Supreme Court of India
R.M. ARUNACHALAM ETC.versusCOMMISSIONER OF INCOME TAX, MADRAS
- Citation
- 1997 INSC 554
- Decided
- 9 July 1997
- Disposal
- Dismissed
Holding
Estate duty paid on inherited property does not constitute cost of acquisition or cost of improvement; the charge created under Section 74(1) of the Estate Duty Act does not create an interest in the property, so no deduction is permissible.
Summary
R.M. Arunachalam inherited immovable properties from his adoptive mother, who had received them by will from her husband Ramanathan Chettiar. The assessee sold these properties during assessment years 1966-67 to 1972-73 and claimed that the estate duty paid under the Estate Duty Act, 1953, should be allowed as "cost of acquisition" or "cost of improvement" for computing capital gains under the Income Tax Act, 1961. The Income Tax Officer rejected the claim, treating the previous owner as Ramanathan Chettiar and using the 1954 valuation as cost. The High Court upheld the rejection, holding that the charge created by Section 74(1) of the Estate Duty Act does not create an interest in the property and the assessee already had full title before paying the duty. The Supreme Court affirmed this view, stating that estate duty cannot be treated as acquisition or improvement cost and that the principle of diversion was not raised earlier. Consequently, the appeals were dismissed.
Issues considered
- Whether estate duty paid under Section 74(1) of the Estate Duty Act can be treated as cost of acquisition of inherited property for capital gains computation.
- Whether estate duty paid can be treated as cost of improvement under Sections 48 and 55 of the Income Tax Act.
- Whether the creation of a charge under the Estate Duty Act creates an interest in the property akin to a mortgage.
- Whether the principle of diversion can be invoked to allow deduction of estate duty.
- Whether payment made to clear a mortgage on inherited property qualifies as cost of acquisition.
Legislation cited
- Income Tax Act, 1961s. 45(1), s. 48(ii), s. 49(1), s. 55(1)(b), s. 55(2)
- Transfer of Property Act, 1882s. 100, s. 58
Subjects
estate dutycost of acquisitioncost of improvementcapital gainsincome taxinheritancewillcharge vs mortgageSection 49Section 48Section 55diversion principle
Judgment
A R.M. ARUNACHALAM ETC.
v.
COMMISSIONER OF INCOME TAX, MADRAS
JULY 9, 1997
B [S.C. AGRAWAL AND D.P. WADHWA, JJ.)
Income Tax Act, 1961:
Sectio11s 45(1), 48(ii), 49(1) a11d 55(l)(b) read with Estate Duty Act,
C 1953-Sections 53(1) and 74(1)---f'roperty after the Death of the owner
devolving upon widow and daughter i11 equal shares-Widow dying a11d u11der
her Will, prope1ties becomi11g the property of the assessee-Many propelties
disposed of by the assessee dwing various accou11ti11g years relevant to A Ys
1966-67 to 1972-73--Under the circumstances, the propo1tionate pan of the
estate duty, paid consequent to the death of the original owner and his widow,
D relevant to the prope1ties sold by the assessee, held neither 'cost of acquisition'
nor 'cost of improvement' of the said properties.
Capital gains--Deductions-"Cost of acquisition ''-Amount paid by the
heir of a m01tgaged property to clear the m01tgage-Held, deductible under
E Section 48 as cost of acquisition.
Transfer of Propelties Act, 1882:
Sections 58 and JOO-Charge and mortgage-Distinguished
F Words & Phrases:
"Cost of acquisition" and "cost of improvement"-Meaning of in the
context of Income Tax Act, 1961.
Constitution of lndia-A1tic/e 136-Special Leave jurisdiction-New
G plea-Income t~iversion of I11come-Prope1ties acquired under 'Will'
subsequently sold-Estate duty paid 011 such propelties, whether deductible in
computing the capital gains a1isi11g out of such sale 011 the ground of diversion
of income-Held, question having been raised for the first time before the
Supreme Coult and being entirely i11depende11t of the issues considered by
H Tribunal and High Cowt, not enteltained by the Supreme Coult.
