acquired another capital asset for a sum of Rs. 2,10,000 and hence its income from capital gain was exempt under section 11(1A) of the Income-tax Act, 1961, (for short "the Act"). This claim of the assessee was rejected by the Income-tax Officer. He, therefore, determined the total income of the assessee-trust at Rs. 1,51,040 and forwarded the draft assessment order to the assessee. The assessee having objected to the draft assessment order, it was forwarded by the Income-tax Officer to the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner was of the opinion that the mortgage loan was not a capital asset and hence the investment made by the assessee did not fall within the provisions of section 11(1A) of the Act. He, therefore, held that the assessee was not entitled to exemption from tax in respect of the capital gain derived by it on the sale of the capital asset and confirmed the draft order of the Income-tax Officer and issued directions accordingly. The assessee appealed to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) held that the mortgage debt was a capital asset and it was not covered by any of the exclusions contained in section 2(14) of the Act. The Commissioner (Appeals), therefore, held that the assessee having acquired a mortgage debt, was entitled to exemption under section 11(1A) of the Act. Aggrieved by the order of the Commissioner (Appeals), the Revenue appealed to the Income-tax Appellate Tribunal. The Tribunal held that the English mortgage acquired by the assessee was not a capital asset within the meaning of section 2(14) of the Act, and hence, utilisation of the sale consideration of the capital asset transferred by the assessee for mortgage did not result in the acquisition of a new capital asset as required by section 11(1A)(a) of the Act. The Tribunal, therefore, held that the assessee was not entitled to any exemption in respect of the capital gain derived by it by transfer of the capital asset under section 11(1A) of the Act. Accordingly, the Tribunal set aside the order of the Commissioner (Appeals) and restored that of the Income-tax Officer. For the sake of completeness, the Tribunal also considered the alternate submission of the Revenue that even if the acquisition of mortgage debt was held to be acquisition of a capital asset and the assessee was held to be covered by the provisions of section 11(1A) of the Act, he would be entitled only to a partial exemption from capital gain because the amount that had been utilised in acquiring the new asset was only a part of the total consideration received by the assessee on transfer of the capital asset. The Tribunal accepted the above contention of the Revenue and held that the assessee having utilised for obtaining the English mortgage a sum of Rs. 2,10,000 only out of the net sale consideration of Rs. 3,62,340, it would be entitled to exemption of a portion of the short-term capital gains. Hence, this reference at the instance of the assessee.
Mr. S.E. Dastur, learned counsel for the assessee, submits that the Tribunal committed a manifest error of law in holding that the mortgage debt was not a capital asset within the meaning of section 2(14) of the Act and that the utilisation of the sale consideration or any part thereof for acquisition of the mortgage debt did not result in acquisition of a new capital asset. Counsel submits that it is well-settled that by reason of the creation of mortgage in favour of the assessee, it is the interest in the land itself which is acquired by the mortgagee which is a capital asset, within the meaning of section 2(14) of the Act. Reliance is placed in support of this contention on the decisions in Perumal Ammal v. Perumal Naicker, AIR [1921] Mad 137, Bank of Upper India Ltd. v. Fanny Skinner, AIR [1929] All 161, Prahlad Dalsukhrai v. Maganlal Muljibhai Tewar, AIR [1952] Bom 454; [1952] 54 Bom LR 519, Ram Shankar Lal v. Ganesh Prasad [1907] ILR 29 All 385, 391 and Muthu Vijia Raghunatha Ramachandra Vacha Mahali Thurai v. Venkatachallam Chetti [1897] ILR 20 Mad 35. Our attention was also drawn to the recent decision of the Supreme Court in RM. Arunachalam v. CIT [1997] 227 ITR 222, wherein it is reiterated that in a mortgage there is a transfer of interest in the property mortgaged. It was contended that the Tribunal was not justified in holding that by the mortgage the assessee did not acquire any capital asset and did not fall within the purview of section 11(1A) of the Act. According to learned counsel, in the instant case, the acquisition of mortgage of immovable property by the assessee squarely falls within the provisions of section 11(1A) of the Act, and hence, the assessee is entitled to the benefit thereof. Mr. Dastur further submits that though in the instant case, out of the aggregate sale consideration of Rs. 3,62,340, a sum of Rs. 2,10,000 only was utilised by the assessee for acquiring the mortgage of the property in question, the assessee would be entitled to get full exemption because out of the balance consideration, a sum of Rs. 1,51,300 was utilised by the assessee for paying the purchase consideration to his vendor and not for a part of the capital gains proportionate to the amount utilised by the acquisition of mortgage as held by the Tribunal.
