Capital gains on inherited property: estate duty payment was not deductible from sale proceeds under income tax law.

Capital gains from the sale of the property were taxable because the estate duty payment made to the Assistant Controller was only an application of the sale proceeds after accrual and not a deductible expenditure under section 48 of the Income-tax Act, 1961. The will's direction to meet estate duty from the sale realisation did not change the character of the property, which was sold free from encumbrance, and the estate duty charge under section 74 of the Estate Duty Act, 1953 attached to the estate as a whole rather than to the specific asset sold. Authorities relied on by the assessee were distinguished on their facts, and the taxpayer's contention was rejected.

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Issues: Whether the capital gains arising on the sale of the property were taxable in the hands of the executors notwithstanding that the sale consideration was paid to the Assistant Controller of Estate Duty pursuant to the will of the deceased.

Analysis: The deceased's will expressed a wish that the executors should meet the estate duty liability out of the sale realisation of the Calcutta property. The property sold was free from any encumbrance, and the estate duty charge under section 74 of the Estate Duty Act, 1953 attached to the estate as a whole and not to the specific property sold. The payment to the Assistant Controller of Estate Duty was therefore only an application of the sale proceeds after they had arisen to the assessee, and it could not be treated as an expenditure deductible in computing capital gains under section 48 of the Income-tax Act, 1961. The authorities and precedents relied on by the assessee were held to be distinguishable on facts.

Conclusion: The capital gains were rightly brought to tax in the hands of the assessee, and the assessee's contention was rejected.

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