COMMISSIONER OF INCOME TAX Vs. BILQUIS JAHAN BEGUM

JUDGEMENT

(1.) THE following question of law is referred to us under s. 256(1) of the I.T. Act, 1961 :

(2.) THE assessee was a co-owner of certain properties, which devolved on the heirs of the late Nawab Rais Yar Jung. THE properties included a large plot land in Yousufguda, which was sold on July 27, 1964, for a sum Rs. 3,58,190. THE assessee held a 1/8th shares in the property and the capital gain corresponding to the assessee's share was determined at Rs. 15,974. Before the ITO, the assessee claimed that the amount of estate duty payable in respect of the property on the death of Nawab Rais Yar Jung should be allowed as a deduction and if such deduction is allowed, there would be no capital gain at all for purposes of computation. THE ITO rejected the contention on the ground that estate duty payable is not a valid deduction under s. 48 of the I.T. Act. THE assessee carried the matter in appeal to the AAC, who confirmed the assessment. THEreupon, the assessee filed a second appeal before the Income-tax Appellate Tribunal and reiterated his submission that the amount of estate duty payable by him in respect of the aforementioned property on the death of Nawab Rais Yar Jung should be deducted in computing the capital gain arising on the transfer of the asset. THE Tribunal examined the relevant provisions of the Act and came to the conclusion that the estate duty that was payable on the property passing on the death of Nawab Rais Yar June one March 18, 1960, could not be deducted in computing the capital gain. Having arrived at this conclusion on the deductibility of the estate duty payable, the Tribunal examined the impact of s. 74 of the E.D. Act on the question. It may be mentioned that s. 74(1) of the E.D. Act created a first charge in favour of the Revenue in respect of the property passing on the death of the deceased. THE Tribunal held that, in view of the first charge created on the property under s. 74(1) of the E.D. Act, there was a statutory obligation on the assessee to pay the corresponding estate duty. THE Tribunal observed that the property in question was sold free of payment of estate duty, the assessee having undertaken to pay whatever estate duty is payable in respect of the property sold. In view of the sale of the property free of payment of estate duty, the Tribunal came to the final conclusion that, in computing the full value of the consideration for the sale of the property, the estate duty liability should be deducted. THE CIT asked for a reference under s. 256(1) of the I.T. Act, as a question of law arose out of the Tribunal's order. That is how the present reference is before us.

(3.) IF regard be had to the provisions contained in ss. 48, 49 and 55 of the I.T. Act, there could be no doubt that the estate duty paid does not qualify itself to be treated either as cost of acquisition of the asset or cost of improvements to the asset. The estate duty does not also constitute a valid deduction under s. 48 of the I.T. Act. Learned standing counsel for the Revenue is, therefore, right in his submission that, applying strictly the provisions of the Act, there is no room for allowing estate duty either as a deduction under s. 48 or for treating the same as "cost of acquisition" or "cost of any improvement" falling within the definition contained in s. 55 of the Act. The liability for payment of estate duty is a personal liability of the accountable person and not a liability of the estate itself. Though estate duty is generally burdened on the property inherited, it cannot, therefore, be related to the property as such. This view finds support in the decision of this court in CED v. Estate of late Om Prakash Bajaj [1977] 110 ITR 263, in the decision of the Karnataka High Court in v. Pramila v. CED [1975] 99 ITR 221, in the decision of the Gujarat High Court in Shantaben Narrottamdas v. CED [1978] 111 ITR 365 and finally in the decision of the Madras High Court in R. M. Arunachalam v. CED [1981] 132 ITR 871. It follows that estate duty corresponding to the property inherited does not constitute expenditure referable to the property as such by the assessee. The provisions of s. 74(1) of the E.D. Act, are merely intended to safeguard the interests of the Revenue by creating a first charge against the property and do not support the proposition that, because of such charge, the payment of estate duty is directly connected with the asset inherited. The Full Bench judgment of the Madras High Court above referred to clearly sets out the above position and we are in respectful agreement with that view. It is not necessary to examine in detail in the present case the contention that, in computing the capital gain, every item of expenditure incurred on commercial considerations falls to be allowed under s. 48 of the Act, notwithstanding the fact that s. 48 itself restricts the expenditure to only to categories specified therein. We are satisfied that, even applying commercial principles, the liability to pay duty in respect of an asset is not an expenditure directly connected with transfer of the property. Cases may arise where persons incur expenditure purely form a commercial point of view in relation to the asset of which he is the owner. In such cases, the question will have to be examined whether such expenditure could be considered to be a normal expenditure which a prudent commercial man would incur and would, therefore, fall to be deducted in computing the capital gain. All that the Supreme Court held in Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651, was that normal commercial principles should apply in the determination of capital gain. It has not been suggested that the application of the above principle would automatically lead to every item of expenditure incurred by an assessee to quality for deduction in computing the capital gain. The nature of the expenditure incurred and its proximate connection with the asset transferred would have a necessary bearing on the determination of the question. The fact in the decision of the Supreme Court are distinguishable. The Tribunal itself came to the conclusion, rightly in our opinion, that the principles set out by the Supreme Court in Dhun Dadabhoy Kapadia's case , will not entitle the assessee in the present case to claim deduction of estate duty. We do not see how the estate duty liability could be deducted from the full value of the consideration for the sale of the property, as held by ] the Tribunal, unless, the deduction falls under s. 48 of the Act. The expression "full value of the consideration received... as a result of the transfer of the capital asset" occurring in s. 48 of the Act represents the full sale price actually paid (please see the decision of the Supreme Court in CIT v. George Henderson andamp; Co. Ltd. [1967] 66 ITR 622 and the decision of this court in Addl. CIT v. Ankineedu Prasad [1978] 115 ITR 78). The sale price actually received against the transfer of the asset is not subject to any artificial deduction except by those specified in s. 48 of the Act. Whether of deductions specifically referred to in s. 48 are exhaustive of not is quite a different matter for consideration; but it would be wrong to say that the full value of the consideration for the sale of the property could be reduced by the estate duty liability, unless such a liability could be held to be a valid deduction under s. 48 of the Act. We have already held that, even on commercial considerations, we do not consider estate duty liability to be a valid deduction under s. 48 of the Act. In our opinion, therefore, the Tribunal was in error in directing that the estate duty payable in respect of the asset should be deducted form the full value of the consideration received for the sale of the property.