Dr. V. Balasubramanian, learned counsel for the Revenue, relies on the reasoning of the Tribunal and submits that the Tribunal was justified in holding that the case of the assessee did not fall within the provisions of section 11(1A) of the Act.
We have carefully considered the rival submissions. The uncontroverted factual position in this case is that on July 19, 1971, the assessee entered into an agreement with the members of the Cama family ("Cama family"), for purchase of certain immovable property for a sum of Rs. 2,11,040. A sum of Rs. 50,000 was paid by the assessee at the time of execution of the said agreement and the balance amount of Rs. 1,51,300 was to be paid at the time of execution of the conveyance. On November 16, 1971, the assessee entered into an agreement with one Prithvi Vandan Co-operative Housing Society ("co-operative housing society"), by which the assessee transferred to the said society its right to obtain the conveyance of the immovable property from the Cama family for a sum of Rs. 3,62,340. In terms of the said agreement, the co-operative housing society was allowed to get the conveyance executed in its favour directly from the Cama family. The terms and conditions of the agreement also provided that the co-operative housing society would pay a sum of Rs. 1,51,300, which was payable by the assessee to the Cama family as a part of the consideration, to the Cama family on its behalf, and the balance consideration shall be paid to the assessee. Accordingly, in terms of the said agreement, the immovable property, which was the subject-matter of the agreement of sale, was conveyed by the Cama family in favour of the cooperative housing society. On the very same day, the assessee advanced a loan of Rs. 2,10,000 to the co-operative housing society and obtained an English mortgage of the property in its favour by way of security for the same. On November 16, 1971, a deed of English mortgage was executed by the co-operative housing society in favour of the assessee. The assessee claimed exemption under section 11(1A) of the Act on the basis of the above mortgage, as according to it, this amounted to acquisition of a capital asset by the assessee. The question that arises for consideration is whether the acquisition of mortgage of the property by the assessee amounts to acquisition of a capital asset for the purpose of section 11(1A) of the Act.
Section 11 of the Act grants exemption in respect of income derived from properties held under trust for charitable or religious purposes, subject to the conditions set out therein. One of the conditions is that the income is applied for charitable or religious purposes. Income derived from sale of capital assets is also Income-taxable in the hands of charitable institutions falling under section 11 of the Act. With a view to enable the trusts to get the benefit of exemption in respect of capital gains, sub-section (1A) was inserted in section 11 in 1971 by the Finance (No. 2) Act, 1971, with retrospective effect from the commencement of the Act, i.e., 1st April, 1962. It provides:
"(1A) For the purposes of sub-section (1),--
(a) where a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:--
(i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of such capital gain;
(ii) where only a part of the net consideration is utilised for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utilised exceeds the cost of the transferred asset;
Explanation.—In this sub-section,--
(i) 'appropriate fraction' means the fraction which represents the extent to which the income derived from the capital asset transferred was immediately before such transfer applicable to charitable or religious purposes;
(ii) 'cost of the transferred asset' means the aggregate of the cost of acquisition (as ascertained for the purposes of sections 48 and 49) of the capital asset which is the subject of the transfer and the cost of any improvement thereto within the meaning assigned to that expression in sub-clause (b) of clause (1) of section 55;
(iii) 'net consideration' means the full value of the 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".
It is clear from sub-section (1A) of section 11 of the Act that in a case where the assessee derives any capital gain from transfer of a capital asset held by it under trust for charitable or religious purposes, the capital gain arising from the transfer of such capital asset shall be deemed to have been applied for charitable or religious purposes to the extent specified therein, if the whole or any part of the sale consideration is utilised for acquiring another capital asset to be so held.
