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Petitioner: Smt. RUGMANI VARMA VS Respondent: COMMISSIONER OF INCOME-TAX
Court Name: Madras High Court Judge(s): N. V. Balasubramanian, K. A. Thanikkachalam Title: Smt. RUGMANI VARMA vs COMMISSIONER OF INCOME-TAX Case No.: Tax Case No, 335 and Reference No,152 of 1981 Date of Judgment:1996-01-24 Reported As: 1998 PTD 2794 Result: Reference answered
JUDGMENT
JUDGMENT ' THANIKKACHALAM, J.---At the instance of the assessee, the Tribunal referred the following question, for the assessm ent year 1975-76, under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), for the opinion of this Court: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the payment of Rs,30,000 made to the applicant's sisters in accordance with the terms of the will, dated January 16, 1956, should not be deducted in computing the capital gains arising from the sale of the property at 27/8, East Bashyakarlu Road, R.S. Puram, Coimbatore?" ' The assessee during the assessm ent year under consideration sold her property at No,27/8, East Bashyakarlu Road, R.S. Puram, Coimbatore, for the Rs,1,76,000 and admitted a capital gain of Rs,9,750. The property was acquired through a will from her late father, K.P. Thampan. Hence, the cost of previous owner was taken into consideration and the value as on January 1, 1954, at the option of the assessee was adopted at Rs,70,000. There is no dispute with regard to the valuation. The assessee's further claim of cost of improvement at Rs,27,000 was also allowed by the Tribunal. The dispute is with regard to the claim of Rs,30.000 paid by the assessee to her sisters on June 16, 1960, in terms, of her late father's will which stipulated that a sum of Rs,15,000 to each of her two sisters, Ammini and Radha, or their representatives in interest was to be paid by the assessee and that the amount "shall be a charge on the said property", while settling the property in question on the assessee. The Income-tax Officer disallowed the claim on the ground that there is no provision for allowance of this claim as it was not within the definitions of "cost of acquisition" of "cost of any improvement", defined under section 55 of the Act.
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' On appeal, the Appellate Assistant Commissioner held that it can be treated as cost of acquisition and allowed the appeal on this point. ' Aggrieved, the Department filed a second" appeal before the Tribunal. The Tribunal found that the payment had already been made to the sisters on June 16, 1960. It was not a charge at the time of sale. The Tribunal further found that section 49 of the Act requires that in the case of properties acquired under will or a gift, the cost of acquisition has to be taken as the cost to the previous owner of the property. This amount of Rs,30,000 could not, therefore, be treated as such cost. According to the Tribunal, it could not be also treated as "cost of improvement", since the "improvement" contemplated was an expenditure on the asset itself. Since the full value of the property had to be adopted as the sale price and that there was no dispute about it, the Tribunal found that there was no way of allowing Rs,30,000 claimed by the assessee. ' Before us learned counsel appearing for the assessee submitted that the full value of consideration for the purpose of section 48 of the Act is not the amount as mentioned in the document, but the said amount as reduced by the amount covered by the charge created in favour of the assessee's sisters. According to learned counsel, there is a diversion by overriding title at source and hence the amount covered by the charge created in favour of the sisters of the assessee did not reach the assessee as her income, but stood diverted even earlier. Learned counsel further submitted that the ownership is a bundle of rights and the owner of the property cannot convey a better title than what he has. In the present case, the property was bequeathed to the assessee minus the charge created over the property in favour of the sisters of the assessee. Therefore, an obligation was created on the assessee to discharge the charge created in favour of her two sisters over the property. Learned counsel further pointed out that of Rs,30,000 was not paid as per the direction in the will, then her sisters would have initiated proceedings and attached the property over which a charge was created and the property would have been brought to sale in which case the assessee would lose the entire property. Further, learned counsel submitted that property includes both tangible and intangible. When the title is defective, incomplete or imperfect, the cost of making the title complete and perfect can be treated as the "cost of acquisition". Therefore, the sum of Rs,30,000 paid to complete the title in favour of the assessee would amount to "cost