TMI Blog1967 (10) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... r to pay this estate duty, the assessee on behalf of herself and her minor son, Pankaj, raised an aggregate loan of Rs. 2,78,000 from the bank of India Ltd. and the Central Bank of India Ltd. and the estate duty was paid in different amounts on diverse dates between 4th December, 1957, and 4th January, 1961. A part of the loan was repaid by assessee and her son out of the income of the estate received under the will and at the commencement of the relevant previous year, the amount of the loan due from the assessee and her son to the banks was Rs. 1,98,022 and this amount was further reduced to Rs. 1,95,022 at the close of the relevant previous year. Now admittedly the amount of the loan during the relevant previous year included a withdrawal of Rs. 60,889 for the construction of an immovable property, but the construction of the immovable property was not completed and no income was received from the immovable property in the relevant previous year. The income of the assesses in the relevant previous year consisted principally of dividends from shares and a small amount by way of interest and income from immovable property and admittedly this entire income was derived from the prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e connection may be direct or it may even be indirect. But howsoever indirect the connection may be, there must be a connection or nexus between the expenditure incurred and the income earned. This is the test which we must apply to the facts of the case and applying the test we must see whether the expenditure incurred by the assessee in payment of interest to the banks on the moneys borrowed for payment of estate duty has any connection, direct or indirect, with the income earned by her from the shares received under the will of her husband. The argument of the revenue was that the liability for payment of estate duty was a personal liability of the assessee and the moneys were borrowed by her to discharge such personal liability and there was accordingly no connection, direct or indirect, between the borrowing of the moneys and the earning of income from shares received by her under the will of her husband. The purpose of borrowing moneys and payment of interest thereon was, it was contended on behalf of the revenue, to discharge the personal liability of the assessee for payment of estate duty and this purpose had no connection whatever with the income earned by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses on the death of such person a duty called " estate duty " at the rates fixed in accordance with section 35. Now, though the estate duty is levied upon the principal value of the property passing on the death of the deceased, it has to be paid by somebody : some person has to be made liable for payment of it and that is done by section 53, sub-section (1). Section 53, sub-section (1), lays down who shall be liable for payment of estate duty to the State and according to that sub-section, where any property passes on the death of the deceased, (a) every legal representative to whom such property so passes 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 is 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. Section 53, sub-section (5), provides that where two or more persons are accountable for es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le person remains a personal liability. If, therefore, the assessee was a legal representative of her deceased husband at the date when she paid the estate duty on behalf of herself and her minor son with moneys borrowed from the banks, there would be no charge at that date on the shares passing her for a beneficial interest in possession and her liability would be purely personal liability as an accountable person. But if, on the other hand, the assessees did not at that date occupy the character of a legal representative of her deceased husband, the shares passing to her for a beneficial interest in possession would be subject to a first charge for a rateable part of the estate duty in proportion to her beneficial interest in possession. The borrowing of the moneys in the former case would be merely for the purpose of discharging a personal liability of the assessee whereas in the latter case it would be for the purpose of clearing a first charge on the shares to the extent of a rateable part of the estate duty. The question is : would it make any difference to the allow ability of the expenditure incurred in payment of interest on the borrowed moneys whether the case falls wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the shares or to earn income from the immovable property or if there were any other income producing asset of the assessee, to earn income from such asset ? The question clearly exposes the fallacy of the argument and shows that there is no connection, direct or indirect, between the borrowing of the moneys and the earning of the income. If the argument of the assessee were pressed to its logical conclusion, the result would be that whenever moneys are borrowed for payment of any liability, it it would always be possible to say, save in the rate case where moneys sufficient to meet the liability are lying idle with the assessee without earning any interest, that if the moneys had not been borrowed, some income producing asset of the assessee,which would include even cash lying on