In the instant case, the assessee acquired a right to obtain conveyance of immovable property for a sum of Rs. 2,10,000. The said asset, admittedly, was a capital asset held by the assessee-trust. It was transferred by the assessee in favour of the co-operative housing society for a consideration of Rs. 3,62,340. In this process, there was capital gain of Rs. 1,51,040 in the hands of the assessee, which was liable to be subjected to tax unless either it was applied in the manner laid down in sub-section (1) of section 11 of the Act or utilised for acquiring another capital asset as provided in sub-section (1A) thereof. The assessee in this case acquired mortgage of the property from the co-operative housing society. The consideration for the same was Rs. 2,10,000. Thus, out of the net consideration of Rs. 3,62,240, the assessee utilised a sum of Rs. 2,10,000 in acquiring a mortgage of the property. The asset acquired by the assessee was the mortgage interest in the property, whereas the asset transferred by the assessee was merely the right to obtain conveyance of the property. The question that arises for consideration is whether the mortgage is a "capital asset" and whether advancing of money on mortgage can be regarded as utilisation for acquisition of another capital asset within the meaning of section 11(1A) of the Act.
"Capital asset" has been defined in clause (14) of section 2 of the Act to mean property of any kind held by an assessee, whether or not connected with his business or profession, except those specifically excluded. The exclusions are stock-in-trade, consumable stores or raw materials held for the business or profession, personal effects, agricultural lands and certain bonds. It is clear from the above definition that for the purpose of this clause, property is a word of the widest import and signifies every possible interest which a person can hold or enjoy except those specifically excluded. "Transfer" in relation to a capital asset, as defined in section 2(47) of the Act, includes sale, exchange, relinquishment of asset or the extinguishment of any rights therein, or the compulsory acquisition thereof under any law. The benefit of exemption under section 11(1) in respect of capital gains arising from transfer of a capital asset held under trust is available by virtue of sub-section (1A) if the whole or part of the net consideration is applied for acquiring another capital asset to be so held. So far as mortgage is concerned, it is well-settled that it is a transfer of interest in specific immovable property for the propose of securing the payment of money advanced. The definition of mortgage in section 58 of the Transfer of Property Act, 1882, also clearly says so. In an English mortgage, the mortgagor binds himself to repay the mortgage money on a certain date, and transfers the property absolutely to the mortgagee, subject, however, to a proviso that he would retransfer it to the mortgagor upon payment of the mortgage money as agreed. Thus, in an English mortgage, there is an absolute transfer of the mortgaged property from the mortgagor to the mortgagee. That being so, investment in the English mortgage of immovable property has to be regarded as utilisation for acquisition of another capital asset, viz., the English mortgage.
Reference may be made in this connection to the decision of the Madras High Court in Perumal Ammal v. Perumal Naicker, AIR [1921] Mad 137, where, dealing with the question whether transfer of mortgages by way of gift could be regarded as gifts of immovable property, it was observed that the mortgagee's interest in land had all along been transferable as immovable property. Similarly, in Bank of Upper India Ltd. v. Fanny Skinner, AIR [1929] All 161, the Allahabad High Court also held that the mortgagee's interest is not a mere right to recover the debt due but to have a charge on the property and to follow it wherever it goes. It was accordingly held that a sale of a mortgagee's interest can only be effected by means of a registered deed of transfer.
In Prahlad Dalsukhrai v. Maganlal Muljibhai Tewar, AIR [1952] Bom 454; [1952] 54 BLR 519, dealing with the nature of a mortgagee's interest, it was held by this court that under section 58(a) of the Transfer of Property Act, 1882, a mortgagee's interest in immovable property even in the case of a usufructuary mortgage is immovable property. It was observed that a mortgage is a transfer of an interest in specific immovable property, and what the mortgagee acquires under the transaction is a mortgagee's interest in specific immovable property which can only be immovable property. By reason of the creation of a mortgage, the totality of the rights of ownership which is enjoyed by the mortgagor is split up into what are called the mortgagee's interest in the property and the equity of redemption which the mortgagor retains in the property. These are two separate interests which are thus carved out by the creation of the mortgage. The mortgagee's interest in property which is thus created is immovable property.
