Overriding title on attached inherited property excludes diverted sale proceeds from capital gains computation and denies section 54E relief.

Property inherited subject to a pre-existing statutory attachment for tax recovery was held to carry that burden to the heirs, so the amount paid directly to the Income-tax Department by the vendee was diverted at source by overriding title and did not form part of the assessee's taxable sale consideration. The same payment was not treated as cost of acquisition because it was a discharge of an attached liability, not expenditure to acquire or improve the asset. Exemption under section 54E was denied because the deposits were made beyond the six-month statutory period after transfer.

---

---

Issues: (i) Whether the amount paid by the vendee to the Income-tax Department towards the deceased father's tax liability was diverted by overriding title and hence did not form part of the assessee's sale consideration for capital gains; (ii) whether that amount could be treated as cost of acquisition of the capital asset; (iii) whether the assessee was entitled to exemption under section 54E on the basis of the deposits made after the transfer.

Issue (i): Whether the amount paid by the vendee to the Income-tax Department towards the deceased father's tax liability was diverted by overriding title and hence did not form part of the assessee's sale consideration for capital gains.

Analysis: The property had been under attachment for arrears of tax during the lifetime of the assessee's father. The attachment created a statutory obligation on the property, and the heirs inherited it subject to that burden. The amount paid directly to the Department was therefore not money that reached the assessee as her income but was part of the sale proceeds diverted at source to satisfy the pre-existing liability attached to the property.

Conclusion: The amount paid to the Income-tax Department was diverted by overriding title and could not be included in the assessee's taxable sale consideration.

Issue (ii): Whether that amount could be treated as cost of acquisition of the capital asset.

Analysis: Cost of acquisition in the case of inherited property is governed by the cost to the previous owner, as adjusted by legally recognised improvements. Payment of the deceased father's tax liability was not expenditure incurred to acquire or improve the asset, but a discharge of an attached liability. It therefore did not answer the description of cost of acquisition.

Conclusion: The amount paid to the Income-tax Department could not be treated as cost of acquisition.

Issue (iii): Whether the assessee was entitled to exemption under section 54E on the basis of the deposits made after the transfer.

Analysis: The sale took place on 17 March 1977, but the deposits were made only in May 1978 and February 1979. The statutory period of six months was not satisfied, and the conditions for exemption were not met.

Conclusion: The assessee was not entitled to exemption under section 54E.

Final Conclusion: The reference was answered in part in favour of the assessee on the capital gains computation issue, while the remaining substantive questions were answered against the assessee; the fourth question was not answered.

Ratio Decidendi: Where property is inherited subject to a pre-existing statutory attachment for tax recovery, the attached liability diverts the relevant sale proceeds at source by overriding title, so only the balance actually accruing to the assessee can be taxed.

---