interest, would have had to be sold or realised, and that would have meant loss of income and, therefore, interest paid on borrowed moneys is for the purpose of earning such income and is deductible against it. Even payment of interest on moneys borrowed for discharge of income-tax liability would be a permissibly deduction. But this conclusion is plainly contrary to the decision of the Bombay High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 84 of the estate Duty Act by a resident company incorporated outside India on the death of shareholders not domiciled in India and the question was whether the amounts paid by way of estate duty were deductible under section 10(2)(xv) as expenditure incurred wholly and exclusively for the purpose of the business of the company. The Supreme Court held that though the amounts paid by way of estate duty were "expenditure ", they could not be said to be laid out or expended wholly and exclusively for the purpose of the business of the assessee. Subba Rao J., as he then was, speaking on behalf of the Supreme Court said : " The payments have nothing to do with the conduct of the business. The fact that on his default, if any, in the payment of the dues, the revenue may realise the amounts from the business assets is a consequence of the default of the assessee in not discharging his statutory obligation, but it does not make the expenditure any the more expenditure incurred in the conduct of the business. It is manifest that the amounts in question were paid by the assessee as a statutory agent to discharge a statutory duty unconnected with the business, though the occas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw in Australia. It was pointed out that in Australia too, as in India, interest paid on moneys borrowed for discharge of income-tax liability was not a permissible deduction but a distinction was made by the Australian cases in regard to interest paid on moneys borrowed for paying succession and estate duties and such interest was always held to be an admissible deduction and the same distinction, it was pleaded, should also be recognized by us. In support of this contention the assessee leaned heavily on the following observations in Mr. Gunn's Commonwealth Income Tax Law and Practice, seventh edition, page 684, paragraph 1741 : " 1741. Interest on money borrowed to pay death duties---In Begg v. Deputy Federal Commissioner of Taxation, it was held that interest paid on moneys borrowed to pay succession and estate duties, legacies and other outgoings was deductible. In Public Trustee v. C. of T. (N.Z.), it was held that interest payable upon money borrowed for the purpose of paying death duties charged upon the estate of the testator, is deductible in computing the assessable income of the estate, but apportionment of the interest is required where both assessable and non-ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee cannot draw any support from the Australian decisions. Moreover it must be noted that this reasoning, though presumably justified by the terms of section 51 of the Australian Income Tax Act--a matter with which we are not concerned--has no validity in the determination of a claim for deduction under section 57(iii) of our Act. We have already discussed this aspect of the matter sufficiently and nothing more need be said about it. We must, therefore, reach the conclusion that if moneys were borrowed by the assessee for the purpose of discharging what was purely a personal liability as an accountable person to pay estate duty, interest paid on the borrowed moneys would not be an allowable expenditure under section 57(iii). The question then arises: Does it make any difference if there was a charge on the shares for payment of estate duty and moneys were borrowed by the assessee for the purpose of clearing the charge ? We cannot assent to the broad proposition canvassed on behalf of the assessee that whenever liability is charged on a property, and moneys are borrowed for clearing the charge, interest paid on the borrowed moneys would necessarily be an allowable expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... close we must refer to two small points raised on behalf of the revenue. Both the points have no merit and must straightaway be rejected. One point was that since a part of the moneys borrowed from the banks in the overdraft accounts, namely, the sum of Rs. 60,889, was utilised for the construction of an immovable property, interest paid to the banks in the overdraft accounts could not be said to be expenditure incurred solely for the purpose of making or earning dividends on the shares and was, therefore, not a permissible deduction. But this point overlooks the fact that, though undoubtedly the sum of Rs. 60,889 was utilised for the construction of an immovable property, the rest of the moneys borrowed from the bank in the overdraft accounts were admittedly utilized exclusively for payment of estate duty and there was no indiscriminate utilisation of the borrowed moneys for different purposes as was the case in Commissioner of Income-tax v. Jagmohandas J. Kapadia. The position was as if there were two borrowings from the same lenders, one borrowing being for the purpose of construction of an immovable property and the other borrowing being for the purpose of payment of estate dut ..... X X X X Extracts X X X X X X X X Extracts X X X X
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