KAVITHA, L/H OF S.SHANMUGAM (LATE),CHENNAI vs. ITO, CHENNAI

आदेश / O R D E R PER GEORGE MATHAN, JUDICIAL MEMBER:

purpose by deposit of title deeds. As these loans remain unpaid, the bank had initiated recovery proceedings against Shri S.Shanmugam and recovery proceedings were filed before Debt Recovery Tribunal-III, Chennai, during 2007. The properties were under attachment of the said banks from 1995 onwards. As a consequence of search operation on the said Shri S.Shanmugam and other family members on 13.02.2009 the assessmentd for the AYs 2003-04 to 2009-10 were re-opened and completed against the assessee’s father which are resulted in demand of Rs.13,39,17,742/-. The TRO had also attached to the said properties.

After the death of the Shri S.Shanmugam, the legal heirs being the two assessees and their mother with a view to earnestly settle the bank loan and arrears of the father, approached the banks for one time settlement of the loans and had also made a request with the Income Tax Department for the private sale of the attached properties to settle tax arrears. Pursuant to the settlement with the bank and after obtaining necessary clearance from the TRO, the properties were sold and the entire consideration was paid directly by the Vendees to the bank and the Income Tax Department in partial settlement of Shri S.Shanmugam dues.

It was a submission that as the properties were under attachment by the banks and Income Tax Department, the diversion of the entire consideration to the bank and Income Tax Department was in effect a diversion by overriding the title and nothing has come to the hands of the assessee’s or the legal heirs, no income by way of capital gains arose for taxation. Consequently, no capital gains income was offered in the return & 1105/Mds/2017 :- 4 -: filed by the assessees. It was a submission that the AO did not accept the contention of the assessee and had brought to tax, the capital gains arising on the transfer of the properties without taking into consideration, the charge created by Shri S.Shanmugam on the properties with the bank as also with the Income Tax Department. It was a submission that Ld.CIT(A) had also upheld the order of the AO. It was a submission that the charge on the properties having been created by Shri S.Shanmugam when he was alive and the assessee’s having inherited the properties along with the charge, the settlement of the charge in respect of the said properties was in effect an improvement to the cost of acquisition of the property and the same was liable to be considered when computing the capital gains in respect of the said properties. It was a submission that in view of the decision of the Hon’ble High Court in the case of Shri R.M.Arunachalam reported in 227 ITR 222 the payment made for the purpose of clearing of the mortgage created by the assessee’s father on the said properties were to be considered as a cost of improvement in respect of the said properties so as to perfect the title of the property inherited by the assessee. It was a submission that consequently the order of the AO & the Ld.CIT(A) was liable to be reversed.

respect of Income Tax dues of Shri S.Shanmugam. It was a submission that the Income Tax dues could not be considered as a charge on the property created by the deceased. It was a submission that Income Tax dues were a personal tax liability.

Though, it has been argued that the Income Tax liability of the deceased father, Shri S.Shanmugam is a charge on all the assets of the deceased father which has been inherited by the assessees, we are unable to subscribe this view that the said Income Tax liability would be a charge on the inherited property so as to be treated as cost of improvement when the same is settled by sale of the said properties, as we are of the view that the Income Tax liabilities are the personal liability of the assessee more so, the deceased assessee, Shri S.Shanmugam. No charge on the said charge had been created by Shri S.Shanmugam on the said properties in respect of the Income Tax liability. In view of this, we are of & 1105/Mds/2017 :- 6 -: the view that the payment made by the assessees to the Income Tax Department for settlement of the tax liability of Shri S.Shanmugam, the deceased father of the assessee from the sale consideration of the properties inherited by the assessee from Shri S.Shanmugam cannot be considered as cost of improvement for the purpose of computing the capital gains. The findings of the AO and the findings of the Ld.CIT(A) to this extent stands confirmed and the AO is directed to grant the benefit of the cost of improvement representing the settlement of the bank liability through one time settlement when computing long term capital gains in the hands of the assessee.