TMI Blog1997 (7) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... property that is transferred by the appellant, can be regarded as " cost of acquisition " of the said property or " cost of improvement " to the said property for the purpose of computation of capital gains under the Income-tax Act, 1961 (hereinafter referred to as " the Act "). Civil Appeals Nos. 6098-6101 of 1983 relate to the assessment years 1966-67 to 1970-71, Civil Appeal No. 860 of 1988 relates to the assessment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n its impugned judgment dated December 23, 1980 (Smt. Valliammai v. CIT [1981] 127 ITR 713), has answered the said question against the assessee and in favour of the Revenue. Civil Appeals Nos. 6098-6101 of 1983 have been filed by the assessee against the said judgment of the High Court. In respect of the assessment year 1971-72, the assessee claimed similar deduction of proportionate estate duty paid in respect 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred or borne by the previous owner or the assessee, as the case may be. Explanation. --- In this sub-section the expression " previous owner of the property " in relation to any capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in clause (i) or clause (ii) or clause (iii) of this sub-section. The expressions " cost of improvement " 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the capital asset, who acquired it by a mode of acquisition other than that referred to in clauses (i), (ii) and (iii) of sub-section (1). In the present case, the capital assets became the properties of the assessee under the will executed by Smt. Umayal Achi, i.e., under clause (ii) of sub-section (1) of section 49. The capital assets became the property of Smt. Umayal Achi under sub-clause (a) of clause (iii) of sub-section (1) of section 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 ". Unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carved out of the immovable properties of the deceased in favour of the Government and that the said interest has been acquired by the assessee on payment of the estate duty and, therefore, the amount of proportion of the estate duty paid by the assessee in respect of the properties sold should also be treated as " cost of acquisition " under section 55(2) of the Act. In the alternative it was submitted that the estate duty paid by the assessee should be 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 am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the charge. The High Court has found that the assessee admittedly became the full owner of the assets even before the payment of estate duty and on payment of the same the assessee had neither acquired any new right in the assets nor had the assessee's title to the assets been improved. On that view of the matter, the High Court has held that no exception could be taken to the decision in CIT v. V. Indira [1979] 119 ITR 837 (Mad), and the said decision 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 prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e payment of estate duty on the property passing on the death of the deceased. Although this liability was in respect of the entire amount of estate duty payable in relation to such property it was limited to the assets of the deceased that were actually received or which, but for his own neglect or default, might have been received by such accountable person. Sub-section (5) of section 53 prescribed that where two or more persons were accountable, they were liable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a charge to one of interest in property. This would show that a charge differs from a mortgage in the sense that in a mortgage there is transfer of interest in the property mortgaged, while in a charge no interest is created in the property charged, so as to reduce the full ownership to a limited ownership. The creation of a charge under section 74(1) of the Estate Duty Act cannot, therefore, be construed as creation of an interest in property that is the subject-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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y section 74), we have found that as a result of the creation of the charge under section 74, no interest is created in the property which is the subject matter of such charge. The submission regarding diversion in relation to the amount paid by way of estate duty has been raised by the assessee for the first time before this court. Before the Tribunal as well as before the High Court the contentions urged on behalf of the assessee were confined to a claim for deduction 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 aff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court has failed to note that in a mortgage there is transfer of an interest in the property by the mortgagor in favour of the mortgagee and where the previous owner has mortgaged the property during his lifetime, which is subsisting at the time of his death, then after his death his heir only inherits the mortgagor's interest in the property. By discharging the mortgage debt his heir who has inherited the property acquires the interest of the mortgagee in the property. As a result of such payment made for the purpose of clearing off the mortgage the interest of the mortgagee in the property has been acquired by the heir. The said payment has, therefore, to be regarded as " cost of acquisition " under section 48 read with section 55(2) of the Act. The position is, however, different where the mortgage is created by the owner after he has acquired the property. The clearing off of the mortgage debt by him prior to transfer of the property would not entitle him to claim deduction under section 48 of the Act because in such a case he did not acquire any interest in the property subsequent to his acquiring the same. In CIT v. Daksha Ramanlal [1992] 197 ITR 123, the Gujarat High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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