Capital Gain on sale of the property of Guarantor by the Bank?
When the mortgaged property of the guarantor is sold for discharge of a loan taken by the firm for whom the assessee has stood guarantee then the assessee steps into the shoes of the lender who has withdrawn his loan by encashment of the mortgaged property and the firm would be liable to treat the assessee as a lender for the consideration representing the sale value of the mortgaged property. Thus, when the assessee being the guarantor, steps into the shoes of the lender, who has encashed the mortgage property, it is deemed that the assessee has given the loan to the firm representing the sale consideration of the mortgage property. Thus, even though, the assessee has not received any portion of the sale consideration, the Capital Gains is liable to be assessed in the hands of the assessee treating the auction amount as the sale consideration.
Assessee was partner in a firm. He mortgaged his immovable properties and gave guarantee in respect of loan taken by the firm. Firm failed to make repayment of loan, therefore, the bank sold the mortgaged property of the assessee in auction. AO invoked section 45 on the ground that the transfer had taken place in respect of the property owned by the assessee, which was liable to tax under long term capital gains. CIT(A) deleted the levy of long term capital gain on the ground that non consideration had been received or accrued to the assessee, therefore, the same could not be counted for computing capital gains.
Held: When the assessee being the guarantor, stepped into shoes of the lender, who had encashed the mortgaged property, then it was deemed that the assessee had given the loan to the firm representing the sale consideration of the mortgaged property. Thus, even though, the assessee had not received any portion of the sale consideration, the capital gains was liable to be assessed in the hands of the assessee treating auction amount as the sale consideration. Therefore, it could not be said that the assessee had not received any consideration. Hence, the order of AO regarding levy of long-term capital gains upon the assessee was restored.
Decision: Against the assessee
Referred: Attili N. Rao 252 ITR 880 (SC)
IN THE ITAT, CHENNAI ‘B’ BENCH
GEORGE MATHAN, J.M. & S. JAYARAMAN, A.M.
V.S. Chandrakumar v. ITO
A.Y. 2010-11
Cross Objection No.178/Chny/2016
28 March, 2018
Department by: Vijayaprabha, JCIT
Assessee by: Mr.T. Banusekar, CA
ORDER
George Mathan, J.M.
ITA No.2736/Chny/2016 is an appeal filed by the Revenue & CO No.178/Chny/2016 is a Cross-Objection filed by the assessee in the Revenue’s appeal, against the Order of Commissioner (Appeals)-3, Coimbatore, inIT Appeal No.144/15-16 dated 29-6-2016 for the assessment year 2010-11.
2. Ms. Vijayaprabha, JCIT represented on behalf of the Revenue and Shri T. Banusekar, CA, represented on behalf of the assessee.
3. It was submitted by the learned Departmental Representative that the assessee is an individual who is the owner of an immovable property representing a plot of land which was mortgaged to the City Union Bank as the assessee stood as a guarantor in respect of a loan taken by Wet Tree, in which, the assessee’s close family members were partners. As the said firm was unable to repay its loans, the City Union Bank auctioned the property for a sale consideration of Rs. 2.55 Crs. and had appropriated the entire sale consideration. It was a submission that the assessing officer on the ground that the transfer had taken place in respect of the property owned by the assessee, brought to tax the Long Term Capital Gains. It was a submission that on appeal, the learned Commissioner (Appeals) had deleted the levy of Long Term Capital Gains by holding that no consideration had been received or accrued to the assessee and the same cannot be counted for computing Capital Gains. Further, the learned Commissioner (Appeals) had held that there was no profits and gains arising from the transfer of the capital asset to the assessee and that the title also did not vest with the assessee as it was mortgaged with the bank, which would sell it and realize the dues. It was a submission that this finding of the learned Commissioner (Appeals) was erroneous and liable to be reversed.
4. In reply, the learned Authorised Representative placed reliance upon the decision of the Coordinate Bench of this Tribunal in the case of M/s. Glad Investments (P) Ltd., 102 ITD 0227 as also the decision of the Hon’ble Kerala High Court in the case of Smt. Thressiamma Abraham 227 ITR 0802. It was a submission that as per the said two decisions, when the sale of the property is done in view of the mortgage, the entire consideration has been appropriated by the lender, no Capital Gains can be assessed in the hands of the assessee in so far as there was a diversion of the entire consideration at source before it became income in the hands of the assessee. It was a submission that the order of the learned Commissioner (Appeals) was liable to be confirmed.
