The cost of acquisition of a capital asset includes the cost of redeeming a mortgage on the asset.

JUDGMENT :

G.T. Nanavati, J.

In this reference under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), the Tribunal has referred the following question to this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to claim deduction of Rs. 25,000 paid by her for redemption of the mortgage for the purpose of computing capital gains ? "

2. The facts giving rise to that question, briefly stated, are as under:

One Surottam Hathising was the owner of land, admeasuring 584 sq. yards. He gifted half of that land to the assessee and the other half to Automi Harsha Hathising. Thus, the assessee received 292 sq. yards and became the owner of it. She sold the same during the accounting year ending on October 19, 1971, for Rs. 59,956. In the return filed for that year, she disclosed capital gain of Rs. 29,125 on the sale of the said land. Apart from other deductions with which we are not concerned, the assessee claimed deduction of Rs. 25,000 paid by her to the mortgagee, as the land, which was gifted to her, was subject to a mortgage. The Income-tax Officer rejected the assessee's claim for deduction of that amount, as he was of the view that it was not a liability which increased the cost of the land. The appeal filed by the assessee to the Appellate Assistant Commissioner of Income-tax was dismissed, as the Appellate Assistant Commissioner agreed with the view of the Income-tax Officer that the assessee's claim for deduction of Rs. 25,000 paid to the mortgagee was not valid. The assessee then approached the Tribunal by preferring an appeal. The Tribunal held that the assessee did not sell the capital asset that she had received by way of gift; what she had sold was something more than that, viz., the interest which the donor had transferred to the mortgagee. As she was required to redeem the mortgage and, for that purpose, she had to pay Rs. 25,000 to the mortgagee, being the mortgage amount, the said cost of acquisition was also required to be taken into account while computing the capital gain. Taking that view, the Tribunal further held that the assessee was entitled to deduction of the said sum of Rs. 25,000 under clause (ii) of section 48 of the Act. The Tribunal partly allowed the appeal and directed the Income-tax Officer to deduct Rs. 25,000 paid by the assessee to the mortgagee as the cost of acquisition. Aggrieved by the decision of the Tribunal, the Revenue has got the reference by the Tribunal of the question set out earlier.

3. What is submitted by learned counsel for the Revenue is that, according to the scheme of the Act, total income is required to be computed in the manner laid down in the Act. As capital gain is deemed to be income, it is required to be computed in the manner laid down in sections 48, 49 and 55 of the Act. It was submitted that, as the capital asset in this case became the property of the assessee under a gift, section 49, and not section 48, would be attracted and, therefore, the cost of acquisition was required to be computed in accordance with section 55(2)(ii). Thus, what was required to, be considered was the cost of acquisition of the capital asset to the previous owner and the fair market value as on January 1, 1954. The Tribunal, overlooking these provisions and computing the capital gain in terms of section 48, committed an error and wrongly held that the sum of Rs. 25,000 paid by the assessee to the mortgagee was deductible as cost of acquisition of the asset.

4. In order to appreciate the contention raised on behalf of the Revenue, it is necessary to refer to the relevant provisions of the Act. Section 45 makes any profits or gains arising from the transfer of a capital asset effected in the previous year chargeable to income-tax. Capital gains is deemed to be the income of the previous year in which the transfer took place. Section 48 provides for the mode of computation and ded