64
R.M. ARUNACHALAM v. C.I.T. MADRAS 65
'
R, who had considerable moveable and immovable properties, died A .
leaving behind bis widow U and daughter S. The properties of R devolved
upon the legal heirs in equal shares. The assessee-appellant being the
adopted son, inherited the properties belonging to U under her will.
During the previous years relevant to AYs 1966-67 to 1972-73, the assessee
sold various prop~rties of R bequeathed to him by U. A question arose as B
to whether the estate duty paid by the assessee with respect to such sale
of property could be regarded as "cost of acquisition" or "cost of improve-
ment" for the purpose of computation of income tax under the Income Tax
Act. The Income Tax Officer computed the capital gains on the ground
that under Explanation to Section 49(1) of the Act, R alone should be
considered as the previous owner. Assistant Commissioner as well as the C
Tribunal rejected the order of assessment by the ITO. However, the
Tribunal referred the said question to the High Court, which answered the
said question against the assessee. Hence the present appeal.
The assessee contended that in view of Section 74(1) of the Estate D
Duty Act, estate duty payable in respect of the properties of R and U was
the first charge on the capital assets and that the amount paid by the
assessee towards the estate duty to the extent it related to those assets
should be treated as "cost of acquisition"or "cost of improvement" under
Section 45 read with Section 55 of the Income Tax Act and deducted in
computing the capital gains arising out of the sale of such properties by E
the assessee. It was for the first time contended before this Court that
estate duty paid was deductible in computing the capital gains O!l the
ground of diversion of income.
Dismissing the appeals, this Court F
Held : 1. 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 charge under G
Section 74(1) of the Estate Duty Act cannot, therefore, be construed as
creation of an interest in the 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 persons. In that sense H
66 SUPREME COURT REPORTS (1997) SUPP. 2 S.C.R.
A the claim in respect of estate duty would have precedence over the claim
of the mortgage because a mortgage is also a charge. 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 assessee to
che immovable properties received by him from U was incomplete and
B imperfect in any way. In the context of the facts, the High Court has found
that the assessee has 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 paid
by the assessee on the properties that were transferred should be treated
C as "cost of acquisition of the assets under Sections 48 and 49 read with
Section 55(2) of the Income Tax 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 improvement in the title of the assessee and
D the said payment could be regarded as "cost of improvement" under
Section 48 read with Section 55(1)(b) of the Income Tax Act. [79-8-G]
Smt. S. Valliammai v. CIT, (1981) 127 ITR 713 (Mad) (FB), affirmed.
Dattatreya Shanker Mote & Ors. v. Anand Chi11tama11 Datar & Ors.,
E [1975) 2 SCR 224, State Bank of Bikaner & Jaipur v. National Iron & Steel
Rolling Corpn., [1995] 2 SCC 19, relied on.
Commissioner of Income Tax v. V. Indira, [1979) 119 ITR 837 (Mad);
Smt Sara/a Devi v. Commissioner of Income Tax, (1996) 222 ITR 211 (Ker),
referred to.
F Winans v.Attomey General, 1910 AC 27, referred to.
2. The payment made by a person for the purpose of clearing off the
mortgage created by the previous owner is to be treated as cost of acquisi-
tion of the interest of the mortgage in the property and is deductible under
G Section 48 of the Act. [82-C]
3. In taking the view that in a case where the property has been
mortgaged by the previous owner during his lifetime and the assessee, after
inheriting the same, has discharged the mortgage debt, the amount paid by
him for the purpose of clearing off the mortgage is not deductible for the
H purpose of computation of capital gains, the Kerela High Court in Ambat
R.M. ARUNACHALAM v. C.I.T. MADRAS 67
Echukutty Menon 's Case failed to note that in a mortgage there is transfer A
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 heirs only inherit the mortgagor's interest in the property. As a result
of such payment made for the purpose of clearing off the mortgage debt the
interest of the mortgagee in the property has been acquired by the heir. The B
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 the mortgage debt by him prior to transfer
of the property would not entitle him to claim deduction under Section 48 C
of the Act because in such a case he did not acquire any interest in the
property subsequent to his acquiring the same. [81-F-H; 82-A-C]
Ambat Echukutty Menon v. Commissioner of Income Tax, (1978) 111
ITR 880, overruled.