of acquisition" in the hands of the father of the assessee. Learned counsel drawing out attention to a passage occurring in the Law and Practice of Income Tax by Kanga and Palkhivala, eighth edition, volume 1, at page 781, submitted that the decision of the Madras High Court in Smt. S. Valliammai v. CIT (1981) 127 ITR 713 (FB) and the decision of the Kerala High Court in Ambat Echukutty Menon v. CIT (1978) 1 1 1 ITR 880 are not dealing with the point as arising in the present case. So also learned counsel submitted that the decision of the Madras High Court in CIT v. V. Indira (1979) 119 ITR 837 was rendered on different facts altogether. Therefore, it was submitted that the above said three decisions would not render any help to the Department to contend that the expenditure incurred for perfecting, improving or completing the title would not go to improve the cost of acquisition. Therefore, according to learned counsel, even if the cost of acquisition is to be ascertained as per the provisions of section 55(2)(iii) of the Act, the expenditure incurred for completing, improving and perfecting the title would go to increase the cost of acquisition, along with the original cost of acquisition in the hands of the previous owner. However, learned counsel appearing for the assessee in order to support his above said contention, relied upon a decision of the Madras High Court in CIT v. C.V. Soundararjan (1984) 150 ITR 80, and another decision of the Gujarat High Court in CIT v. Daksha Ramanlal (1992) 197 ITR 123. ' On the other hand, learned standing counsel for the 'Department, submitted that the scheme of sections 48, 49 and 55 of the Act would contemplate imposing tax on capital gains. According to learned standing counsel we must go by what is provided therein and we cannot import any idea, which is foreign to the above said provision. Section 48 lays down the mode of computation of
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capital gains and the deduction to be made therein, viz., the expenditure incurred wholly and exclusively in connection with the transfer, the cost of acquisition of the capital asset and the cost of any improvement thereto. No other deductions are provided. According to learned standing counsel, section 55 of the act defines what is "cost of improvement" and what is "cost of acquisition". "Cost of improvement" means expenditure of a capital nature incurred for making any addition or alternation to the capital asset by an assessee, after it became his property, and in the case of assets which became the property of the assessee by any of the modes specified in subsection (1) of section 49 by the previous owner; subsection (2) defines what is meant by "cost of acquisition" of the purposes of sections 48 and 49. Section 49 deals with cost with reference to certain modes of acquisition. One of the modes of acquisition, which is relevant for the purpose of this case is where the capital asset became the property of the assessee under a will, the section provides that in such a case, 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. Therefore, according to learned standing counsel, there is no question of adding the cost of acquisition incurred by the assessee along with the cost of acquisition in the hands of the original owner. In order to support his contentions, learned standing counsel relied upon the decisions reported in CIT v. V. Indira (1979) 119 ITR 837 (Mad.); S. Valliammai (Smt.) v. CIT (1981) 127 ITR 713 (Mad.); Ambat Echukutty Menon v. CIT (1978) I 1 1 ITR 880 (Ker.); Salay Muhammad Ibrahim Sait v. ITO (1994) 210 ITR 700 (Ker.) and K.V. Idiculla v. CIT (1995) 214 ITR 386 (Ker.). ' We have heard learned counsel appearing for the assessee as well as learned standing counsel for the Department. The point for consideration is, whether a sum of Rs,30,000 paid by the assessee to two of her sisters, as per the directions contained in the will, dated January 16, 1956, executed by her father, would go to increase the cost of acquisition in the hands of the previous owner, viz., her father. Section 45 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, subject to certain exemptions and deductions, be chargeable to income-tax as capital gains and shall be deemed to be the income of the previous year in which the transfer took placed. Section 48 lays down the mode of computation of the capital gains and the deductions to be made. According to section 48, 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, the amounts mentioned which include the cost of acquisition of the capital asset and the cost of any improvement thereto. Section 55 defines what is "cost of improvement" and what is "cost of acquisition". "Cost of improvements" means expenditure of a capital nature incurred in making any additions or alterations to the capital asset by an assessee after it became his