In CIT v. Tata Services Ltd. [1980] 122 ITR 594 (Bom), a question arose before this court whether a right to obtain conveyance of immovable property is a capital asset within the meaning of section 2(14) of the Act. This court held (headnote):
"A contract for sale of land is capable of specific performance. It is also assignable. Therefore, a right to obtain conveyance of immovable property is clearly property as contemplated by section 2(14) of the Act".
The above decision was followed by this court in CIT v. Sterling Investment Corporation Ltd. [1980] 123 ITR 441, where it was held that the contractual right of a purchaser to obtain title to immovable property for a price, which is assignable, can be considered as property and, therefore, a capital asset. In CIT v. Vijay Flexible Containers [1990] 186 ITR 693 (Bom), it was reiterated by this court that the right to obtain a conveyance of immovable property falls within the expression "property of any kind" used in section 2(14) of the Act and is, consequently, a capital asset. It was held that the payment of earnest money in order to obtain such a right constitutes its cost of acquisition. Where such a right is given up, there is a transfer of a capital asset.
In A. Gasper v. CIT [1979] 117 ITR 581 (Cal), tenancy or leasehold right was also held to be a capital asset. In Rajabali Nazarali and Sons v. CIT [1987] 163 ITR 7, the Gujarat High Court held that a lease creates an interest in immovable property and transfer of a leasehold right amounts to transfer of a capital asset.
In RM. Arunachalam v. CIT [1997] 227 ITR 222, the Supreme Court while holding that a charge does not amount to a mortgage, observed that a charge differs from a mortgage in the sense that in a mortgage there is transfer of interest in the property mortgaged, in a charge no interest is created in the property changed, so as to reduce the full ownership to a limited ownership.
It is clear from the above discussion that a mortgage is a capital asset because by the mortgage there is a transfer of interest in the property mortgaged from the mortgagor to the mortgagee. The investment of the net consideration or any part thereof in acquiring the English mortgage, therefore, has to be regarded as utilisation for acquisition of another capital asset within the meaning of section 11(1A) of the Act.
In the instant case, when the mortgage was granted in favour of the assessee by the co-operative housing society, it was the owner of the said property. By the mortgage in favour of the assessee, there was a transfer of interest of the mortgagor in the property mortgaged to the assessee who was the mortgagee. As a result, the full ownership of the co-operative housing society was reduced to a limited ownership. In view of the above, we are of the clear opinion that the assessee was entitled to the benefit of exemption under section 11(1A) of the Act to the extent permissible thereunder.
This brings us to the next question as to whether the assessee is entitled to get full relief in respect of the capital gain or partial relief to be calculated in the manner set out in sub-section (1A) of section 11 of the Act. The net sale consideration in this case, admittedly, was Rs. 3,62,340 and the amount utilised for acquiring the mortgage was Rs. 2,10,000. The assessee had thus used only a part of the net consideration for acquiring a new capital asset. The assessee will, therefore, be entitled to exemption only of a part of the capital gains to be calculated in the manner laid down in section 11(1A)(a)(ii) of the Act. The Tribunal was justified in its conclusion in this regard.
Accordingly, we answer question No. 1 in the affirmative and in favour of the assessee. So far as question No. 2 is concerned, we answer the same in the negative, i.e., in favour of the Revenue and against the assessee.
This reference is disposed of accordingly with no order as to costs.
HIGH COURT OF BOMBAY
Bafna Charitable Trust
v.
Commissioner of Income-tax
DR. B.P. SARAF AND DR. PRATIBHA UPASANI, JJ.
IT REFERENCE NO. 80 OF 1985
SEPTEMBER 24, 1997
JUDGMENT
Dr. B.P. Saraf, J.—By this reference under section 256(1) of the Income-tax Act, 1961 (for short "the Act"), the Income-tax Appellate Tribunal has referred the following questions of law to this court for opinion at the instance of the assessee:
"1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to exemption under section 11(1A) of the Income-tax Act, 1961, in respect of short-term capital gains of Rs. 1,51,040?