D
Salay Mohamad Ibrahim Sail v.Income Tax officer, (1994) 210 ITR 700
(Ker); KK Idiculla v. Commissioner of Income Tax, (1995) 214 ITR 386
(Ker), impliedly overruled.
Commissioner of Inconie Tax v. Daksha Raman/al, (1992)197 ITR 123
(Guj.), approved. E
4. The submission regarding diversion in relation to the amount paid
byway of estate duty has been raised by the assessee for the first time before
this Court. This is an entirely independent issue which has not been con-
sidered by the Tribunal or the High Court. It cannot be permitted to be F
raised for the first time at this stage. [80-F-G]
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 6098-
6101 Of 1983 Etc.
From the Judgment and Order dated 23.12.80 of the Madras High G
Court in T.C. Nos. 994-997 of 1979
Ms. Janki Ramachandran for the appellant in C.A. No.4386/97.
G.C. Sharma, B.K. Prasad, B.S. Ahuja and C. Radha Krishna for the
Respondent. H
68 SUPREME COURT REPORTS (1997] SUPP. 2 S.C.R.
A The Judgment of the Court was delivered by
S.C. AGRAWAL, J. Special leave granted in Special Leave Petition
No. 10737 of 1981.
These appeals filed by the assessee involve the question whether the
B 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 for the purpose of computation of
capital gains under the Income Tax Act, 1961 (hereinafter referred to as
C '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. 10737of1981 relates
to assessment year 1971-72.
D Ramanathan Chettiar, who had considerable movable and immov-
able properties, died on January 26, 1958 leaving behind his wife, Smt.
Umayal Achi and daughter, Smt. S. Valliammi 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. Valliammi. Smt.
E 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.
F lJi 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 pur-
pose, 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
G 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
H 1966-67, 1967-68, 1969-70 and 1970-71 at Rs. 80050 and Rs. 489876,
R.M. ARUNACHALAM v. C.I.T. MADRAS [S.C. AGRAWAL, J.] 69
Rs.55758 and Rs. 81254 respectively on the ground that under Explanation A
to Section 49(1) of the Act, Ramanathan Chettiar alone should be con-
sidered as the 'previous owner' and that consequently the appellant would
be entitled to adopt as the cost of acquisition cf 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 B
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 C
assessment years 1966-67, 1967-68, 1969-70 and 1970-71 , propor-
tionate estate duty paid on the death of Shri Ramanathan Chettiar
and Shrimati Umayal Achi in respect of properties sold should be
deducted?"
D
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
Commissioner of Income Tax v. V. Indira, (1979) 119 ITR 837, on the
meaning of 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 E
of the High Court in its impugned judgment dated December 23, 1980 Smt.
S. Valliammai & Anr. v. Comi;nissioner of :ncome-tax, Madras, (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.
F
In respect of 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:-
G
"Whether in computing the capital gains on the sale of the proper-
ties 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?" H
70 SUPREME COURT REPORTS (1997] SUPP. 2S.C.R.
A 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. Civil Appeal arising out of Special Leave
Petition (C) No. 10737of1981 has been filed against the said judgment of
the High Court.
B In respect of assessment year 1972-73 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.
c Before we deal with the submissions of the learned counsel for the
assessee, it would be convenient to take note of the relevant provisions of
the Act relating to capital gains. Under sub- section (1) of Section 45 of
the Act any profits or gains arising from the transfer of a capital asset
effected in the previous year are chargeable to income tax under the head
"Capital Gains" and are deemed to be the income of the previous year in
D which the transfer took place. Section 48 which prescribes the mode of
computation of income chargeable under the head "Capital Gains" and
permissible deductions, at the relevant time, provided as follows :-
Section 48. Mode of Computation and deductions - The income
E chargeable under the head "Capital gains" shall be computed by
deducting from the full value of the consideration received or
accruing as a result of the transfer of t~e capital asset the following
amounts, namely :-
(a) expenditure incurred wholly and exclusively in connection with
F such transfer;
(b) the cost of acquisition of the capital asset and the cost of any
improvement thereto."
