IMPORTANT POINT
When the assessee had admittedly become the full owner of the assets even before the payment of the same he had not acquired a new right, tangible or intangible, in the assets, it cannot be said that the amount proportionate to estate duty paid by the assessee on the properties that were transferred should be treated as cost of acquisition of the assets u/ss 48 and 49 r/ws 55(2) of the Income Tax Act, 1961.

Headnote:(i) Transfer of Property Act, 1882 -Section 100-Charges-No interest is created in the property charged so as to reduce full ownership to a limited ownership-Creation of a charge u/s 74(1) of Estate Duty Act-Cannot be construed as creation of an interest in property that is subject matter of charge-It only means that in matter of recovery of estate duty from the property, the amount recoverable would have priority over other liabilities of accountable person-Difference between a mortgage and a charge, 1995(2) SCC 19 : Relied on.
       Held : 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. (Para 22)
       (ii) Taxation-Income Tax Act, 1961-Sections 45(1) 48, 49, 55-Capital Gains-Computing capital gains on sale of properties-Cost of acquisition of assets and cost of improvement thereto to be deducted -Claim of deduction of proportionate estate duty paid in respect of properties sold-Maintainability-Properties were bequeathed to assessee by his mother-Assessee had taken cost of acquisition of capital assets concerned at their market value on the date when he became entitled to them under Will-Estate duty had been paid consequent upon death of previous owner-Whether estate duty paid can be claimed as a deduction as cost of acquisition or as cost of improvement u/ss 48 and 49 r/ws 55(2) of the Act?-(No)-Title of assessee to immovable properties acquired was not incomplete and imperfect before payment of estate duty-No improvement in title of assessee as a result of payment of estate duty-Impugned order of High Court affirmed.
       Held : 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 title of the assessee to the immovable properties received by him from Smt. Umayul 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 estate duty paid by the assessee on the properties that were transferred should be treated as cost of acquisition of the assets under Sections 48 and 49 read with Section 55(2) of the Act. Since the title of the assessee to the immovable properties acquired was not incomplete and imperfect in any way, it cannot also be said that as a result of the payment of the estate duty by the assessee there was an improvement in the title of the assessee and the said payment could be regarded as cost of improvement under Section 48 read with Section 55(1)(b) of the Act. (Para 22)

JUDGMENT

S.C. Agrawal, J.-Special leave granted in Special Leave Petition No. 10737 of 1981.

2. These appeals filed by the assessee involve the question whether the estate duty paid by the assessee under the provisions of the Estate Duty Act, 1953, to the extent it relates to the property that is transferred by the appellant, can regarded as cost of acquisition of the said property or cost of improvement to 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 assessment years 1966-67 to 1970-71, Civil Appeal No. 860 of 1988 relates to assessment year 1972-73 and Civil Appeal arising out of S.L.P. (C) No. 10737 of 1981 relates to assessment year 1971-72.

3. 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 the capital assets concerned at their market value as on August 20, 1964, the date on which he became entitled to them under the will from his adoptive mother. The assessee claimed that since estate duty had been paid consequent upon the death of Ramanathan Chettiar and Smt. Umayal Achi, the proportionate part thereof as is attributable to the value of the properties sold should be deducted in computing the capital gains. The Income Tax Officer rejected the said contention and computed the capital gains for the assessment years 1966-67, 1967-68, 1969-70 & 1970-71 at Rs, 80,050/-, Rs. 4,89,876/-, Rs 55,758/- & Rs.81,254/- respectively on the ground that under Explanation to Section 49(1) of the Act, Ramanathan Chettiar alone should be considered as the previous owner and that consequently the appellant would be entitled to adopt as the cost of acquisition of the properties sold their value as on January 1,1954. Appeals filed against the said orders of assessment of the Income Tax Officer were rejected by the Appellate Assistant Commissioner as well as the Income Tax Appellate Tribunal (hereinafter referred to as the Tribunal ). At the instance of the assessee, the Tribunal referred the following question to the Madras High Court :

Whether in computing the capital gains on the sale of properties made by the assessee 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 Shrimati Umayal Achi in respect of properties sold should be deducted?

4. Since the Division Bench of the High Court was not inclined to agree with the view taken in the earlier judgment of the said High Court in, on the meaning Commissioner of Income Tax v. V. Indira1of the words cost of improvement in Section 55(1)(b) of the Act, the matter was referred to a Full Bench of the High Court. The Full Bench of the High in its impugned judgment dated December 23, 1980 (Smt. S. Valliammai & Anr. v. Commissioner of Income Tax, Madras2), has answered the said question

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1997 Supreme(SC) 917

Cases Referred (2)