ORDER
U.T. Shah, Accountant Member
1. In this appeal, the assessee is contesting the capital gains of Rs. 3,54,035 included in the total income.
2. The assessees in this case are the executors to the estate of late Shrimatiben P. Hutheesing, who died on 17-7-1978 (hereinafter referred to as the deceased). The assessment year is 1980-81 and the relevant previous year is the calendar year 1980.
3. As we narrate the facts, it would be apparent as to how ingenious stand is taken by the assessee to urge that capital gains of Rs. 3,54,035included in his total income ma not exigible to tax. The deceased had number of properties both movable and immovable. Her husband had died earlier and had no issues. The deceased had executed her will on 11-9-1975. The relevant portion of the said will is reproduced below in Roman English as according to us, free translation in English of the original will in Gujarati does not clearly bring the intention of the deceased:
(c) Mari milkat ange je estate duty appvi pade mara executoro-aye mari milkat mathi apvani chee.
(p) Shaher Calcuttama mari Swatantra malikina makan avelu chee. Te makan no je mukhya darvajo chhe te darvajo pun mara executerone thik lage to Leelabai ane Purshottambhai Hathee-singh Visual Are Centre jo sharu thayalu hoi to teva Centre-ne mara executero-ne thik lage to sharte kul swatantra malik tarike mara executaro aapse ane jo teva centre-ne te darwaje aapvanu mara exeoutero-ne yogya na lage to teva sanjog-ma mara execu-tero tevo darwajo Shreemati Hatheesingh Tagore Charitable Trust-ne kul swatantra malik tarike aye sharte aapse ke sadarhu trust teva darwaja-ne museum-na ek bhag tarike rakhse.
(q) Saher Calcuttama je makano mara rahethan mate upayog karvama aave chhe te makan tena mukhya darwaja sivayni aye rite-ni milkat mara executero-aye mari milkat angeni estate duty bharva mate mara executero-ne thik lage te sarato-thi ane thik lage te kimat-e vichavani chhe. Ane te mate mara executero-aye koyi court ni koyi parvangi levani raheshe nahi. Ane tevi milkat-na vahechan-na aavej mathi mara executero-aye estate duty bharva mate karvani chhe. Ane tevi estate duty bhartan je kayi vadharani rakam rahe te rakam mari milkat-no bhag banshe.
4. During the relevant previous year, the assessee sold the property situated at Calcutta for a total consideration of Rs. 3,91,410 to one Nandini Bansal Nee Jhunjhunwala by a conveyance deed. The relevant portion of the said conveyance deed reads as under:
NOW THIS INDENTURE WITNESSBTH AS FOLLOWS:
(Rupees twenty-one thousand) only paid in part payment of the total consideration money of Rs. 3,91,410 (Three lacs ninety-one thousand four hundred ten) only calculated at the rate of Rs. 75,000 (Rupees seventy-five thousand) only per Cottah, and in further payment of the balance consideration money of Rs. 3,70,410 (Three lacs seventy thousand four hundred and ten) only to be paid by the purchaser to the Vendors by demand draft in favour of Asstt. Controller, Estate Duty, Ahmedabad, at or immediately at the time of the execution of these presents, the vendors do hereby sell, transfer and convey unto the purchaser. . . .
5. As would appear from the above, the entire amount of Rs. 3,91,410 was paid to the Assistant Controller of Estate Duty, Ahmedabad by a demand draft.
6. On the aforesaid facts, the assessee took up a stand before the ITO that since the entire sale realisation was handed over to the Assistant Controller of Estate Duty towards the payment of estate duty on the principal value of the estate left by the deceased, no capital gains should be worked out in respect of the sale of the property situated at Calcutta. It may be mentioned that in the revised return, the assessee had declared income of Rs. 42,118. Since the ITO was of the view that the capital gains has to be worked out on the sale of property situated at Calcutta, and in doing so variation in the total income would be more than one lac the ITO framed a draft assessment order under Section 143(3) read with Section 144B of the Act, wherein, he had proposed to include capital gains of Rs. 3,54,035 in the total income of the assessee. The assessee filed objections in writing before the ITO. Thereafter, the ITO had referred the matter to the IAC under Section 144B of the Act for his (IAC’S) directions. It appears that no body appeared before the IAC on the date of hearing which was fixed on a couple of occasions. The IAC, therefore, after considering written objections of the assessee, approved the action of the ITO in including the capital gains on the aforesaid transaction. The reasonings given by the IAC in this regard are as under:
(1) The sale took place for the piece of land, during the accounting year 1980-81, i.e., A.Y. by the assessee; had he not been the owner the Estate Duty Officer, would have effected sale, in view of this, the assessee was the owner as per his own act and conduct hence liable for capital gain.
(2) The assessee himself has declared in his own wealth-tax return about owning of this piece of land by him on the date of the death of the lady, right from the A.Y. 1979-80 till the relevant assessment year.