G Section 49 makes provision regarding the cost of acquisition with
reference to certain modes of acquisition of the assets. Sub- section (1) of
Section 49 provided as under :
"Section 49. Cost with reference to certain modes of acquisition.-
H Where the capital asset became the property of the asser.see
R.M. ARUNACHALAMv. C.l.T.MADRAS [S.C.AGRAWAL,J.) 71
(i) on any distribution of assets on the total or partial partition of A
a Hindu Undivided Family;
(ii) under a gift or will;
(iii) (a) by succession, inheritance or devolution; or
B
(b) on any distribution of assets on the dissolution of a firm,
body of individuals or other association of persons, or;
(c) on any distribution of assets on the liquidation of a com-
pany, or
c
(d) under a transfer to a revocable or an irrevocable trust, or
(e) under any such transfer as is referred to in clause (iv) or
clause (v) or clause (vi) of Section 47
the cost of acquisition of the asset shall be deemed to be the cost D
for which the previous owner of the property acquired it, as
increased by the cost of any improvement of the assets incurred
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 any capital asset owned by an assessee
means· the last previous owner of the capital asset who acquired it
E
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 acquisiti!ln" for F
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 improvement", in relation to a capital asset,-
G
(i) where the capital asset became the property of the previous
owner or the assessee before the 1st day of January, 1954, and the
fair market value of the asset on that date 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 H
72 SUPREME COURT REPORTS (1997) SUPP. 2 S.C.R.
A 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
B asset became the property of the assessee by any of the modes
specified in 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 property', 'Profits and gains of business or profession', or
c 'Income from other sources', and the expression 'improvement'
shall be construed accordingly."
In sub-section (2) of Section 55 the expression 'cost of acquisition'
was defined in the following terms :
D "(2) For the purposes of Sections 48 and 49, 'cost of acquisition',
in relation to a capital asset.-
(i) where the capital asset became the property of the assessee
before the 1st day of January, 1954, means the cost of acquisition
of the asset to the assessee or the fair market value of the asset
E on the Ist day of January, 1954, at the option of the assessee;
(ii) where the capital asset became the property of the assessee by
any of the modes specified in sub-section (1) of Section 49, and
the capital asset became the property of the previous owner before
the 1st day of January, 1954, means the cost of the capital asset to
F the previous owner or the fair market value of the asset on the 1st
day of January, 1954 at the option of the assessee;"
(Rest omitted).
A perusal of the aforesaid provisions would show that for the pur-
G pose of computation of income chargeable under the head 'Capital gains'
the cost of acquisition of the asset and cost of improvement thereto are to
be deducted in view of Section 48(b). Under sub-section (1) of Section 49
in a case where the capital asset became the property of the assessee under
any of the modes specified in (i), (ii) and (iii), which include succession,
H testamentary as well as non-testamentary, the cost of acquisition of the
R.M.ARUNACHALAMv. C.I.T.MADRAS[S.C.AGRAWAL,J.) 73
asset is to be deeme<i to be the cost for which the previous owner of the A
property acquired it as increased by the cost of any improvement of the
assets incurred or borne by the previous owner or the assessee, as the case
may be. Under the Explanation to sub-section {1) of Section 49 previous
owner 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 acquisi- B
tion 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 C
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 D
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 Rarnanathan Chettiar and the estate of Smt.
Umayal Achi, to the extent such duty related to the assets in question, can
E
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 F
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 (c) every person in whom any interest in the _G
property so passing is vested in possession by alienation or other derivative
title, shall be accountable for the whole of the estate duty on the property
passing on the death but shall not be liable for any duty in excess of the
assets of the deceased which he actually received or which, but for his own
neglect or default, he might have received. In Section 74 of the Estate Duty H
74 SUPREME COURT REPORTS (1997) SUPP. 2 S.C.R.
A Act the following provision was made :-
"Section 74. (1) Subject to the provisions of Section 19, the estate
duty payable in respect of property movable, or immovable, passing
on the death of the deceased, shall be a first charge on the
immovable property so passing (including agricultural land) in
B whomsoever it may vest on his death after the debts and en-
cumbrances allowable under Parf VI of this Act; and any private
transfer or delivery of such property shall be void against any claim
in respect of such estate duty.
c (2) A rateable part of the estate duty on an estate, in proportion
to the value of any beneficial interest in possession in movable
. ·' property which passes to any person (other than the legal repre-
sentative of the deceased) on the death of the deceased shall be a
first charge on such interest : ·
D Provided that the property shall not be so chargeable as against
a bona fide purchaser the;eof for valuable consideration without
notice.