2. Whether, on the facts and in the circumstances of the case, the transaction of sale of the property coupled with the liability of Rs. 1,51,040 constituted a single transaction and, accordingly, the net consideration was only Rs. 2,11,040 within the meaning of section 11(1A) and the Explanation (iii) of the Income-tax Act, 1961?"
This reference pertains to the assessment year 1972-73, the previous year being the year ended on March 31, 1972. The material facts giving rise to this reference are as follows:
The assessee is a charitable trust. During the relevant assessment year, the assessee-trust sold its right to obtain the conveyance of certain immovable property, which was a capital asset, to a co-operative housing society for a sum of Rs. 3,62,340 and in that process, obtained capital gain of Rs. 1,51,040. The assessee thereafter advanced a sum of Rs. 2,10,000 to the purchaser and obtained an English mortgage of the plot of land so purchased by the co-operative society. The assessee claimed that it had acquired another capital asset for a sum of Rs. 2,10,000 and hence its income from capital gain was exempt under section 11(1A) of the Income-tax Act, 1961, (for short "the Act"). This claim of the assessee was rejected by the Income-tax Officer. He, therefore, determined the total income of the assessee-trust at Rs. 1,51,040 and forwarded the draft assessment order to the assessee. The assessee having objected to the draft assessment order, it was forwarded by the Income-tax Officer to the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner was of the opinion that the mortgage loan was not a capital asset and hence the investment made by the assessee did not fall within the provisions of section 11(1A) of the Act. He, therefore, held that the assessee was not entitled to exemption from tax in respect of the capital gain derived by it on the sale of the capital asset and confirmed the draft order of the Income-tax Officer and issued directions accordingly. The assessee appealed to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) held that the mortgage debt was a capital asset and it was not covered by any of the exclusions contained in section 2(14) of the Act. The Commissioner (Appeals), therefore, held that the assessee having acquired a mortgage debt, was entitled to exemption under section 11(1A) of the Act. Aggrieved by the order of the Commissioner (Appeals), the Revenue appealed to the Income-tax Appellate Tribunal. The Tribunal held that the English mortgage acquired by the assessee was not a capital asset within the meaning of section 2(14) of the Act, and hence, utilisation of the sale consideration of the capital asset transferred by the assessee for mortgage did not result in the acquisition of a new capital asset as required by section 11(1A)(a) of the Act. The Tribunal, therefore, held that the assessee was not entitled to any exemption in respect of the capital gain derived by it by transfer of the capital asset under section 11(1A) of the Act. Accordingly, the Tribunal set aside the order of the Commissioner (Appeals) and restored that of the Income-tax Officer. For the sake of completeness, the Tribunal also considered the alternate submission of the Revenue that even if the acquisition of mortgage debt was held to be acquisition of a capital asset and the assessee was held to be covered by the provisions of section 11(1A) of the Act, he would be entitled only to a partial exemption from capital gain because the amount that had been utilised in acquiring the new asset was only a part of the total consideration received by the assessee on transfer of the capital asset. The Tribunal accepted the above contention of the Revenue and held that the assessee having utilised for obtaining the English mortgage a sum of Rs. 2,10,000 only out of the net sale consideration of Rs. 3,62,340, it would be entitled to exemption of a portion of the short-term capital gains. Hence, this reference at the instance of the assessee.
