Expenditure incurred to discharge mortgage debt created by previous owner would be treated as cost of acquisition

Expenditure incurred to discharge mortgage debt created by previous owner would be treated as cost of acquisition The issue in this appeal of the assessee is regard to the disallowance of mortgage expenditure of Rs. 55 Lakh as cost of acquisition with the corresponding indexation. In this matter, the assessee has sold his capital asset i.e. C.S. No. 2838/8, B Ward, Subhash Road, Mahalaxmi Nagar, Kolhapur on 08.04.2010 for Rs.49 lakhs in the capacity of joint of co-owner along with his brother Shri Prem Shitaldas N. Ahuja. He thereafter sought to claim the impugned mortgage amount of Rs. 55 lakhs as a deduction on the ground that his father had executed the same. During the assessment proceedings, AO has disallowed the claim of the assessee on the grounds that this mortgage was neither in the nature of cost of acquisition or cost of improvement, as the case may be, but claimed as a deduction in his individual capacity so as to improve the title. CIT(A) also upheld the decision. Aggrieved, the assessee preferred an appeal before the tribunal. ITAT relied on the decision given by the Hon’ble jurisdictional high court in (2005) 144 Taxman 720 (Bom.) CIT vs. Roshanbabu Mohammed Hussein Merchant and find no merit in Revenue's stand. The decision given by the High Court in the case of CIT vs. Roshanbabu Mohammed Hussein Merchant is as follows: "14. From the aforesaid decisions of the Apex Court, it is clear that there is a distinction between the obligation to discharge the mortgage debt created by the previous owner and the obligation to discharge the mortgage debt created by the assessee himself. Where the property acquired by the assessee is subject to the mortgage created by the previous owner, the assessee acquires absolute interest in that property only after the interest created in the property in favour of the mortgage is transferred to the assessee, that is after the discharge of mortgage debt. In such a case, the expenditure incurred by the assessee to discharge the mortgage debt created by the previous owner to acquire absolute interest in the property is treated as 'cost of acquisition' and is deductible from the full value of consideration received by the assessee on transfer of that property. However, where the assessee acquires a property which is unencumbered, then, the assessee gets absolute interest in that property on acquisition. When the assessee transfers that property, the assessee is liable for capital gains tax on the full value (less admitted deductions) realised, even if an encumbrance is created by the assessee himself on that property and the assessee is under an obligation to remove that encumbrance for effectively transferring the property. In other words, the expenditure incurred by the assessee to remove the encumbrance created by the assessee himself on the property which was acquired by the assessee without any encumbrance is not allowable deduction under section 48 of the Income Tax Act.”