(3) The Controller may release the whole or any part of any
property, whether movable or immovable, from charge under this
E
section in such circumstances and on such conditions as he thinks
fit."
Before the High Court it was urged on behalf of the assessee that
under Section 74(1) of the Estate Duty Act a first charge has been created
F on the immovable property of the deceased for the purpose of securing
payment of the estate duty in respect of properties, movable or immovable
passing on the death of the deceased and that as a result an interest has
been carved out of the immovable properties of the deceased in favour of
the Government and that the said interest has been acquired by the
G assessee on payment of the estate duty and, therefore, amount of propor-
tion of the estate duty paid by the assessee in respect of the properties sold
should also be trea<ed 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.
H The contention that estate duty paid should be treated as cost of
R.M.ARUNACHALAMv. C.l.T.MADRAS[S.C.AGRAWAL,J.] 75
acquisition was rejected by the High Court on the view that it is only when A
the title acquired is defective, incomplete or imperfect, 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 B
immovable properties acquired cannot be said to be incomplete or imper-
fect 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 C
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 the immovable
property from charge in view of the availability of sufficient cash and in
that case, . . . there is no effective statutory charge on the immovable D
property. According to the High Court when she acquired, by inheritance,
half of the properties held by Ramanathan Chettiar, on his death, Smt.
Umayal Achi got full and complete title therein and likewise when the
assessee got the properties under the Will of Smt. U mayal Achi, he gc.t full
and complet~ title therein and the non-payment of the estate duty did not
result in their getting an imperfect or incomplete title in the property. The E
High Court has, therefore, held that since the assessee became the full
owner of the assets even before the payment of estate duty, he has not
acquired any new rights, tangible or intangible, in the assets.
The High Court has also rejected the alternate claim put forward by F
the assessee that the estate duty paid is to be treated as the cost of
improvement of the assets sold. While holding that in the case of a tangible
asset an addition can be only in the form of physical addition but in the
case of intangible assets, the addition cannot be physical and, therefore, it
is not possible to say in every case that without any physical addition to the G
capital asset there can be no improvement thereto and that whether
physical addition is necessary or not will depend on the nature of the asset,
the High Court has observed that in the present case the court was
concerned with tangible assets and that by paying the estate duty and there
by releasing the property from the charge under Section 74, the assessee
cannot be said to make any addition in the property as such. H
76 SUPREME COURT REPORTS (1997) SUPP. 2 S.C.R.
A The High Court has further observed that in the present case it is
not possible to say that the capital assets were the only assets for which the
estate duty could be paid and, therefore, there was a danger of the capital
assets being proceeded against in enforcement of the charge. The High
Court has found that the assessee admittedly became the full owner of the
B 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 Commissioner of Income Tax v. V. Indira.
C (supra) 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
D arising out the sale of the property the said sum of Rs. 6,943 shoul~ 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 Assistant Appellate Commis-
sioner. But the Tribunal held that in paying the said amount the assessee
perfected her title to the property by removing the cloud cast on it by a
E 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
F Rs. 6,943 should not be treated as the cost of acquisition to the previous
owner and, therefore, it could not qualify for deduction as cost of acquisi-
tion of the asset and it could not also be treated as 'cost of improvement
thereto' as the expression 'thereto' would appear to cover a case where the
amount is expended on the asset itself.
G In the judgment of the High Court a reference has been made to the
_judgment of the Kerala High Court inAmbat Echukutty Menon v. Commis-
sioner of Income Tax, (1978) 111 ITR 880 (Kerala], wherein it was held that
an assessee could not claim deduction of the amount paid by him to
discharge a mortgage on the asset as the cost of improvement of the asset
H sold under Section 48 of the Act.