property and in the case of assets which became the property of the assessee by any of the modes mentioned in subsection (1) of section 49 by the previous owner. Subsection (2) (Nines what is "cost of acquisition" for the purpose of sections 48 and 49. Section 49 deals with cost with reference to certain modes of acquisition. One of the modes of acquisition, which is relevant is, where the capital asset became the property of the assessee under the gift or will. In such cases of acquisition, the cost 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. It is in view of the provisions contained in section 55(2)(ii), we have to consider in the present case whether the sum of Rs,30,000 paid by the assessee to two of her sisters as per the direction contained in the will executed by her father would go to increase the cost of acquisition ascertained in the hands of the previous owner. ' A similar question came up for consideration before this Court in CIT v. V. Indira (1979) 119 ITR 837. According to the facts arising in that case, the assessee's father gifted to the assessee, a house
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property. One A filed a suit claiming title to an area of land on which the above gifted property was situate. The assessee paid to a sum of Rs,6,943 in a compromise and claimed that in computing the capital gains arising on the sale of the property by the assessee, this sum of Rs,6,943 paid to A should also be taken into account as representing the cost of improvement to the property which would be deductible under section 49(1) read with section 55(1)(b) of the Income Tax Act, 1961. On these facts, on a reference, this Court held that as the asset became the property of the assessee by way of gift, the cost of acquisition has to be in accordance with section 49(1). As the previous owner has not paid the amount of Rs,6,943 and the same has been paid by the assessee, it cannot be treated as the cost to the previous owner and it cannot be qualified for deduction as cost of acquisition of the property. The amount cannot also be allowed as a deduction as "cost of any improvement thereto". As the amount has been paid only to improve the title of the owner rather than improving the asset as such, there is no scope for deducting the amount in the computation of the capital gains. It was further held that if the property had been acquired prior to the 1st day of January, 1954, by the previous owner, then the cost of acquisition of the capital asset or the fair market value as on the first day of January, 1954, would alone represent the cost of acquisition or the deductible amount. ' This Court also had an occasion to consider a similar question in Smt. S. Valliammai v. CIT (1981) 127 ITR 713 (FB). According to the facts arising in that case, one R died leaving behind his wife, U, and daughter, V. As his legal heirs and hence all his properties devolved on them equally. A partition was effected between them under which certain properties were allotted to U and others to V. Subsequently, U adopted A and left a will bequeathing all her properties to the adopted son, A, and hence on her death all her properties vested in A. Both V and A sold the properties which they got and in the computation of cost of acquisition for the properties for the purpose, of determining the capital gains arising on the sale, they claimed deduction of the estate duty that had been paid by them attributable to the properties that fell to their share. On a reference, this Court held that nonpayment of estate duty did not result in their getting an imperfect or incomplete title in the property. Only when the title is defective, incomplete or imperfect, the cost of making the title complete and perfect can be treated as the cost of acquisition. Accordingly, estate duty paid cannot be treated as part of the cost of acquisition as defined in section 55(2) of the Income Tax Act, 1961. The assessee's title to immovable properties acquired cannot be said to be incomplete or imperfect in any way. They had become the full owners of the assets even before the payment of the estate duty and on payment of the same, they had not acquired any new rights, tangible or intangible, in the asset or the asset had not been physically or otherwise improved to any extent. Hence, the estate duty paid cannot be taken to be an expenditure of a capital nature incurred for perfecting an imperfect or incomplete title to the asset nor can it be treated as an expenditure incurred for making an addition to the asset as contemplated by section 55(1)(b) of the Income Tax Act. ' The Kerala High Court in Ambat Echukutty Menon v. CIT (1978) 111 ITR 880, while considering the provisions of sections 49(1) and 55(1)(b) of the Act, held as under (headnote): '...As the capital asset had become the property of the assessee by succession or inheritance on the death of P who had acquired the property in December, 1953, under section 49(1) of the Income Tax Act, 1961, the cost of acquisition of the asset is to be deemed to be the cost for which the previous owner P, acquired it, as increased by the cost of any improvement of the assets incurred or borne either by the previous owner or the assessee. The original cost of the property was Rs,49,920. Having regard to the definition of 'cost of improvement' contained in section 55(1)(b), 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 previous owner. Where the previous owner had mortgaged the
