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PETITIONER: R. M. ARUNACHALAM

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX,MADRAS

DATE OF JUDGMENT:       09/07/1997

BENCH: S.C. AGARWAL, D.P. WADHWA.

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T [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

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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.

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    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.

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    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

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    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

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    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

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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

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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

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    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

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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

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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

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dismissed. But  in the  circumstances there will be no order as to costs.