R.M.ARUNACHALAMv. C.I.T.MADRAS [S.C.AGRAWAL,J.) 77
Smt. Janaki Ramachandran, the learned counsel appearing for the A
assessee, has urged that in view of the Section 74(1) of the Estate Duty
Act, estate duty payable in respect of the properties of Ramanathan
Chettiar and Smt. Umayal Achi was the first charge on the capital assets
that were transferred by the assessee and that the amount paid by the
assessee towards the estate duty, to the extent it related to those assets, B
should be treated as 'cost of acquisition' or in any event 'cost of
improvement' under Section 48 read with Section 55 of the Act. The
learned counsel has placed reliance on the observations of Lord Chancellor
Loreburn in Winans v. Attomey General, (1910) AC. 27, explaining the
difference between Estate Duty and Legacy and Succession duties. The
Learned counsel has also invoked the principle of diversion governing C
computation of income chargeable to tax for the purpose of excluding the
amount payable as estate duty and has relied upon the decision of the
Kerala High Court in Smt. Sara/a Devi v. Commissioner of Income Tax,
(1996) 222 ITR 211 wherein this principle has been applied in the matter
of computation of Capital Gains.
D
As noticed earlier under Section 53(1) of the Estate Duty Act the
persons referred in clauses (a) to (c) thereof were accountable for the
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 E
of the deceased that we.re actually received or which but for his own neglect
or default, might have been received by such accountable person. Sub-sec-
tion (5) of Section 53 prescribed that where two or more persons were
accountable, they were liable jointly and severally for whole of the estate
duty on the property so passing. This would show that the liability of the F
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 G
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 : H
78 SUPREME COURT REPORTS (1997) SUPP. 2 S.C.R.
A "Section 100, CHARGES, where immovable property of one per-
son 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
B
charge.
Nothing in this section applies to the charge of a trustee on the
trust-property for expenses properly incurred in the execution of
his trust, and, save as other expressly provided by any law for the
c time befog in force, no charge shall be enforced against any
property in the hands of a person to whom such property has been
transferred for consideration and without notice of the charge."
Construing the said provision, this Court in Dattatraya Shanker Mote
D & Ors. v. Anand Chintaman Datar & Ors., (1975] 2 SCR 224, has said :-
"It is apparent from the provisions of the above section that a charge
does not amount to a mortgage though all the provisions which
apply to a simple mortgage contained the preceding provisions
E shall, so far as may be, apply to such charge. While a charge can be
created either by act of parties or operation of law, a mortgage can
only be created by act of parties. A charge is thus a wider terms as
it includes alsc a mortgage, in that every mortgage is a charge, but
every charge is not mortgage. The Legislature while defining a
charge in Section 100 indicated specifically that it does not amount
F to a mortgage. It may be incongruous and in terms even appear to
be an anti-thesis to say on the one hand that a charge does not
amount to a mortgage and yet apply the provisions applicable to a
simple mortgage to it as if it has been equated to a simple mortgage
both in respect of the nature and efficacy of the security. This
G misconception had given rise to certain decisions where it was held
that a charge created by a decree was enforceable against a trans-
feree for consideration without notice, because of the fact that a
charge has been erroneously assumed to have created an interest
in property reducing the full ownership to a limited ownership. The
H declaration that 'all the provisions hereinbefore contained which
R.M.ARUNACHALAMv. C.I.T.MADRAS(S.C.AGRAWAL,J.] 79
apply to a simple mortgage shall, so far as may be, apply to such A
charge' does not have the effect of changing the nature of a charge
to one of the interest in property." [pp. 232, 233)
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 B
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
I
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 C
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 & Jaipur v. National Iron & Steel Rolling Corporation 1995 (2) SCC D
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 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 E
payment of estate duty and on payment ()f the same he had not acquired
a new right, tangible or intangible, in that assets. It cannot, therefore, be
said that the amount proportionate to estate duty paid by the assessee on
the properties that were tran~ferred should be treated as 'cost of acquisi-
tion of the assets' under Sections 48 and 49 read with Section 55(2) of the p
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. G
In Winans v. Attorney General (supra) the question for consideration
was whether foreign bonds and certificates payable to bearer passing by
delivery and marketable on the London Stock Exchange, were, when
physically situate in the United Kingdom ;it the death of owner, liable to H
•
80 SUPREME COURT REPORTS [1997] SUPP. 2 S.C.R.
A Estate duty under the Finance Act, 1894, even though the deceased was
domiciled abroad. It was urged that the principle of domicile which governs
the liability to Legacy and Succession duties was also applicable to Estate
duty. The said contention was negatived by the House of Lords and a
distinction was made between Estate duty and Legacy and Succession duty.
