TMI Blog1974 (7) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... and the income of the trust was by way of dividends from shares and interest on securities. His Highness Maharaja died on August 17, 1957, and by reason of the fact that the settlement in favour of his son was created by the deceased within two years before his death, the property comprised in the trust was includible in the property passing on the death of Maharaja Mahendrasinhji which was liable to pay estate duty. The estate duty return in the case of the estate of the deceased was filed on March 3, 1958. The provisional assessment was completed and estate duty liability determined on that basis was apportioned among different accountable persons and the amount allocated to the trustees under the deed of indenture dated October 6, 1955 (who were the assessees in question), came to Rs. 8,25,000. The assessee paid the estate duty immediately on March 26, 1958, by borrowing the amount from the Bank of India Ltd. The amount borrowed was repaid in three subsequent years, partly by selling the shares belonging to the trust and partly out of accumulated income. However, the trustees had to pay interest amounting to Rs. 23,592 in the first year (assessment year 1959-60), Rs. 15,666 in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be determined without taking into account the liabilities attached to the assets and the expenditure which resulted from that liability has, therefore, a direct bearing on the maintenance of the assets and the income thereform. In this view of the matter the Tribunal allowed the deduction claimed by the assessee. At the instance of the Commissioner of Income-tax, Bombay City-I, the question set out above has been referred to this court by the Tribunal for our decision. Mr. Joshi, appearing for the revenue, has contended before us that under the provisions of the Estate Duty Act, 1953, the liability of the trustees to pay proportionate estate duty was the personal liability of the trustees and the borrowings in question had been made by the trustees for the purpose of discharging their personal liability, though the motive behind the borrowings might have been to preserve the shares or the securities being the corpus of the trust and since the borrowings were not made " solely for the purpose of making or earning such income " as required by section 12(2) of the Indian Income-tax Act, 1922, the same was not allowable as a deduction under that provision. In support of his contenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordance with law after recording certain findings of facts which had not been recorded when the matter was decided by the High Court. He, therefore, contended before us that in the instant case also, unless the court found as a fact that there was a statutory charge on the shares and securities which were the subject-matter of the trust in the hands of the trustees under section 74(2) of the Estate Duty Act, the expenditure in the shape of interest paid on the borrowings could not be allowed as a permissible deduction under section 12(2) of the Act. He, however, fairly conceded that it would be difficult for him to contend, in view of the provisions of section 74(2) of the Estate Duty Act, that there was no charge on the movable property which had been held by the trustees which was the subject-matter of the trust and all that he contended in that behalf was that the Tribunal has not given any finding on this particular aspect and, therefore, the deduction claimed by the assessee ought not to have been allowed as a deduction under section 12(2) of the Act. On the other hand, Mr. Palkhiwala, appearing for the assessee, has invited our attention to a decision of this Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rring in the said expression was referable even to the quantum of income derived from the particular source, namely, shares and securities and if in this case the borrowings had not been made by the trustees to meet proportionate estate duty liability, then the only alternative for the trustees was to sell some of the shares or securities which would have definitely resulted in the reduction of income that was otherwise receivable by the trustees and to the extent to which such reduction in income was avoided the trustees could be said to have " earned such income ". In other words, according to Mr. Palkhivala, the expenditure in the shape of interest on the borrowings was obviously incurred for the purpose of preserving the particular source of income so that the exact quantum of income hitherto received by them was also preserved and in that sense the expenditure must be regarded as having been incurred " solely for the purpose of earning such income ". He further pointed out that it was well settled that if with the borrowings that are made, a source of income like shares or securities is acquired, then obviously the interest paid on such borrowings is a permissible deduction un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eby reducing the income or borrowing money and paying interest on it. Inasmuch as she exercised the option of borrowing money, she preserved the source of the income and, therefore, this expenditure is an allowable expenditure. Now what sub-section (2) emphasises is the purpose for which the expenditure is incurred. The court is not concerned with the motive of the assessee and what Mr. Mehta in fact asks us to do is to probe into the motive of the assessee. It may be that the assessee's motive was to save her fixed deposit and interest accruing from it and to purchase the jewellery by means of loan borrowed from some person or other. But that consideration is entirely irrelevant. What we are concerned with is the actual action on the part of the assessee and not of the action she could have taken under the circumstances. If she had chosen to parchase this jewellery by withdrawing money from the fixed deposit, then undoubtedly her income would have been reduced and to that extent the tax on that income would also be reduced. But because she chose to borrow money to buy the jewellery, it does not establish the purpose, namely, that she borrowed money in order to maintain or prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncerned with the motive of the assessee. The purpose of the borrowings was obviously to purchase jewellery and, therefore, the interest paid on such borrowings could not be allowed as a deduction under section 12(2) of the Act. But, in the same context, the court has observed that if the assessee had borrowed the moneys in order to maintain or preserve the fixed deposit or help her to earn interest, then obviously the deduction would be permissible under section 12(2) of the Act. The ratio of the decision has been set out in the last portion of the judgment at page 550 of the report and the relevant observations run as follows : " If an assessee has no option except to incur an expenditure in order to make the earning of an income possible, then undoubtedly the exercise of that option is compulsory and any expenditure incurred by reason of the exercise of that option would come within the ambit of section 12(2). But where the option has no connection with the carrying on of the business or the earning of the income and the option depends upon personal considerations or upon motives of the assessee, that expenditure cannot possibly come within the ambit of section 12(2). " Now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Mr. Palkhivala contended before us that if the payment of interest made for the purpose of avoiding forfeiture of shares that had been allotted to the assessee was regarded as permissible deduction under section 12(2) of the Act, then in the instant case the payment of interest for the purpose of preserving the assets and avoiding the dissipation thereof should be regarded as permissible deduction under section 12(2) of the Act. In our view, the contention is well-founded and will have to be accepted. Mr. Joshi, for the revenue, contended that the immediate purpose for borrowings in the instant case should be regarded as discharging personal liability which the trustees were under an obligation to do and the ultimate motive on the part of the trustees may be to preserve or maintain the trust property so as to maintain the same old income that was being received. It is not possible to accept this submission of Mr. Joshi. It is undoubtedly true that since the trustees held the trust property as legal owners they would as such legal owners be under a liability to meet the proportionate estate duty but all the same that liability really attached to the trust property and it was th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the income and there would accordingly be the requisite connection or nexus between the borrowing of the moneys and the earning of the income. If, therefore, at the time when the estate duty was paid by the assessee in the instant case, the shares and securities were charged with payment for the estate duty, then interest paid on moneys borrowed for the purpose of discharging that liability would be admissable expenditure under section 12(2) of the Act. The relevant provision creating statutory charge in respect of estate duty liability is to be found in section 74(2) of the Estate Duty Act, which runs as follows : " 74. Estate duty a first charge on property liable thereto.--(1) ...... (2) A rateable part of the estate duty on an estate, in proportion to the value of any beneficial interest in possession in movable property which passes to any person (other than the legal representative of the deceased) on the death of the deceased shall be a first charge on such interest ". It was not disputed by Mr. Joshi for the revenue that in view of the aforesaid provision at the date when the proportionate estate duty was paid by the assessee in this case, the movable property ..... X X X X Extracts X X X X X X X X Extracts X X X X
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