Estate duty on inherited property is not deductible as acquisition or improvement cost for capital gains computation.

Under sections 45, 48, 49(1) and 55 of the Income-tax Act, capital gains are computed by deducting only the cost of acquisition and the cost of improvement. The note explains that estate duty paid on the death of a previous owner, though it creates a statutory charge on inherited immovable property, does not transfer any fresh interest to an assessee who already holds full title. Payment of that duty merely discharges an encumbrance and does not perfect title or amount to any addition or alteration of the capital asset. Accordingly, proportionate estate duty is not deductible as either cost of acquisition or cost of improvement.

---

---

Issues: Whether proportionate estate duty paid on the death of the previous owner could be deducted in computing capital gains, either as part of the cost of acquisition or as the cost of improvement of the inherited properties.

Analysis: Under sections 45, 48, 49(1) and 55 of the Income-tax Act, 1961, capital gains are computed by deducting the cost of acquisition and the cost of any improvement to the capital asset. Estate duty payable under section 74 of the Estate Duty Act, 1953 creates a first charge on immovable property passing on death, but payment of that duty does not transfer any fresh interest in the asset to the assessee. Where the assessee already holds full and complete title in the property, discharge of the estate duty liability only removes an encumbrance attached to the estate and does not perfect an imperfect title or produce an addition or alteration to the asset itself. The removal of a burden or obligation on the property is not the same as making an improvement to the capital asset within section 55(1)(b).

Conclusion: Proportionate estate duty paid is not deductible either as cost of acquisition or as cost of improvement, and the question is answered in the negative against the assessees.

Ratio Decidendi: Payment of estate duty that merely discharges a statutory charge on property already owned absolutely by the assessee is neither part of the cost of acquisition nor cost of improvement for capital gains purposes.

---