R. M. Arunachalam
Vs. Commissioner of Income Tax,Madras [1997]
INSC 590 (9 July 1997)
S.C.
AGARWAL, D.P. WADHWA.
ACT:
HEADNOTE:
[WITH
CIVIL APPEAL NO 860 (NT) OF 1988 and CIVIL APPEAL NO 4386 OF 1997 (arising out
of S.L.P (C) No. 10737 OF 1981] 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 estate duty paid
by the assessee under the provision 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 `the Act'). Civil Appeal 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.
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. Valliammi as his legal heirs. On his death the said properties devolved upon
the aforesadi 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. 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. 19015/-
and Rs. 32,118/- respectively as capital gains arising from the said transfers.
For that purpose, the assessee has 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 year 1966-67, 1967-68, 1969-70 and 1970-71 at Rs. 80,050/-, Rs.
4,89,876/-, Rs. 55,758/- and 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 Appellant Assistant Commissioner as
well as the Income Tax Appellant 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?" Since the Division Bench of the High Court was not inclined to
agree with the view taken in the earlier judgement 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 of the High Court in its impugned judgment dated December 23, 1980 [Smt. S. Valliammai & Anr. v. Commissioner
of Income-tax, Madras, (1981) 127 ITR 713] has answered
the said question against the assesse 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.
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 :- "Whether in computing the capital gains on the sale of the
properties 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 ?" 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. 10737 of 1981 has been
filed against the said judgment of the High Court.
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.
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 which the transfer took
place. Section 48 which prescribed 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
deduction,- the income 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 the capital asset the
following amounts, namely :- (a) expenditure incurred wholly and exclusively in
connection with such transfer;
(b) the
cost of acquisition of the capital asset and the cost of any improvement
thereto." 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 :- (1) Where the capital asset became the property
of the assessee –
(i) on
any distribution of assets on the total or partial partition of a Hindu
Undivided Family;
(ii) under
a gift or will;
(iii)
(a) by succession, inheritance of devolution, or (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 company, or (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 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 by a mode of
acquisition other than that referred to in clause (i) or clause (ii) or clause
(iii) of this sub-section " The expression "cost of improvement"
and "cost of acquisition" for the purpose of Section 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,- (i) where the capital
asset became the property of the previous owner or the assessee before the Ist day
of January, 1954, and 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 nay additions or alteration to 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 alternations to the capital asset by the assessee after it
became his property, and, where the capital 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 `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 :- "(2) For the purpose 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 Ist day
of January, 1954, means the cost of acquisition of the asset to the assessee or
the fair market value of the asset 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 mode
specified in sub- section (1) of section 49, and the capital asset became the
property of the previous owner before the Ist day of January, 1954, means the
cost of the capital asset to the previous owner or the fair market value of the
asset on the Ist day of January, 1954 at the option of the assessee;"
(Rest omitted) A perusal of the aforesaid provisions would show that for the
purpose 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 nay of
the mode specified in (i), (ii) and (iii), which include succession,
testamentary as well as non testamentary, the cost 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. 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 acquisition other than
that referred to in clause (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 of Smt.
Umayal
Achi under sub-clause (a) 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 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 Ramanathan Chettiar and the estate of Smt. Umayal Achi, to the extent
such duty related to the assets in question, can 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 where any property
passes on the death of the deceased (a) every legal representative to whom such
property so passed 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 property so passing in 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 Act the following provision was made :- "Section 74. (1)
Subject to the provision 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 whomsoever it may vest on his death after the debts and encumbrances
allowable under Part 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.
(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 representative of the deceased) on the death of the
deceased shall be a first charge on such interest;
Provided
that the property shall not be so chargeable as against a bona fide purchaser
thereof 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 section in such circumstances and
on such conditions as he thinks fits." Before the High Court it was urged
on behalf of the assessee that under Section 74(1) of the Estate Duty Act a
first charged has been created 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 assessee
as payment of the estate duty and, therefore, amount of proportion of the
estate duty paid by the assessee in respect of the properties sold should also
be treated 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.
The
contention that estate duty paid should be treated as cost of acquisition was
rejected by the High Court on the view that it is only when 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 the all
properties passing on death the title to the immovable properties acquired
cannot be said to be incomplete or imperfect 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 circumstance so warrant under
sub-section (3) of 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 paying the estate duty and thereby releasing the property from
the charge under Section 74, the assessee cannot be said to make any addition
in the property as such.
