Law: Income Tax Act, 1961

Section: 45

Income-tax---Income---Overriding title---Capital gains---Property of assessee mortgaged to State Financial Corporation and assessee standing guarantee for repayment of loan taken by company---Property sold by Corporation in exercise of rights under mortgage---Entire consideration appropriated to discharge loan---Corporation exercising overriding title---No income or capital gain accrues to assessee---Indian Income Tax Act, 1961, S.45. The assessee stood guarantee for repayment of a loan taken by an industrial concern from the Kerala Financial Corporation and had also mortgaged certain property belonging to her in favour of the Corporation. In exercise of its rights under the document of mortgage, the Corporation sold the property and appropriated the entire proceeds towards discharge of the loan. The Income-tax Officer held that the assessee should be deemed to have received the entire sale proceeds and computed capital gains thereon. The Tribunal recorded the undisputed factual position that no amount was received by the assessee, that the entire sale consideration was paid directly to the Corporation by the purchasers and it was thereafter that the mortgaged property was released. The Tribunal held that the sale consideration was diverted to the Corporation by overriding title. On a reference: Held, that undisputedly the entire sum had been appropriated towards discharge of the mortgage debt under the document. The Corporation had acted in exercise of the rights arising out of the document against the assessee who was in the position of a guarantor. There could be no dispute as regards the legal position that the guarantor and the debtor were in the same position. Additionally, the various peculiarities of the document clearly showed that the Corporation had an absolute right to sell the mortgaged property in the event of failure to repay the loan amount. The Corporation had acted in exercise of the overriding title in its favour. The undisputed factual matrix in the context showed that the assessee received not a pie as a result of the transfer under consideration. There could not be said to have been any income to the assessee muchless any capital gains.…

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