Mr. S.E. Dastur, learned counsel for the assessee, submits that the Tribunal committed a manifest error of law in holding that the mortgage debt was not a capital asset within the meaning of section 2(14) of the Act and that the utilisation of the sale consideration or any part thereof for acquisition of the mortgage debt did not result in acquisition of a new capital asset. Counsel submits that it is well-settled that by reason of the creation of mortgage in favour of the assessee, it is the interest in the land itself which is acquired by the mortgagee which is a capital asset, within the meaning of section 2(14) of the Act. Reliance is placed in support of this contention on the decisions in Perumal Ammal v. Perumal Naicker, AIR [1921] Mad 137, Bank of Upper India Ltd. v. Fanny Skinner, AIR [1929] All 161, Prahlad Dalsukhrai v. Maganlal Muljibhai Tewar, AIR [1952] Bom 454; [1952] 54 Bom LR 519, Ram Shankar Lal v. Ganesh Prasad [1907] ILR 29 All 385, 391 and Muthu Vijia Raghunatha Ramachandra Vacha Mahali Thurai v. Venkatachallam Chetti [1897] ILR 20 Mad 35. Our attention was also drawn to the recent decision of the Supreme Court in RM. Arunachalam v. CIT [1997] 227 ITR 222, wherein it is reiterated that in a mortgage there is a transfer of interest in the property mortgaged. It was contended that the Tribunal was not justified in holding that by the mortgage the assessee did not acquire any capital asset and did not fall within the purview of section 11(1A) of the Act. According to learned counsel, in the instant case, the acquisition of mortgage of immovable property by the assessee squarely falls within the provisions of section 11(1A) of the Act, and hence, the assessee is entitled to the benefit thereof. Mr. Dastur further submits that though in the instant case, out of the aggregate sale consideration of Rs. 3,62,340, a sum of Rs. 2,10,000 only was utilised by the assessee for acquiring the mortgage of the property in question, the assessee would be entitled to get full exemption because out of the balance consideration, a sum of Rs. 1,51,300 was utilised by the assessee for paying the purchase consideration to his vendor and not for a part of the capital gains proportionate to the amount utilised by the acquisition of mortgage as held by the Tribunal.
Dr. V. Balasubramanian, learned counsel for the Revenue, relies on the reasoning of the Tribunal and submits that the Tribunal was justified in holding that the case of the assessee did not fall within the provisions of section 11(1A) of the Act.
We have carefully considered the rival submissions. The uncontroverted factual position in this case is that on July 19, 1971, the assessee entered into an agreement with the members of the Cama family ("Cama family"), for purchase of certain immovable property for a sum of Rs. 2,11,040. A sum of Rs. 50,000 was paid by the assessee at the time of execution of the said agreement and the balance amount of Rs. 1,51,300 was to be paid at the time of execution of the conveyance. On November 16, 1971, the assessee entered into an agreement with one Prithvi Vandan Co-operative Housing Society ("co-operative housing society"), by which the assessee transferred to the said society its right to obtain the conveyance of the immovable property from the Cama family for a sum of Rs. 3,62,340. In terms of the said agreement, the co-operative housing society was allowed to get the conveyance executed in its favour directly from the Cama family. The terms and conditions of the agreement also provided that the co-operative housing society would pay a sum of Rs. 1,51,300, which was payable by the assessee to the Cama family as a part of the consideration, to the Cama family on its behalf, and the balance consideration shall be paid to the assessee. Accordingly, in terms of the said agreement, the immovable property, which was the subject-matter of the agreement of sale, was conveyed by the Cama family in favour of the cooperative housing society. On the very same day, the assessee advanced a loan of Rs. 2,10,000 to the co-operative housing society and obtained an English mortgage of the property in its favour by way of security for the same. On November 16, 1971, a deed of English mortgage was executed by the co-operative housing society in favour of the assessee. The assessee claimed exemption under section 11(1A) of the Act on the basis of the above mortgage, as according to it, this amounted to acquisition of a capital asset by the assessee. The question that arises for consideration is whether the acquisition of mortgage of the property by the assessee amounts to acquisition of a capital asset for the purpose of section 11(1A) of the Act.
Section 11 of the Act grants exemption in respect of income derived from properties held under trust for charitable or religious purposes, subject to the conditions set out therein. One of the conditions is that the income is applied for charitable or religious purposes. Income derived from sale of capital assets is also Income-taxable in the hands of charitable institutions falling under section 11 of the Act. With a view to enable the trusts to get the benefit of exemption in respect of capital gains, sub-section (1A) was inserted in section 11 in 1971 by the Finance (No. 2) Act, 1971, with retrospective effect from the commencement of the Act, i.e., 1st April, 1962. It provides:
"(1A) For the purposes of sub-section (1),--
(a) where a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:--
(i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of such capital gain;
(ii) where only a part of the net consideration is utilised for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utilised exceeds the cost of the transferred asset;
Explanation.—In this sub-section,--
(i) 'appropriate fraction' means the fraction which represents the extent to which the income derived from the capital asset transferred was immediately before such transfer applicable to charitable or religious purposes;
(ii) 'cost of the transferred asset' means the aggregate of the cost of acquisition (as ascertained for the purposes of sections 48 and 49) of the capital asset which is the subject of the transfer and the cost of any improvement thereto within the meaning assigned to that expression in sub-clause (b) of clause (1) of section 55;
(iii) 'net consideration' means the full value of the 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".
