1980 (12) TMI 198 - HC - Income Tax

Summary

Issues Involved:
1. Whether the proportionate estate duty paid on the death of Ramanathan Chettiar and Umayal Achi should be deducted in computing capital gains.
2. Whether the estate duty paid can be considered as part of the cost of acquisition or cost of improvement of the assets sold.

Detailed Analysis:

Issue 1: Deduction of Proportionate Estate Duty in Computing Capital Gains

The primary question was whether the proportionate estate duty paid on the death of Ramanathan Chettiar and Umayal Achi should be deducted in computing the capital gains on the sales of properties made by Arunachalam and Valliammai during the relevant previous years. The court examined the relevant statutory provisions, including sections 45, 48, and 55 of the Income-tax Act, 1961, and section 74 of the Estate Duty (E.D.) Act, 1953.

Section 45 of the Act states that all profits and gains arising from the transfer of capital assets shall be chargeable to income-tax under the head "Capital gains." Section 48 provides the mode of computation of capital gains by deducting from the sale consideration the expenditure incurred wholly or exclusively in connection with such transfer and the cost of acquisition of the capital asset and the cost of any improvement thereto. Section 55 defines "cost of improvement" and "cost of acquisition."

The Tribunal had rejected the contention that the estate duty paid should be deducted as part of the cost of acquisition or as the cost of improvement. The Tribunal's view was that the estate duty did not result in an acquisition of interest in the properties, nor did it constitute an expenditure incurred in making physical alterations or additions to the capital assets.

The court upheld the Tribunal's view, stating that the payment of estate duty did not amount to the acquisition of an interest in the capital asset. The court reasoned that Arunachalam and Valliammai had already acquired full and complete title to the properties upon the death of their predecessors. The estate duty paid was a liability that came along with the assets, and discharging this liability did not improve their title to the assets.

Issue 2: Estate Duty as Cost of Acquisition or Cost of Improvement

The court also considered whether the estate duty paid could be treated as part of the cost of acquisition or as the cost of improvement of the assets sold. The Tribunal had held that the estate duty paid could not be considered as part of the cost of acquisition because the title acquired by Arunachalam and Valliammai was already full and complete. The court agreed with this view, stating that the cost of making the title complete and perfect could only be treated as the cost of acquisition if the title acquired was defective, incomplete, or imperfect.

Regarding the cost of improvement, the Tribunal had held that the payment of estate duty could not be considered as an expenditure incurred in making physical alterations or additions to the capital assets. The court agreed with this interpretation, stating that the definition of "cost of improvement" in section 55(1)(b) refers to expenditure of a capital nature incurred in making additions or alterations to the capital asset. The court concluded that the estate duty paid did not result in any physical or otherwise improvement to the assets.

The court also referred to previous judgments, including CIT v. V. Indira [1979] 119 ITR 837, where it was held that improving the owner's title to the asset is different from improving the asset itself. The court distinguished this case from CIT v. Bengal Assam Investors Ltd. [1969] 72 ITR 319, where the expenses incurred for registering shares in the assessee's name and acquiring voting rights were considered as part of the cost of acquisition and cost of improvement, respectively.

Ultimately, the court concluded that the estate duty paid could not be deducted as part of the cost of acquisition or cost of improvement in computing the capital gains. The questions referred to the court were answered in the negative and against the assessees.