(3) Any Estate Duty tax is only tax upon the assessee, and cannot be allowed as a set off for reducing the sale price for the piece of land, for the purpose of calculation on capital gain, in accordance with any other provisions of law including income-tax.
(4) Section 50B of the Estate Duty Act quoted by the assessee in support of the stand, I agree with the ITO that the same is irrelevant with regard to computation of capital gain under Income-tax Act. This section is about the benefit or reduction which the aasessee gets under Estate Duty assessment and hence got no connection with capital gain computation under Income-tax Act.
Thereafter, the ITO finalised the assessment wherein, he has included Rs. 3,54,035 being the long-term capital gains on the sale of the property situated at Calcutta.
7. Being aggrieved by the order of the ITO, the assessee preferred an appeal before the Commissioner (Appeals) and once again urged that capital gains of Ks. 3,54,035 included in his total income should be deleted. It may be mentioned that the assessee had reiterated the submissions which were made before the ITO/IAC and had also invited the attention of the Commissioner (Appeals) to the provisions of Sections 50B and 74 of the Estate Duty Act, 1953. The Commissioner (Appeals), however, agreeing with the action of the lower authorities, confirmed the order of the ITO in this regard.
8. Aggrieved by the order of the Commissioner (Appeals), the assessee has come up in appeal with the following grounds:
The learned CIT (Appeals) has erred in confirming the order of the ITO under Section 143(3) r.w.s. 144B of the IT Act, 1961 and thereby dismissing the appeal for A.Y. 1981-82.
The learned CIT (Appeals) ought to have appreciated the contention raised before him that the property sold was a specific property with a condition in the will that the sale proceeds be paid over with a condition in the will that the executors are directed to pay the Estate Duty and as such the purchaser of the property have paid the sales proceeds to the Asstt. Controller of Estate Duty and therefore, there is no interest in the said property either of the executors or other beneficiaries or legatees under the Will of the said sale proceeds of the property.
The learned CIT (Appeals) ought to have upheld the contention of the assessee that the demand for capital gains in respect of the property specifically directed in the will to be sold and the sale proceeds be paid over for payment of Estate Duty, be raised on the Asstt. Controller of Estate Duty who in turn will have to permit the rebate under Section SOB of the ED Act for capital gains chargeable in respect of the property included in the principal value of the estate.
The learned CIT (Appeals) ought to have appreciated that the Estate Duty payment is a charge in respect of immovable property passing under Section 74 of the ED Act and as such the demand of capital gains should have been raised in the name of Asstt. Controller of Estate Duty who in turn will adjust the demand of capital gains against the rebate of capital gain under Section 50B of the ED Act.
9. The learned counsel for the assessee reiterated the submissions which were made before the lower authorities and strongly urged that on the proper appreciation of the relevant provisions of the will left by the deceased (reproduced above) as well as the provisions contained in the conveyance deed (reproduced above), there was no scope of including Rs. 3,54,035 in the total income of the assessee. In this connection, he stressed the point that the capital gains had not arisen to the assessee at all as right from its inception the entire sales consideration was handed over to the Asstt. Controller of Estate Duty towards estate duty liability of the assessee on the principal value of the estate left by the deceased. Inviting our attention to Section 74 of the ED Act, 1953, the learned counsel for the assessee stressed the point that the estate duty payable on the passing of the deceased was first charge on the immovable properties passing on her death. In this connection, he relied on the decision in the cases of CIT v. H.H. Maharani Shri Vijaykuverba Saheb of Morvi [1975] 100 ITR 67 (Bom.) as well as in the case of CIT v. C.V. Soundararajan [1984] 150 ITR 80 (Mad.). He also relied on the order of the Tribunal in the case of N.M.A. Mohammed Haneefa v. ITO [1987] 23 ITD 409 (Mad.). Finally, he summarised his submissions in the following manner:
(1) There was a specific bequeath for the payment of estate duty under the Will left by the deceased,
(2) Even assuming for the sake of arguments that the capital gains has arisen in the hands of the assessee, the assessee should be allowed deduction of payment made to the Assistant Controller of Estate Duty out of such gains as under the IT Act, only the real income is brought to tax,
(3) In view of the aforesaid order of the Tribunal, we should hold that the capital gains had not arisen to the assessee, and
(4) In any event, the amount paid to the Assistant Controller of Estate Duty should be deductible in computing the capital gains as there is no distinction made in Section 48 of the Act, between the revenue and the capital expenditure incurred by the assessee. He, therefore, urged that Rs. 3,54,035 should be deleted from the total income of the assessee.