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 assets even before the
payment of estate duty and on payment of the same the assessee has 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 (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 arising out the sale of the
property the said sum of Rs. 6,943/- should be deducted as `cost of
improvement' of the property under Section 48 read with Section 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 Commissioner. 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 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 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 acquisition 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 in expended on the asset itself.
In the
judgment of the High Court a reference has been made to the judgment of the Kerala
High Court in Ambat Echukutty Menon v. Commissioner of Income Tax, 111 ITR 680
[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 sold under Section 48 of the Act.
Smt. Janaki
Ramachandran, the learned counsel appearing for the 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, should by 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 observation of lord Chancellor Loreburn
in Winans v. Attorney General, 1910 A.C. 27, explaining the difference between
Estate Duty and Legacy and Succession duties. The Learned counsel has also
invoked the principle of diversion governing 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. Sarala Devi v.
Commissioner of Income Tax, (1996) 222 ITR 211 wherein this principle has been
applied in the matter of computation of Capital Gains.
As
noticed earlier under Section 53(1) of the Estate Duty Act the persons referred
in clause in clause (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 of the deceased that
were actually received for which but for his own neglect or default, might have
been received by such accountable person. Sub-section (5) of Section 53
prescribed that where tow or more person were accountable, they were liable
jointly and severally for the whole of the estate duty of the property so
passing. This would show that the liability of the 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 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 :- "Section 100. CHARGES.
Where immovable property of one person is by act of parties of 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 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 time being 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 & 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 shall, so far as may be, apply to such charge. While a
charge can be created either by act of parties or 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 also 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 to a mortgage. It may be icongruous 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 misconception had given rise to certain decision where it
was held that a charge created by a decree was enforceable against a transferee
for consideration without notice, because of the fact that a charge has been
erroneously assumed to have created an interest in properly reducing the full
ownership to a limited ownership.
The
declaration that `all the provision hereinbefore contained which apply to a
simple mortgage shall, so far as may be, apply to such 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 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
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. [See :
State Bank of Bikaner & Jaipur vs. National Iron & Steel Rolling
Corporation, 1995 (2) SCC 19]. The High Court has therefore, right 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. Umayal 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
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 properties that were transferred should be treated as `cost of
acquisition of the assets' under Section 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.
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
at the death of the owner, liable to 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. 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] These observation of Lord Loreburn,
on which reliance has been placed by Smt. Ramachandran, relate to chargeability
of Estate duty and have no bearing on the question whether any interest in
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 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.
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 of improvement under Section 48 of the Act. The questions
referred to by the Tribunal to the High Court have to be considered in the
light of the said submission. The submission regarding diversion involves the
question whether apart from the deductions permissible under the express
provision contained in Section 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 independent issue which has not been considered by the
Tribunal or the High Court. It cannot be permitted to the raised for the first
time at this stage. We, therefore, do not propose to go into this question.
While
we are affirming the impugned judgement of the High Court, we are unable to endore
the view of the Kerala High Court in Ambat Echukutty Menon v. Commissioner of
Income Tax (supra) to which reference has been made by the High Court in the
impugned judgment. In that case, the assessee, as one of the heirs, has
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 acquired under the Land Acquisition Act and for the purpose of
capital gains the assessee sought deduction of the amount spent to clear the
mortgage. The High Court held that the capital asset has 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 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 alterations to the capital asset that was
originally acquired by the property and the assessee and his co-owner cleared
off the mortgage so created, it could not be said that they incurred any
expenditure by way of effecting and improvement to the capital asset that was
originally purchased by the previous owner. This decision has been followed in
subsequent decisions of the High Court in Salay Mohamad Ibrahim Sail v.
Income-tax Officer and Anr., (1994) 210 ITR 700, and K.V. Idiculla 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) 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 of capital gains, the Kerala High Court has failed to
note that in a mortgage there is transfer of an interest in the property by the
mortgagor in favour of mortgagee and where the previous owner has mortgaged the
property during his life time, which is subsisting 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. 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 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 Daksha Ramanlal
(supra) the Gujarat High Court has rightly held that 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 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.
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