Estate duty on inherited property is not deductible in capital gains computation under the statutory scheme.

Estate duty payable on inherited property is not deductible in computing capital gains under the Income-tax Act. The computation is confined to the statutory scheme in sections 48, 49 and 55, and such duty is neither the cost of acquisition nor the cost of improvement, nor an expenditure directly deductible under section 48. The liability is a personal obligation of the accountable person, not an encumbrance on the asset, and the first charge under the Estate Duty Act only protects revenue without changing that character. On this basis, the deduction was disallowed and the issue was decided against the assessee.

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Issues: Whether estate duty payable on inherited property can be deducted in computing capital gains, either as a deduction under the capital gains provisions or as part of the cost of acquisition or cost of improvement, and whether the first charge under the Estate Duty Act alters that position.

Analysis: The relevant provisions of the Income-tax Act confined computation of capital gains to the statutory scheme in sections 48, 49 and 55. Estate duty payable on the inherited property was neither the cost to the previous owner nor a cost of improvement within the statutory definitions, and it was not an expenditure directly deductible under section 48. The liability to pay estate duty was a personal liability of the accountable person and not an encumbrance attached to the asset itself. The first charge created by section 74(1) of the Estate Duty Act only protected the revenue and did not change the character of the liability or make it an expenditure referable to the transfer of the property. Commercial principles did not justify treating every liability connected with an asset as deductible in computing capital gains.

Conclusion: Estate duty payable on the inherited property could not be deducted in computing capital gains, and the reference was answered against the assessee and in favour of the Revenue.

Ratio Decidendi: In computing capital gains, only those deductions expressly or necessarily falling within the statutory scheme of sections 48, 49 and 55 of the Income-tax Act can be allowed, and a personal liability such as estate duty on inherited property is not deductible merely because a first charge exists on the property.

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