It is clear from sub-section (1A) of section 11 of the Act that in a case where the assessee derives any capital gain from transfer of a capital asset held by it under trust for charitable or religious purposes, the capital gain arising from the transfer of such capital asset shall be deemed to have been applied for charitable or religious purposes to the extent specified therein, if the whole or any part of the sale consideration is utilised for acquiring another capital asset to be so held.
In the instant case, the assessee acquired a right to obtain conveyance of immovable property for a sum of Rs. 2,10,000. The said asset, admittedly, was a capital asset held by the assessee-trust. It was transferred by the assessee in favour of the co-operative housing society for a consideration of Rs. 3,62,340. In this process, there was capital gain of Rs. 1,51,040 in the hands of the assessee, which was liable to be subjected to tax unless either it was applied in the manner laid down in sub-section (1) of section 11 of the Act or utilised for acquiring another capital asset as provided in sub-section (1A) thereof. The assessee in this case acquired mortgage of the property from the co-operative housing society. The consideration for the same was Rs. 2,10,000. Thus, out of the net consideration of Rs. 3,62,240, the assessee utilised a sum of Rs. 2,10,000 in acquiring a mortgage of the property. The asset acquired by the assessee was the mortgage interest in the property, whereas the asset transferred by the assessee was merely the right to obtain conveyance of the property. The question that arises for consideration is whether the mortgage is a "capital asset" and whether advancing of money on mortgage can be regarded as utilisation for acquisition of another capital asset within the meaning of section 11(1A) of the Act.
"Capital asset" has been defined in clause (14) of section 2 of the Act to mean property of any kind held by an assessee, whether or not connected with his business or profession, except those specifically excluded. The exclusions are stock-in-trade, consumable stores or raw materials held for the business or profession, personal effects, agricultural lands and certain bonds. It is clear from the above definition that for the purpose of this clause, property is a word of the widest import and signifies every possible interest which a person can hold or enjoy except those specifically excluded. "Transfer" in relation to a capital asset, as defined in section 2(47) of the Act, includes sale, exchange, relinquishment of asset or the extinguishment of any rights therein, or the compulsory acquisition thereof under any law. The benefit of exemption under section 11(1) in respect of capital gains arising from transfer of a capital asset held under trust is available by virtue of sub-section (1A) if the whole or part of the net consideration is applied for acquiring another capital asset to be so held. So far as mortgage is concerned, it is well-settled that it is a transfer of interest in specific immovable property for the propose of securing the payment of money advanced. The definition of mortgage in section 58 of the Transfer of Property Act, 1882, also clearly says so. In an English mortgage, the mortgagor binds himself to repay the mortgage money on a certain date, and transfers the property absolutely to the mortgagee, subject, however, to a proviso that he would retransfer it to the mortgagor upon payment of the mortgage money as agreed. Thus, in an English mortgage, there is an absolute transfer of the mortgaged property from the mortgagor to the mortgagee. That being so, investment in the English mortgage of immovable property has to be regarded as utilisation for acquisition of another capital asset, viz., the English mortgage.
Reference may be made in this connection to the decision of the Madras High Court in Perumal Ammal v. Perumal Naicker, AIR [1921] Mad 137, where, dealing with the question whether transfer of mortgages by way of gift could be regarded as gifts of immovable property, it was observed that the mortgagee's interest in land had all along been transferable as immovable property. Similarly, in Bank of Upper India Ltd. v. Fanny Skinner, AIR [1929] All 161, the Allahabad High Court also held that the mortgagee's interest is not a mere right to recover the debt due but to have a charge on the property and to follow it wherever it goes. It was accordingly held that a sale of a mortgagee's interest can only be effected by means of a registered deed of transfer.
