R.M. ARUNACHALAM ETC. versus COMMISSIONER OF INCOME TAX, MADRAS

Citation: [1997] SUPP. 2 S.C.R. 64 · Decided: 09-07-1997 · Supreme Court of India · Bench: S.C. AGRAWAL, D.P. WADHWA · Disposal: Dismissed

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Judgment (excerpt)

A 
R.M. ARUNACHALAM ETC. 
v. 
COMMISSIONER OF INCOME TAX, MADRAS 
JULY 9, 1997 
B 
[S.C. AGRAWAL AND D.P. WADHWA, JJ.) 
Income Tax Act, 1961: 
Sectio11s 45(1), 48(ii), 49(1) a11d 55(l)(b) read with Estate Duty Act, 
C 1953-Sections 53(1) and 74(1)---f'roperty after the Death of the owner 
devolving upon widow and daughter i11 equal shares-Widow dying a11d u11der 
her Will, prope1ties becomi11g the property of the assessee-Many propelties 
disposed of by the assessee dwing various accou11ti11g years relevant to A Ys 
1966-67 to 1972-73--Under the circumstances, the propo1tionate pan of the 
estate duty, paid consequent to the death of the original owner and his widow, 
D relevant to the prope1ties sold by the assessee, held neither 'cost of acquisition' 
nor 'cost of improvement' of the said properties. 
Capital gains--Deductions-"Cost of acquisition ''-Amount paid by the 
heir of a m01tgaged property to clear the m01tgage-Held, deductible under 
E Section 48 as cost of acquisition. 
Transfer of Propelties Act, 1882: 
Sections 58 and JOO-Charge and mortgage-Distinguished 
F 
Words & Phrases: 
"Cost of acquisition" and "cost of improvement"-Meaning of in the 
context of Income Tax Act, 1961. 
Constitution of lndia-A1tic/e 136-Special Leave jurisdiction-New 
G plea-Income t~iversion of I11come-Prope1ties acquired under 'Will' 
subsequently sold-Estate duty paid 011 such propelties, whether deductible in 
computing the capital gains a1isi11g out of such sale 011 the ground of diversion 
of income-Held, question having been raised for the first time before the 
Supreme Coult and being entirely i11depende11t of the issues considered by 
H Tribunal and High Cowt, not enteltained by the Supreme Coult. 
64 
R.M. ARUNACHALAM v. C.I.T. MADRAS 
65 
' 
R, who had considerable moveable and immovable properties, died A . 
leaving behind bis widow U and daughter S. The properties of R devolved 
upon the legal heirs in equal shares. The assessee-appellant being the 
adopted son, inherited the properties belonging to U under her will. 
During the previous years relevant to AYs 1966-67 to 1972-73, the assessee 
sold various prop~rties of R bequeathed to him by U. A question arose as B 
to whether the estate duty paid by the assessee with respect to such sale 
of property could be regarded as "cost of acquisition" or "cost of improve-
ment" for the purpose of computation of income tax under the Income Tax 
Act. The Income Tax Officer computed the capital gains on the ground 
that under Explanation to Section 49(1) of the Act, R alone should be 
considered as the previous owner. Assistant Commissioner as well as the C 
Tribunal rejected the order of assessment by the ITO. However, the 
Tribunal referred the said question to the High Court, which answered the 
said question against the assessee. Hence the present appeal. 
The assessee contended that in view of Section 74(1) of the Estate D 
Duty Act, estate duty payable in respect of the properties of R and U was 
the first charge on the capital assets and that the amount paid by the 
assessee towards the estate duty to the extent it related to those assets 
should be treated as "cost of acquisition"or "cost of improvement" under 
Section 45 read with Section 55 of the Income Tax Act and deducted in 
computing the capital gains arising out of the sale of such properties by E 
the assessee. It was for the first time contended before this Court that 
estate duty paid was deductible in computing the capital gains O!l the 
ground of diversion of income. 
Dismissing the appeals, this Court 
Held : 1. A charge differs from a mortgage in the sense that in a 
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 
F 
full ownership to a limited ownership. The creation of charge under G 
Section 74(1) of the Estate Duty Act cannot, therefore, be construed as 
creation of an interest in the property 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 persons. In that sense H 
66 
SUPREME COURT REPORTS (1997) SUPP. 2 S.C.R. 
A the claim in respect of estate duty would have precedence over the claim 
of the mortgage because a mortgage is also a c

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