Anjaneyulu, J.:— The following question of law is referred to us under s. 256(1) of the I.T Act, 1961:
“Whether, on the facts and in the circumstances of the case, in computing the capital gains, the estate duty payable on the property consequent on the death of Nawab Rais Yar Jung is to be taken into account?”
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 of land in Yousufguda, which was sold on July 27, 1964; for a sum of Rs. 3,58,190. The assessee held a ⅛th share 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.
3. 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 on 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 pay ment 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.
4. Learned standing counsel for the Income-tax Department, Sri M. Surya-. narayana Murthy, urged that the liability to pay estate duty is a personal liability and is not attached to the property in question. The mere fact that a first charge was created against the property in favour of the Revenue under s. 74(1) of the, E.D Act, learned standing counsel urged, does not make the estate duty either part of “cost of acquisition” or “cost of improvements” so as to qualify for deduction under s. 48 of the I.T Act. Learned standing counsel pointed out that this is a case where the assessee became the owner of the property by inheritance or succession and the provisions of s. 49(1)(iii) of the I.T Act will apply. Section 55(2) of the Act provided that, for purposes of s. 49, “cost of acquisition” in relation to a capital asset, where the capital asset became the property of the assessee by any of the modes specified in s. 49(1) of the Act, means “the cost of the capital asset to the previous owner or the fair market value of the asset on January 1, 1954, at the option of the assessee”. Thus, the expression “cost of acquisition”is defined statutorily” as meaning only the cost of the capital asset to the previous owner and nothing more. The expression “cost of any improvement” is also defined in s. 55(1)(b) of the Act and the learned standing counsel urged that the payment of estate duty is not covered by the definition of the expression “cost of any improvement”. It is, therefore, contended that the claim for deduction of estate duty corresponding to the property is not supported by the provisions contained in s. 48, 49 or 55 of the I.T Act and, consequently, the Tribunal was in error in directing the estate duty payable by way of deduction. Learned standing counsel relied on the decision of the Kerala High Court in Echukutty Menon v. Commissioner Of Income-Tax, [1978] 111 ITR 880, and the Full Bench decision of the Madras High Court in S. Vallidmmai v. CIT, [1981] 127 ITR 713. There was also a decision of the Division Bench of the Madras High Court in Commissioner Of Income-Tax, Tamil Nadu-V v. V. Indira, [1979] 119 ITR 837 (Mad), on which strong reliance was placed by the learned standing counsel. The Full Bench decision of the Madras High Court in S. Valliammai v. CIT, [1981] 127 ITR 713, is directly on the point. In that case also, the question was whether the estate duty payable in respect of property which was inherited by an assessee could be allowed as a deduction while computing the capital gain. The Madras High Court held that such a deduction is not permitted by the provisions contained in s. 48, 49 or 55 of the Act and, therefore, the estate duty payable could not be considered to be a deduction in computing the capital gain.
5. Learned counsel for the assessee, Sri M.L Ramakrishna Rao, pointed out that estate duty payable by the assessee in respect of the property sold had clearly the effect of enhancing the value of the property and, consequently, it forms part of the cost of the asset for purposes of s. 48 of the Act. In the alternative, the learned counsel contended that capital gain has to be computed on commercial principles and if commercial principles are borne in mind, there could be no gainsaying the fact that the estate duty paid in respect of an asset sold giving rise to a capital gain ought to be deducted as an expenditure for purposes of determining the capital gain. Learned counsel relied on the judgment of, the Supreme Court in Dlun Dadabhoy Kapadia v. CIT, [1967] 63 ITR 651 (SC), wherein it was held that ordinary commercial principles apply in the matter of determining the capital gains under the Act.
6. 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 be considered to be an encumbrance against the property and 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 ED. 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 two 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 the transfer of the property. Cases may arise where persons' incur expenditure purely from 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 facts 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, [1967] 63 ITR 651 (SC), 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 & Co. Ltd., [1967] 66 ITR 622 and the decision of this court in Addl. Commissioner Of Income-Tax, A.P v. S.R.Y Ankeneedu Prasad, [1973] 115 ITR 78). The sale price actually received against the transfer of the asset is not subject to any artificial deduction except Try those specified in s. 48 of the Act. Whether the deductions specifically referred to in s. 48 are exhaustive or 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 from the full value of the consideration received for the sale of the property.
7. For the aforesaid reasons, we answer the question referred in the negative, i.e, in favour of the Revenue and against the assessee. No costs. Advocate's fee Rs. 500.