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property and the assessee and his co-owners cleared off the mortgage so created, it could not be said that they incurred any expenditure by way of effecting any improvement to the capital asset that was originally purchased by the previous owner." ' So also the Andhra Pradesh High Court in CIT v. Bilquis Jahan Begum (1984) 150 ITR 508, while considering the provisions of sections 48, 49 and 55 of the Act, held that in computing the capital gains on sale of properties inherited on the death of an owner, estate duty payable in respect of the properties cannot be deducted from the full value of the consideration received on the transfer of the properties. This decision was rendered by following the Full Bench decision of this Court in Valliammai (S.) (Smt.) v. CIT (19.81) 127 ITR 713. ' Again the Kerala High Court had an occasion to consider a question of similar nature in the decision of Salay Muhammad Ibrahim Sait v. ITO (1994) 210 ITR 700. According to the facts arising in that case, the petitioners who were brothers jointly owned land. They mortgaged it to the Canara Bank. More than rupees sixty lakhs was due to the bank under the mortgage, at a time when the petitioners entered into an agreement to sell the property to ten persons under different assignment deeds, for a total consideration of Rs,10,33,966. The bank agreed to release the mortgage on the property, if an amount of rupees nine lakhs was paid towards the outstandings. The amount was accordingly deposited by the petitioners on June 21, 1985, through the purchasers, or with funds made available by them, and the bank released their mortgage right on the property. The deeds of assignment were thereafter executed and the property sold in accordance with the agreement to sell. The petitioners contended that the consideration for the transfers should be taken as the amount of Rs,10,33,966 less rupees nine lakhs paid to the bank in discharge of the mortgage, in which event, there was no capital gain liable to be assessed. It was also contended that the amount paid to the bank did not reach the petitioners as it has been diverted by overriding title and, therefore, capital gains, if any, should be computed only with reference to the balance. On these facts, the Kerala High Court held that the consideration by the petitioners was thus, Rs,10,33,966 and not this amount reduced by Rs,9 lakhs. There was no diversion of the amount at source or by overriding title as the amount of Rs,9 lakhs had actually reached the petitioners and had been applied in discharge of their dues. The amount spent for discharge of the mortgage could not be deducted in the computation of capital gains. This decision was also rendered after taking into consideration the decision in Ambat Echukutty Menon v. CIT (1978) 111 ITR 880 (Ker.) and Valliammai (S.) (Smt.) v. CIT (1981) 127 ITR 713 (Mad.) (FB) and distinguishing the decision in CIT v. Daksha Ramanlal (1992) 197 ITR 123 (Guj.) referred to above. ' There is also decision of this Court in CIT v. C.V. Soundararajan (1984) 150 ITR 80, which would support the plea put forward by learned counsel appearing for the assessee. According to the facts in that case in a family partition, the assessees were allotted a property in which their mother was given a right of residence. In order to obtain a relinquishment of the said right of residence to enable them to sell the property, the assessee paid to their mother a sum of Rs,60,000. In computing the capital gains arising on the sale of the property, the claim of the assessees for deduction of this sum of Rs,60,000 was allowed by the Income-tax Officer, which was ultimately confirmed by the Tribunal. On a reference, this Court held that admittedly the assessee did not have the benefit of the said sum of Rs,60,000 when the interest of the mother in the property in question had been purchased by getting the relinquishment for a consideration of Rs,60,000 and hence the said amount could not be taken as consideration paid in respect of the interest of the assessees. Consequently, the Tribunal was right in its view that the sum of Rs,60,000 paid to the mother was to be excluded in computing the capital gains. This decision was distinguished by the Kerala High Court in the decision reported in K.V. Idiculla v. CIT (1995) 214 ITR 386. According to the facts arising in K.V. Idiculla v. CIT (1995) 214 ITR 386 (Ker.), the assessees father, V, purchased a land with building in June, 1964, for Rs,21,000. The assessee's wife had received sthreedhanam which was
