TMI Blog1980 (4) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... and site at Kodambakkam High Road, of the extent of 15 grounds and 1,400 sq. ft. to the American Embassy for Rs. 6,00,000 and a plot of land measuring 7.2040 grounds at Nungambakkam High Road for Rs. 1,17,750 and a house at Pattukkottai for Rs. 65,000. During the previous year ending with March 31, 1969, he had sold 6 grounds and 260 sq. ft. at Thirumalai Pillai Road, T. Nagar, Madras, for Rs. 79,200. During the previous year ending with March 31, 1970, the assessee sold 4 grounds and 1,020 sq. ft. in Thirumalai Pillai Road for a sum of Rs. 64,162.50 and the house bearing door No. 44, III Main Road, Adayar, for Rs. 81,000. He offered Rs. 7,537, Rs. 1,84,480, Rs. 19,015 and Rs. 32,118 as capital gains for the assessment years 1966-67, 1967-68, 1969-70 and 1970-71, respectively, as arising from the aforesaid transfers. In doing so, he had taken the cost of acquisition of the capital assets concerned at their market value as on April 28, 1964, the date on which he became entitled to them under the will of his adoptive mother. He had also claimed that since the estate duty had been paid consequent upon the death of Ramanathan Chettiar and Umayal Achi, the proportionate part thereof as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee during the previous years relevant for the assessment years 1966-67, 1967-68, 1969-70 and 1970-71, proportionate estate duty paid on the death of Shri Ramanathan Chettiar and Shrimathi Umayal Achi in respect of properties sold should be deducted ? " Valliammai in her turn had sold 2.5 grounds of land in Valliammal Road, Alagappa Nagar, for Rs. 23,125 on April 11, 1966, 1.5 grounds of land in the same road for Rs. 13,875 on June 5, 1966, three grounds of land for Rs. 47,795 on March 16, 1967, and 32008 grounds of land in Nungambakkam High Road for Rs. 45,995 on March 18, 1967. In the return filed by her for the assessment year 1967-68 she had offered Rs. 1,07,479 as capital gains arising from the aforesaid sales liable to be taxed under s. 45 of the Act and sought deduction of the proportionate part of the estate duty levied and paid on the estate of Ramanathan Chettiar as was attributable to the value of the properties sold by her. The ITO rejected the contention holding that since she had acquired the properties sold by inheritance on the death of her father to whom they belonged, her father alone should be considered as the previous owner under the Explanation to s. 49( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrectness of the earlier Bench decision and, therefore, referred the matter to a larger Bench. That is how the matter has come before the Full Bench. The question that arises for consideration by the Full Bench in these cases is whether in computing the capital gains arising on the sales made by the assessees during the relevant previous years, the proportionate estate duty attributable to the properties sold could be deducted from the sale consideration either on the ground that it represents part of the cost of their acquisition or the cost of their improvement subsequent to the acquisition. The relevant statutory provisions which have a bearing on the above question are ss. 45, 48 and 55 of the Act, and s. 74 of the E.D. Act, 1953. As per s. 45 of the Act all profits and gains arising from the transfer of capital assets effected in the previous year shall be chargeable to incometax under the head " Capital gains " and shall be deemed to be the income of the previous year in which the transfer took place. Section 48 gives the mode of computation of capital gains and says that the income chargeable under the head " Capital gains " shall be computed by deducting from the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of a mortgage there is a transfer of an interest in the property while there is no such transfer of an interest when a mere charge is created over it, that in the case of a charge a right to payment out from a particular fund or a particular property without transferring that fund or property is alone created, and that right cannot be said to be an interest carved out of the properties in favour of the Government on the creation of a charge so that it could be said that there is a retransfer of an interest in favour of the assessee from the Government on the payment of estate duty, and, therefore, the estate duty paid cannot be taken as part of the cost of acquisition of the asset. Though the learned counsel for the assessee questions the said view of the Tribunal, we do not see how payment of estate duty will amount to acquisition of an interest in the capital asset. In the case of Arunachalam, he had got the entire right, title and interest in the properties left by Umayal Achi under the will executed by her, along with her liability to pay estate duty on the properties passing on the death of the earlier owner, Ramanathan Chettiar, and as an accountable person he also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld restrict the applicability of that provision only to tangible property and it could not be applied to the case of an intangible asset. Such a construction would also lead to the mode of computation being different from asset to asset. He further contended that it is neither necessary nor possible to restrict the meaning of the words " cost of improvement " in relation to a capital asset in a literal sense and that it is possible to understand and interpret that provision in a general or commercial sense. In that connection, he relied on the decision of the Supreme Court in Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651, wherein the Supreme Court held that the principles to be applied are those which are part of commercial practice or which an ordinary man of business will resort to when making computation for his business purposes. Referring to the decision of the Calcutta High Court in CIT v. Bengal Assam Investors Ltd. [1969] 72 ITR 319 and of this court in CIT v. V. Indira [1979] 119 ITR 837, both of which dealt with the scope of the expression " cost of improvement ", the learned counsel submitted that " cost of improvement " had been construed in the latter case in nar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to enhance the value of the shares and hence the expenditure was also of a capital nature incurred for making additions or alterations to the shares. Though the learned counsel for the assessees places much reliance on the above decision, we are clearly of the view that the principle laid down in that decision will not apply to the cases on hand. In that case, unless the shares acquired by the assessee are registered in the books of the company in its name, it cannot be taken to have acquired a complete title to the shares and, therefore, the expenses incurred in having the shares registered in its name in the books of the company was taken to be an expenditure of a capital nature, incurred for perfecting the assessee's title to the shares, forming part of its actual cost of the shares. By incurring the expenses for having the articles of association amended so as to get voting rights for each and every share, the assessee had acquired additional voting rights in respect of each of its shares and, therefore, the expenditure has been taken to be of a capital nature incurred for making additions to the assets. In the cases before us, there is no question of title being incomp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovides for the deduction of cost of acquisition of the capital asset and also the cost of any improvement thereto subject to the terms of the other sections, that as the asset became the property of the assessee by way of gift, the cost of acquisition had to be the cost to the previous owner in accordance with s. 49(1), that as the previous owner had not paid the amount of Rs. 6,943 and the same had been paid only by the assessee, it could not be treated as the cost of acquisition to the previous owner and that, therefore, it could not qualify for deduction as the cost of acquisition of the asset. The court also held that the amount could not also be treated as " cost of any improvement thereto " as the expression " thereto " would appear to cover a case where the amount is expended on the asset itself. In the context, Sethuraman J. speaking for the Bench, observed (p. 841): " We have now to examine whether the amount can be allowed as deduction as 'cost of any improvement thereto '. The expression ' thereto' would appear to cover a case where the amount is expended on the asset itself. Improving the owner's title to the asset is different from improving the asset itself. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re by way of effecting any improvement to the capital asset that was originally purchased by the previous owner. In this view, the court held that the mortgage amount paid could not be treated as " cost of improvement of the asset The capital asset, the sale of which has brought in the capital gain, may either be tangible or intangible. In the case of a tangible asset, an addition can be only in the form of physical addition. In the case of intangible assets, the addition cannot be physical. Therefore, it is not possible to say in every case that without any physical addition to the capital asset, there can be no improvement thereto. Whether physical addition is necessary or not will depend on the nature of the asset. We are concerned here with tangible assets and the question is whether by payment of the estate duty, which of course, results in the assets being released from the statutory charge, any addition is made to the asset as such physically or otherwise. Section 74(1) of course creates a first charge on the immovable property for payment of estate duty in respect of all properties passing on death. But, the proviso to sub-s. (2) says that the property shall not be so cha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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