10. The learned representative for the department, on the other hand, strongly supported the action of the IT authorities. According to him, the provisions contained in the Will would only show that the deceased desired that her executors should pay the estate duty on her death out of the sales realisation of her property situated at Calcutta. In other words, he wanted to impress upon us that there was no ‘charge’ which should be taken into account in determining the capital gains in the hands of the assessee. Inviting our attention to Section 74 of the Estate Duty Act, 1953, he submitted that ‘charge’ mentioned therein referred to the entire estate of the deceased and not any particular estate like the property situated in Calcutta in the instant case. The provisions of that Section, according to the learned representative for the department, was to safeguard the interest of the national exchequer and nothing more. Thereafter, he referred to the provisions contained in the Act, regarding capital gains and submitted that the capital gains arising on a sale of a capital asset has to be computed as per theprovisions contained in Part E of Chapter IV of the Act. Section 48 of the Act contains the provisions for computation of capital gains. According to that Section, the assessee would be entitled to claim deduction from the full value of the consideration in respect of any expenditure incurred wholly and exclusively in connection with a transfer of the capital asset and the cost of acquisition/improvement of such asset. Since in the instant case, the estate duty paid to the Assistant Controller of Estate Duty was neither an expenditure incurred in connection with the sale of the property situated in Calcutta nor it is cost of acquisition/ improvement, there was no question of not bringing to tax Rs. 3,54,035 under the head ‘Capital gains’. He, therefore, urged that we should uphold the order of the Commissioner (Appeals).
11. The learned counsel for the assessee, in his reply, once again urged that since the capital gains had not arisen to the assessee and since the entire sale realisation was handed over to the Assistant Controller of Estate Duty towards the estate duty liability as per the provisions of the Will of the deceased, the IT authorities ought not to have brought to tax Rs. 3,54,035 in the hands of the assessee. At this stage, he also relied, on yet another order of the Tribunal in the case of Daksha Ramanlal [IT Appeal No. 796 (Ahd.) of 1975-76 dated 27-7-1976] wherein, the Tribunal had allowed the claim of the assessee in that case of deduction of payment of Rs. 25,000 made to the mortgagee to enable him to sell the property in question which was subject to mortgage.
12. We have carefully considered the rival submissions of the parties and are of the view that a vain attempt is made by the assessee to exclude the capital gains arising on the sale of the property in question. We make this observation as according to us, on the plain reading of the relevant portion of the will left by the deceased (reproduced above) it can easily be found out that the deceased was aware of the fact that on her death estate duty will have to be paid on the principal value of the estate left by her. In this connection, in the said will she expressed her desire that her executors should meet the estate duty liability out of the sale realisation of her property situated in Calcutta. In other words, it was the wish expressed to her executors (the assessee) that they should meet the estate duty liability from the sale realisation of her property situated in Calcutta. It is this desire/ wish that has reflected in the deed of conveyance between the vendors and the purchasers. Under these circumstances the sale realisation on the transaction of the property situated at Calcutta was handed over to the Assistant Controller of Estate Duty and nothing more. This fact by itself would not, in our opinion, absolve the assessee to pay capital gains on the sale of the property situated at Calcutta.
13. We entirely agree with the submissions made on behalf of the revenue that the provisions of Section 74 of the Estate Duty Act, 1953 talk of “charge” on the whole of the estate left by the deceased and not only in respect of the property situated in Calcutta as contended on behalf of the assessee. In our opinion, none of the aforesaid decisions of the High Court or the orders of the Tribunal could advance the assessee’s case in any manner.
14. The head notes in the case of H.H. Maharani Shri Vijaykuverba Saheb of Morvi (supra) read as under:
By a trust deed dated October 6, 1955, M created a trust in favour of his son, Prince M. The trust property comprised of shares and securities and the income of the trust was by way of dividends from shares and interest on securities. M died on August 17, 1957, within two years of the execution of the trust deed, and the property comprised in the trust was includible in the property passing on the death of M which was liable to estate duty. The estate duty payable by the trustees, who were the assessees, was Rs. 8,25,300. The trustees paid the estate duty immediately on March 26, 1958, by borrowing the amount from the Bank of India Ltd. The trustees paid interest to the bank in the three assessment years 1959-60, 1960-61 and 1961-62 till the whole amount was repaid in 1962. The trustees claimed the amounts paid as interest as deduction against their income under the head. ‘Dividends’ and ‘interest on securities’. The Income-tax Officer rejected the claim but it was allowed by the Tribunal. On a reference at the instance of the Commissioner:
Held, that if an assessee had no option except to incur an expenditure in order to make the earning of the income possible, then undoubtedly the exercise of that option is compulsory and any expenditure by reason of the exercise of that option would come within the ambit of Section 12(2). In the instant case, it was clear that the assessee had no other option except to incur expenditure in order to make the earning of an income possible and that the exercise of the option, in the circumstances of the case, was compulsory.
