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

For capital gains computation under the Income-tax Act, proportionate estate duty paid on inherited property is deductible only if it represents cost of acquisition or cost of improvement. The Madras High Court noted that estate duty under the Estate Duty Act creates a statutory charge on immovable property, but its payment does not create any new interest in the asset, perfect an imperfect title, or add to or alter the property itself. Discharging a liability attached to the property is not the same as incurring expenditure on the capital asset. Accordingly, such estate duty was not deductible as either acquisition cost or improvement cost.

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Issues: Whether proportionate estate duty paid on inherited property is deductible in computing capital gains either as part of the cost of acquisition or as cost of improvement.

Analysis: Under sections 45, 48, 49(1), 55(1)(b) and 55(2) of the Income-tax Act, 1961, deduction is permissible only for 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 statutory charge on immovable property, but payment of that duty does not transfer any new interest to the assessee, does not perfect an incomplete title, and does not amount to an addition or alteration to the asset itself. The discharge of a liability attached to the property is different from expenditure incurred on the asset, and the removal of a burden or encumbrance by itself is not an improvement of the capital asset.

Conclusion: The proportionate estate duty paid was not deductible either as cost of acquisition or as cost of improvement.

Final Conclusion: The reference was answered against the assessees and in favour of the Revenue.

Ratio Decidendi: For capital gains purposes, payment of estate duty discharging a statutory charge on inherited property does not constitute either acquisition of a new interest in the asset or expenditure on the asset itself so as to qualify as deductible cost of acquisition or cost of improvement.

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