TaxTMI 
TaxTMI 
1997 (7) TMI 5
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....sessment year 1972-73 and the civil appeal arising out of S. L. P. (C) No. 10737 of 1981 relates to the assessment year 1971-72. Ramanathan Chettiar, who had considerable movable and immovable properties, died on January 26, 1958, leaving behind his wife, Smt. Umayal Achi and daughter, Smt. S. Valliammai as his legal heirs. On his death, the said properties devolved upon the aforesaid heirs in equal shares and a partition was effected between them under which certain properties were given to Smt. Umayal Achi and the rest to Smt. S. Valliammai. Smt. Umayal Achi adopted the assessee as her son in April, 1961. She later died on August 20, 1964, leaving a will bequeathing all her properties to the assessee as her adopted son. During the previous years relevant to the assessment years in question, the assessee disposed of various properties of Ramanathan Chettiar that were bequeathed to him by Smt. Umayal Achi. In respect of the assessment years 1966-67, 1967-68, 1969-70 and 1970-71, the assessee offered Rs. 7,537, Rs. 1,84,480, Rs. 19,015 and Rs. 32,118, respectively, as capital gains arising from the said transfers. For that purpose, the assessee had taken the cost of acquisition of ....
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....of the properties sold which claim of the assessee was declined and the following question was referred to the High Court : " Whether in computing the capital gains on the sale of the properties made by the assessee during the previous year relevant for the assessment year 1971-72 the proportionate estate duty paid on the death of Shri Ramanathan Chettiar and Smt. Umayal Achi in respect of the properties sold should be deducted ? " By judgment dated July 29, 1981, the High Court, following the impugned judgment of the Full Bench, answered the said question in the negative and against the assessee. The civil appeal arising out of Special Leave Petition (C) No. 10737 of 1981 has been filed against the said judgment of the High Court. In respect of the assessment year 1972-73, a similar question referred by the Tribunal was similarly answered against the assessee by the High Court by its judgment dated November 24, 1986. Civil Appeal No. 860 of 1988 has been filed against the said judgment of the High Court. Before we deal with the submissions of learned counsel for the assessee, it would be convenient to take note of the relevant provisions of the Act relating to capital gains. U....
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....ovement " and " cost of acquisition " for the purpose of sections 48, 49 and 50 have been defined in section 55 of the Act. In clause (b) of sub-section (1) of section 55 " cost of improvement " was thus defined : " (b) ' cost of any improvement ', in relation to a capital asset,--- (i) where the capital asset became the property of the previous owner or the assessee before the first day of January, 1954, and the fair market value of the asset on that day is taken as the cost of acquisition at the option of the assessee, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee, and (ii) in any other case, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property, and, where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, by the previous owner, but does not include any expenditure which is deductible in computing the income chargeable under the head ' Interest on securities ', ' Income from house pr....
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....n 49 by succession after the death of her husband, Ramanathan Chettiar. By virtue of the Explanation in sub-section (1) of section 49 Ramanathan Chettiar has been treated as the previous owner of the assets by the Income-tax Officer. In view of section 48(ii) for computation of income chargeable under the head " Capital gains ", deduction can be claimed in respect of cost of acquisition of the capital asset or the cost of improvement thereto. The question for consideration is whether the estate duty paid in respect of the estate of Ramanathan Chettiar and the estate of Smt. Umayal Achi, to the extent such duty related to the assets in question, can be claimed as a deduction as " cost of acquisition " or as " cost of improvement ". Under section 53(1) of the Estate Duty Act it was prescribed that where any property passes on the death of the deceased (a) every legal representative to whom such property so passes for any beneficial interest in possession or in whom any interest in the property so passing is at any time vested ; (b) every trustee, guardian, committee or other person in whom any interest in the property so passing or the management thereof is at any time vested, and ....