B In that context, Lord Chancellor Loreburn said :-
"Legacy and succession duties fall upon the benefits received by
survivors on their accession upon a death. Estate duty falls upon
the property passing upon a death, apart from its destination ." [p.
30]
c These observations of Lord Loreburn, on which reliance has been
placed by Sml. Ramachandran, relate to chargeability of Estate duty and
have no bearing on the question whether any interest is created in the
property in respect of the Estate duty payable on the property. That is a
question which has to be considered in the light of the provisions contained
D in the Estate Duty Act of our country. On a consideration of the said
provisions (especially 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.
E 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 oi improvement under
Section 48 of the Act. The questions referred to by the Tribunal to the
F 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 Sec-
tion 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
G 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 wiable to endorse the view of the Kerala High Court in Ambat
H Eclzukutty Menon v. Commissioner of Income Tax (supra) to which refer-
I
0
I
R.M. ARUNACHALAM v. C.I.T. MADRAS [S.C. AGRAWAL, J.] 81
ence has been made by the High Court in the impugned judgment. In that A
case, the assessee, as one of the heirs, had inherited. property from the
previous owner who had mortgaged the same during his life time and after
his death the heirs, including the assessee, had discharged the mortgage
created by the deceased. The said property was subsequently ~cquired
under the Land Acquisiti?n· Act and for the purpose of capital gains the B
assessee sought deduction of the amount spent to clear the mortgage. The
High Court held that the capital asset had become the property of the
assessee by succession or inheritance on the death of the previous owner
under Section 49(1) of the Act and the cost of acquisition of the asset is
to be deemed to be the cost for which the previous owner acquired it, as
increased by the cost of any improvement of the assets incurred or borne c
either by the previous owner or by the assessee. According to the High
Court, having regard to the definition of the expression 'cost of
improvement' contained in Section 55(1)(b) of the Act, in order to entitle
the assessee to claim a deduction in respect of the cost of any improvement,
the expenditure should have been incurred in making any additions or D
alterations to the capital asset that was originally acquired by the previous
owner and if the previous owner had mortgaged the property and the
assessee and his co-owners cleared off the mortgage so created, it could
not be said that they incurred any expenditure by way of effecting any
improvement to the capital asset that was originally purchased by the E
previous owner. This decision has been followed in subsequent decisions
of the High Court in Salay Mohamad Ibrahim Sai(v. Income-Tax Officer
andAnr. (1994) 210 ITR 700, andK.V. ldiculla v. Commissioner of Income-
tax (1995) 214 ITR 386. A contrary view has been taken by the Gujarat
High Court in Commissioner of Income Tax v. Daksha Ramanlal (1992)
F
197 ITR 123. In taking the view that in a case where the property has been
mortgaged by the previous owner during his life time and the assessee, after
inheriting the same, has discharged the mortgage debt, the amount paid by
him for the purpose of clearing off the mortgage is not deductible for the
purpose of computation of capital gains, the Kerala High Court has failed
to note that in a mortgage there is transfer of an interest in the property G
by the mortgagor in favour of mortgagee and where the previous owner
has mortgaged t!ie property during his life time, 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 acqafres the interest of the mortgagee in the H
82 SUPREME COURT REPORTS [1997] SUPP. 2 S.C.R.
A 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 the mortgage
B
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 Commissioner of Income-tax v. Daksha Ramanlal (supra) the Gujarat
High Court has rightly held that the payment made by a person for the
C purpose of clearing off the mortgage created by the previous owner is to
be treated as cost of acquisition of the interest of the mortgagee in the
property and is deductible under Section 48 of the Act.
For the reasons aforementioned, the appeals are dismissed. But in
the circumstances there will be no order as to costs.
R.KS. Appeals dismissed.
)
•
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