The Tribunal had observed that the trustees could either have disposed of the shares and securities immediately regardless of the consideration whether the ruling rates were favourable or not, or they could have waited till a suitable time came for disposal of shares and in the meantime borrowed the money to meet the estate duty liability and the trustees considered the latter course to be the expenditure one, thereby maintaining the income at its old level subject to the amount payable on money borrowed from the bank. It was, therefore, clear that the expenditure in the form of interest paid on the borrowings during the concerned years would have to be regarded as expenditure incurred solely for the purpose of earning such income and would fall within Section 12(2) of the Act.
Though the trustees held the trust property as legal owners, they were, as such legal owners, under a personal liability to meet the estate duty, but, all the same, that liability really attached to the trust property and it was that liability which the trustees were required to meet in the management of the trust. Moreover, the estate duty liability was the first charge on the movable property held by them as trustees under Section 74(2) of the Estate Duty Act, 1953. Further, though in the sense it was the personal liability of the trustees, ultimately the trustees were entitled to reimburse themselves out of the trust fund. The test for allowing a deduction under Section 12(2) would not be whether the liability that was to be discharged was personal liability or not but whether the expenditure in the shape of interest that was incurred had any direct or indirect connection with the earning of the income, which expression would include maintaining the income or preserving the income at the old rate. Since, on the facts in this case, it was clear that the borrowings were made by the trustees ‘avowedly for the purpose of meeting the estate duty liability which attached to the property which was the subject matter of the trust and that too for the purpose of maintaining or preserving the erstwhile income that was being received from the corpus of the trust, the nexus between the expenditure incurred and the earning of the income could be said to have been easily established. Therefore, the expenditure in the instant case would be a permissible deduction under Section 12(2) of the Act.
14.1 On the bare reading of the facts and circumstances of the aforesaid case would clearly show that the facts and circumstances obtaining in the instant case are clearly distinguishable. Therefore, it is not necessary to discuss anything further in this regard.
15. The head notes in the case of C.V. Soundararajan (supra) read as under:
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 relincLuishment of the said right of residence to enable them to sell the property, the assessees 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 toy the ITO. Though the Commissioner exercising his suo motu powers of revision set aside the said order giving- deduction, the Tribunal held that the money received by the mother was for extinguishment of her right of residence in the property and hence it could not be taken into the computation of capital gains and accordingly directed its deduction. The application by the Department to the Tribunal for referring certain questions of law having been dismissed, the department filed applications in the High Court for directing a reference:
Held, dismissing the applications, that admittedly the assessees did nob 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. No question of law arose for reference.
15.1 It would be apparent from the aforesaid that the assessee in that case was required to pay Rs. 60,000 to the mother “for relinquishment of her life interest in the property”. At page 85 of the report, the Hon’ble High Court observed that “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, the said sum could not be taken to be consideration paid in respect of the interest of the assessee-sons.” Thus, it would be clear that in that case the payment was made to the mother with a view to acquire the full title of the property sold by the assessee. However, in the instant case, the position is quite different. There was no encumbrance in the property sold by the assessee which was required to be liquidated before entering into sale transaction with the purchaser. We, therefore, fail to appreciate how this decision could at all support the stand taken on behalf of the assessee.
16. Similarly, we find from the aforesaid orders of the Tribunal that in both the cases the properties sold were subject to mortgage. With a view to eliminate the encumbrance in the property sold by the assessees in those cases, the assessees were required to pay certain amount to the mortgagees before executing the deed of sale. In this view of the matter, we are of the opinion that the said orders of the Tribunal would not be of any help to the assessee.
17. In the instant case, it is not in dispute that the property in question sold by the assessee was free from any encumbrance. As per the provisions of Section 74 of the Estate Duty Act, 1953, as already stated above, the “charge” was on the entire properties left by the deceased and not on the property situated at Calcutta. Under Clause (c) of the will of the deceased it is stated that her executors should pay the estate duty on the principal value of the estate left by her. In this connection, in Clause (q) of the will, the deceased had expressed her wish that such estate duty may be met by selling her property situated in Calcutta. It is pertinent to note that the conveyance deed has been executed between the assessee and the purchasers and the Assistant Controller of Estate Duty was not a confirming’ party to the said deed as it was not necessary to do so. The relevant portion of the deed of conveyance (reproduced above) only shows that the executors of the deceased are carrying out the desire expressed by the deceased in Clause (q) of the will left by her. In other words, the said property cannot be said to be under “charge” as contemplated under Section 74 of the Estate Duty Act, 1953. Instead of receiving the sale proceeds from the purchaser the assessee, while fulfilling the wish of the deceased, has requested the purchaser to pay the sales proceeds to the Assistant Controller of Estate Duty towards the estate duty liability. In other words, according to us, there was an application of income after it had arisen to the assessee. In this view of the matter, we have no hesitation in upholding the order of the Commissioner (Appeals) on this point.
18. In the result, the appeal is dismissed.