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....e treated as " cost of improvement " of the assets sold. The contention that estate duty paid should be treated as cost of acquisition was rejected by the High Court on the view that it is only when the title acquired is defective, incomplete or imperfect that the cost of making the title complete and perfect can be treated as the cost of acquisition. According to the High Court, though under section 74(1) of the Estate Duty Act, a charge is created on the immovable properties for payment of estate duty in respect of all properties passing on death, the title to the immovable properties acquired cannot be said to be incomplete or imperfect in any way. The High Court has observed that the charge created under section 74 is quite ambulatory in effect and in extent, depending on the nature of the assets passing on the death and the discretion of the Controller of Estate Duty to release the whole or any part of the property from the charge, if the circumstances so warrant under sub-section (3) of section 74. The High Court has stated that where the deceased left immovable property as well as cash sufficient to meet the estate duty liability on his estate, the Controller may release th....
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....ion did not require reconsideration. In that case the assessee's father had gifted to her a house property. A third party had filed a suit claiming title to an area of land forming part of the gifted property. The assessee compromised with the said third party by paying him a sum of Rs. 6,943. She claimed that in computing the capital gains arising on the sale of the property, the said sum of Rs. 6,943 should be deducted as " cost of improvement " of the property under section 48 read with sections 49(1) and 55(1)(b) of the Act. The said claim was rejected by the Income-tax Officer as well as by the Appellate Assistant Commissioner. But the Tribunal held that by paying the said amount the assessee perfected her title to the property by removing the cloud cast on it by a rival claimant and this involved an improvement to the assessee's title to the property and, therefore, the amount in question would constitute the cost of acquisition within the meaning of section 49(1) of the Act and the assessee was eligible to the deduction claimed by her. The High Court did not agree with the said view of the Tribunal and held that the amount of Rs. 6,943 should not be treated as the cost of ac....
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....able jointly and severally for the whole of the estate duty on the property so passing. This would show that the liability of the accountable persons was personal but limited to the assets of the deceased actually received or which might have been received by the accountable person. At the same time, under section 74(1) of the Estate Duty Act, the estate duty payable in respect of the property, movable or immovable, passing on the death of the deceased was the first charge on the immovable property so passed to whomsoever it may vest on his death. What is the legal effect of the creation of this charge under section 74 of the Estate Duty Act ? In section 100 of the Transfer of Property Act, 1882, the following provision is made regarding charges : " 100. Charges. --- Where immovable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property ; and all the provisions hereinbefore contained which apply to a simple mortgage shall, so far as may be, apply to such charge. Nothing in this section applies to the charge of a....
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....-matter of the charge. The creation of the charge under section 74(1) only means that in the matter of recovery of estate duty from the property which is the subject-matter of the charge the amount recoverable by way of estate duty would have priority over other liabilities of the accountable person. In that sense the claim in respect of estate duty would have precedence over the claim of the mortgagee because a mortgage is also a charge. (See State Bank of Bikaner and Jaipur v. National Iron and Steel Rolling Corporation ([1995] 96 STC 612 ; 2 SCC 19). The High Court has, therefore, rightly held that as a result of the charge created under section 74(1) of the Estate Duty Act, it could not be said that the title of the assessee to the immovable properties received by him from Smt. Umayal Achi was incomplete and imperfect in any way. In the context of the facts of this case, the High Court has found that the assessee had admittedly become the full owner of the assets even before the payment of estate duty and on payment of the same he had not acquired a new right, tangible or intangible, in the assets. It cannot, therefore, be said that the amount proportionate to the estate duty p....
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.... by way of cost of acquisition or cost of improvement under section 48 of the Act. The questions referred by the Tribunal to the High Court have to be considered in the light of the said submissions. The submission regarding diversion involves the question whether apart from the deductions permissible under the express provision contained in section 48 of the Act, deduction on account of diversion is permissible in the matter of computation of capital gains under the Act. This is an entirely independent issue which has not been considered by the Tribunal or the High Court. It cannot be permitted to be raised for the first time at this stage. We, therefore, do not propose to go into this question. While we are affirming the impugned judgment of the High Court, we are unable to endorse the view of the Kerala High Court in Ambat Echukutty Menon v. CIT [1978] 111 ITR 880 to which reference has been made by the High Court in the impugned judgment. In that case, the assessee, as one of the heirs, had inherited property from the previous owner who had mortgaged the same during his lifetime and after his death the heirs, including the assessee, had discharged the mortgage created by the d....