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inyested by her in her father-in-law, Vs business, in which she had a credit balance of Rs,73,570 as on December 31, 1978. V executed a will on August 21, 1979, bequeathing the house property to his son, the assessee directing that the amount due to the assessee's wife should be paid out of this property. After V's death on September 30, 1979, the assessee transferred the property to his wife for a consideration of Rs,83,700. In the assessment year 1980-81, the assessee declared a capital gain of Rs,5,544 claiming, inter alia, that he had effected improvements to the property to the extent of Rs,49,047. The Income-tax Officer adopted the amount of Rs,83,700 as the full value of the consideration from which he deducted Rs,21,000 as the cost of acquisition, being the amount for which V purchased the property on June 16, 1964, as also an amount of Rs,20,000 as cost of improvement and brought to tax an amount of Rs,42,700 as capital gains. On reference, it was contended by the assessee that the full value of the consideration for the purpose of section 48 was not the amount of Rs,83,700 recited in the documents as the consideration, but the said amount as reduced by the amount covered by the charge in favour of the assessee's wife. The contention was that there was a diversion by overriding title at source. In the alternative, it was argued that the assessee had inherited the property under the will subject to the charge, and, therefore, the amount of the liability to the wife would be deducted in the computation of the capital gains. The Kerala High Court held that the payment of the debt was not made by virtue of any overriding obligation to make payment of it, but was just the discharge of an obligation created by V himself in favour of the daughter-in-law. This was a case of an application of the sale price after it had reached the assessee and not a diversion at source before it reached the assessee. The full value of the consideration had, therefore, to be taken as Rs,83,700 and not that amount less the amount due to the assessee's wife. Therefore, the amount due to the assessee's wife was not liable to be taken note of in computing the capital gains on the sale of the property. In this decision, the Kerala High Court pointed out that the decision of the Madras High Court in CIT v. C.V. Soundararajan (1984) 150 ITR 80 is distinguishable on facts. The Kerala High Court followed the decisions reported in Ambat Echukutty Menon v. CIT (1978) 111 ITR 880 (Ker.) and CIT v. V. Indira (1979) 119 ITR 837 (Mad.) referred to above. ' Our attention was also drawn to the decision of the Gujarat High Court in CIT v. Daksha Ramanlal (1992) 197 ITR 123. According to the facts arising in that case, the assessee had received a piece of land as a gift. She sold the same and disclosed the capital gains on such sale. The assessee claimed deduction of Rs,25,000 paid by her to the mortgagee, as the land which was gifted to her was subject a mortgage. The assessee claimed that amount for deduction, since according to the assessee, the said sum of Rs,25,000 would go to increase the cost of the land. On these facts, the Gujarat High Court held that when the previous owner gifted the mortgaged property to the assessee, what he had transferred to the assessee was the right, title or interest which he had in that property. When the assessee discharged the mortgage by paying Rs,25,000 to the mortgagee, what she did was to purchase that right or interest which the mortgagor did not then possess and which the mortgagee had in the property. When the assessee sold the property, she did not merely sell the right, title or interest which she had received from the donor but also the right, title or interest, which she had purchased from the mortgagee. For this reason, the case would not be covered by section 49(1)(ii) of the Income Tax Act, 1961, nor by section 55(2)(ii) for the purpose computation of the capital gains. The case would be governed either by section 48 read with section 55(2)(i) or partly by section 48(1)(ii) and partly by section 49(1), read with section 55(2)(i). In either case, what is required to be considered is the cost of acquisition of the asset to the assessee. Payment of Rs,25,000 to the mortgagee by removing that encumbrance was certainly the cost of acquisition of the interest of the mortgagee and, therefore, it had to be taken into account of the purpose of computing the total cost of acquisition of the property which the assessee…
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