S VALLIAMMAI Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) ONE Ramanathan Chettiar, who owned considerable movable and immovable properties, died on January 26, 1958, leaving behind him his wife, Srimathy Umayal Achi, and his daughter, Srimathy Valliammai, as his legal heirs. On his death, the properties devolved upon the aforesaid two persons in equal shares. A partition was effected between them under which certain properties were allotted to Umayal Achi and the rest Valliammai. Umayal Achi adopted one Arunachalam in April, 1961. She later died on August 20, 1964, leaving a will bequeathing all he properties to her adopted son, Arunachalam.During the previous year ending with March 31, 1966, Arunachalam sold 9.0111 grounds in the property known as "Green Field House Site" for Rs. 99, 500. During the previous year ending with March 31, 1967, he sold a bunglow 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 Nung ambakkam 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, 196970 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 adopt ive mother. He had also claimed that since the estate duty had been paid consequent upon the death of Ramanthan Chettiar and Umayal Achi, the proportionate part thereof as was attributable to the value of the property sold should also be deducted in computing the capital gains.

(2.) THE ITO rejected the contention and computed the capital gains ar Rs. 80, 050, Rs. 4, 89, 876, Rs. 55, 758 and Rs. 81, 254 for the asessment years 1966-67, 1967-68, 1969-70 and 1970-71, respectively, on the ground that under the Explanation to s. 49(1) of the I.T. Act, 1961, hereinafter referred to as "the Act". Ramanathan Chettiar alone should be considered as the"previous owner" and consequently, the assessee would be entitled to adopt, as the cost of acquisition of the properties sold, their values as on January 1, 1954.Aggrieved by the said assessment, Arunachalam preferred appeals to the AAC contending that the proportionate part of the estate duty paid consequent on the death of Ramanathan Chettiar and Umayal Achi as its attributable to the properties sold should be deducted in computing the capital gains on the ground that estate duty was a first charge on the properties. However, the AAC rejected those appeals. THEreupon Arunachalam preferred appeals to the Income-tax Appellate Tribunal reiterating the same contention. THE Tribunal, however, held that even if a first charge has been created on the property passing on his death for payment of the estate duty, the said charge cannot be equated to a mortgage which alone involves the transfer of an interest in immovable properties and that consequently it cannot be said that when estate duty is paid there is any acquisition of the interest in the properties, which had been carved out in favour of the Government resulting in an addition to the cost of acquisition of the property concerned.

(3.) THUS, the question in these cases is whether by paying the estate duty, the assessees have made any addition or alteration to the capital asset and whether the said payment is in the nature of a capital expenditure.The learned counsel for the assessees contended that the words "expenditure of a capital nature incurred in making any additions or alterations to the capital asset" *in s. 55(1)(b) of the Act cannot be given a restricted meaning as relating to physical additions or alterations to tangible or physical property, and that those words would comprehend also a removal of a burden or an encumbrance or an obligation. Any other construction, according to the learned counsel, would 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 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. and of this court in CIT v. V. Indira both of which dealt with the scope of the expression "cost of improvement", learned counsel submitted that "cost of improvement" had been construed in the latter case in a narrow sense after distinguishing the former case as such it requires reconsideration. He also referred to the absence of the word "thereto" in the definition of "cost of any improvement" in s. 55(1)(b) and submitted that the section itself does not say that the "improvement" is to be vis-a-vis the asset divorced of the ownership. According to him, if any expenditure incurred between the original acquisition and the sale had resulted in an addition to the value of the asset sold, then it should be taken to be the cost of the improvement of the asset as such. The learned counsel would further contend that there need not be any physical addition to the capital asset to get the benefit of deduction as cost of its improvement and it is enough if the expenditure has been incurred for improving the assessee's title to the asset. It is said that by paying the estate duty, the asset is freed from the statutory charge under s. 74 of the E.D. Act and as such there is an addition to the assessee's title to the asset.In CIT v. Bengal Assam Investors Ltd. the assessee had incurred litigation expenses for compelling a company to register the shares purchased in its name and for acquiring the voting rights in respect of each share by cancelling the special resolution amending the articles of association providing for only one vote in respect of each member, and had claimed those expenses as deductions under s. 48 of the Act in the computation of capital gains arising on the sale of some of the shares.