In Prahlad Dalsukhrai v. Maganlal Muljibhai Tewar, AIR [1952] Bom 454; [1952] 54 BLR 519, dealing with the nature of a mortgagee's interest, it was held by this court that under section 58(a) of the Transfer of Property Act, 1882, a mortgagee's interest in immovable property even in the case of a usufructuary mortgage is immovable property. It was observed that a mortgage is a transfer of an interest in specific immovable property, and what the mortgagee acquires under the transaction is a mortgagee's interest in specific immovable property which can only be immovable property. By reason of the creation of a mortgage, the totality of the rights of ownership which is enjoyed by the mortgagor is split up into what are called the mortgagee's interest in the property and the equity of redemption which the mortgagor retains in the property. These are two separate interests which are thus carved out by the creation of the mortgage. The mortgagee's interest in property which is thus created is immovable property.
In CIT v. Tata Services Ltd. [1980] 122 ITR 594 (Bom), a question arose before this court whether a right to obtain conveyance of immovable property is a capital asset within the meaning of section 2(14) of the Act. This court held (headnote):
"A contract for sale of land is capable of specific performance. It is also assignable. Therefore, a right to obtain conveyance of immovable property is clearly property as contemplated by section 2(14) of the Act".
The above decision was followed by this court in CIT v. Sterling Investment Corporation Ltd. [1980] 123 ITR 441, where it was held that the contractual right of a purchaser to obtain title to immovable property for a price, which is assignable, can be considered as property and, therefore, a capital asset. In CIT v. Vijay Flexible Containers [1990] 186 ITR 693 (Bom), it was reiterated by this court that the right to obtain a conveyance of immovable property falls within the expression "property of any kind" used in section 2(14) of the Act and is, consequently, a capital asset. It was held that the payment of earnest money in order to obtain such a right constitutes its cost of acquisition. Where such a right is given up, there is a transfer of a capital asset.
In A. Gasper v. CIT [1979] 117 ITR 581 (Cal), tenancy or leasehold right was also held to be a capital asset. In Rajabali Nazarali and Sons v. CIT [1987] 163 ITR 7, the Gujarat High Court held that a lease creates an interest in immovable property and transfer of a leasehold right amounts to transfer of a capital asset.
In RM. Arunachalam v. CIT [1997] 227 ITR 222, the Supreme Court while holding that a charge does not amount to a mortgage, observed that a charge differs from a mortgage in the sense that in a mortgage there is transfer of interest in the property mortgaged, in a charge no interest is created in the property changed, so as to reduce the full ownership to a limited ownership.
It is clear from the above discussion that a mortgage is a capital asset because by the mortgage there is a transfer of interest in the property mortgaged from the mortgagor to the mortgagee. The investment of the net consideration or any part thereof in acquiring the English mortgage, therefore, has to be regarded as utilisation for acquisition of another capital asset within the meaning of section 11(1A) of the Act.
In the instant case, when the mortgage was granted in favour of the assessee by the co-operative housing society, it was the owner of the said property. By the mortgage in favour of the assessee, there was a transfer of interest of the mortgagor in the property mortgaged to the assessee who was the mortgagee. As a result, the full ownership of the co-operative housing society was reduced to a limited ownership. In view of the above, we are of the clear opinion that the assessee was entitled to the benefit of exemption under section 11(1A) of the Act to the extent permissible thereunder.
This brings us to the next question as to whether the assessee is entitled to get full relief in respect of the capital gain or partial relief to be calculated in the manner set out in sub-section (1A) of section 11 of the Act. The net sale consideration in this case, admittedly, was Rs. 3,62,340 and the amount utilised for acquiring the mortgage was Rs. 2,10,000. The assessee had thus used only a part of the net consideration for acquiring a new capital asset. The assessee will, therefore, be entitled to exemption only of a part of the capital gains to be calculated in the manner laid down in section 11(1A)(a)(ii) of the Act. The Tribunal was justified in its conclusion in this regard.
Accordingly, we answer question No. 1 in the affirmative and in favour of the assessee. So far as question No. 2 is concerned, we answer the same in the negative, i.e., in favour of the Revenue and against the assessee.
This reference is disposed of accordingly with no order as to costs.