5. We have considered the rival submissions.
6. Transfer, admittedly, is defined in section 2(47) of the Act, it is an inclusive definition. Capital Gains on transfer of a capital asset is leviable as per section 45 of the Act. The Capital Gains arises in the previous year, in which, the transfer of the capital asset took place. The exclusion from the levy of Capital Gains is provided in section 47 of the Act. A mortgage is defined as a legal agreement by which a bank, building, society, etc., lends money at interest in exchange for taking title of the debtor’s property, with the condition that the conveyance of title becomes void upon the payment of the debt. A perusal of the provisions of section 2(47) which is an inclusive definition clearly shows that a mortgage is not considered as a transfer in so far as there is no extinguishment of any right of the assessee in the property mortgaged. In a transaction of mortgage, the mortgager has the right to redeem his property after paying the debt amount. In the present case, it is true that the assessee has stood as a guarantor for the loans taken by the firm, in which, his close relatives are partners and for such purpose as standing guarantor, he has mortgaged his property against the loans. Thus, what has happened here is that the assessee having stood as a guarantor, he steps into the shoes of the lender, the minute lender sells the property mortgaged against the loans taken by the close relatives. Thus, the assessee takes the place of lender, City Union Bank, in respect of the loans taken by the firms whose loans the assessee has stood guarantee for. Thus, when the mortgage was done by the assessee, though some interest in the property is transferred, in so far as the owner of the mortgage property becomes a limited owner, such mortgage does not fall within the ambit of the term transfer under section 2(47) of the Act. It must be remembered that there is no extinguishment of any rights in the property and whatever rights that have been mortgaged on account of the mortgage is a redeemable right. Under section 73 of the Transfer Properties Act, where a mortgage property is sold, the mortgagee has a prior claim over the other creditors and the mortgagee is entitled to receive payment directly in discharge of the debts when a property is sold. In the present case, the assessee had mortgaged the property when he stood as a guarantor. When the mortgage was encashed by the sale of the property, the transfer of the capital asset has taken place from the hands of the assessee to the purchaser in the auction. Though, the auction has been done by the City Union Bank, the transfer has been done from the hands of the assessee. Therefore, as per the provisions of section 45 the Capital Gains that may arise, is liable to be assessed only in the hands of the assessee.
7. Now coming to the issue as to whether Capital Gains can be levied when the assessee has not received any consideration on account of the transfer. Here, it must be remembered that when the mortgaged property of the guarantor is sold for discharge of a loan taken by the firm for whom the assessee has stood guarantee then the assessee steps into the shoes of the lender who has withdrawn his loan by encashment of the mortgaged property and the firm would be liable to treat the assessee as a lender for the consideration representing the sale value of the mortgaged property. Thus, when the assessee being the guarantor, steps into the shoes of the lender, who has encashed the mortgage property, it is deemed that the assessee has given the loan to the firm representing the sale consideration of the mortgage property. Thus, even though, the assessee has not received any portion of the sale consideration, the Capital Gains is liable to be assessed in the hands of the assessee treating the auction amount as the sale consideration.
8. A perusal of the decision of the Co-ordinate Bench of this Tribunal in the case of M/s. Glad Investments (P) Ltd., shows that the facts in that case was entirely different in so far as what has been sold there was shares and the transfer of the shares in question was completed when the shares were pledged as the assessee therein had completed the requisite formalities for the transfer at that stage itself. In the present case, there was no transfer nor were the requisite formalities for the transfer completed at the stage of the mortgage. The decision relied upon by the learned Authorised Representative in the case of Smt. Thressiamma Abraham also has no applicability in the present facts in so far as the decision was in relation to a claim under section 54E of the Act. Further, this view of ours that Capital Gains is leviable on the sale of the mortgaged property is supported by the Hon’ble Supreme Court in the case of Shri Attili N. Rao 252 ITR 880 (SC). Thus, it cannot be said that the assessee has not received any consideration on account of the sale of the mortgage property as the assessee has steps into the shoes of the lender when the mortgage property was sold and the sale consideration appropriated.
9. In the result, the appeal filed by the Revenue stands allowed and the order of the learned Commissioner (Appeals) stands reversed and that of the assessing officer restored.
10. At the time of hearing, the learned Authorised Representative did not wish to press the Cross-Objection and consequently, the Cross-Objection filed by the assessee is dismissed as not pressed.
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