Tulzapurkar, J. - (1.) The question that has been referred to us for our decision at the instance of the Commissioner of Income-tax, Bombay City-I, Bombay, runs as follows : "Whether, on the facts and in the circumstances of the case, interest paid by the trustees on the loan obtained from the Bank of India Ltd. for the payment of estate duty chargeable on the trust property was an admissible deduction from the income of the trust assessable under section 12 of the Act for all the three assessment years 1959-60, 1960-61 and 1961-62 ?"
(2.) The facts giving rise to the question may briefly be stated : By an indenture of trust dated October 6, 1955, executed by late His Highness Maharaja Shri Mahendrasinhji of Morvi, His Highness Maharaja created a trust in favour of his son, Prince Mayurdhwanjsinhji. 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. 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 assessee 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 the second year (assessment year 1960-61) and Rs. 9,619 in the third year (assessment year 1961-62) on the borrowings from the bank till the whole amounts was repaid some time in 1962. The trustees claimed these amounts as deduction against their income under the heads "Dividends" and "Interest on securities". The Income-tax Officer rejected the claim of the assessee for deduction of interest. The claim, which was pressed under section 12 (2) of the Indian Income-tax Act, 1922, was rejected on the ground that the said deduction was admissible only if funds had been borrowed for the purpose of making investments. In the appeal preferred by the trustees the Appellate Assistant Commissioner also rejected the claim for deduction. He took the view that section 12 of the Act permitted the deduction of any expenditure other than capital expenditure incurred solely for the purpose of making or earning such income and since the expenditure claimed was not so incurred, the deduction was not permissible. Before the Tribunal the assessee contended that the interest was clearly deductible from the trustees' income from the other sources because the trustees had, of necessity, to borrow the amounts in order to discharge the estate duty liability which would have otherwise forced them to part with some of the shares held by them under the trust and it was contended that, if interest on moneys borrowed for acquiring a source of income could be allowed as a deduction under section 12 (2), interest on amounts borrowed for the purpose of preserving a source of income or avoiding the dissipation of a source of income should also be allowed. The Tribunal found that the arrangement for borrowing the moneys was directly related to the source of income held by the trustees and the interest paid on these amounts was a proper charge against the income derived from that source. It also found that the amounts were in effect borrowed to preserve the source yielding income. The Tribunal noticed that the estate duty was the first charge on the assets themselves and the trustees had, therefore, to devise the most prudent way of discharging the liability, keeping in mind their main purpose of safeguarding the interest of the beneficiaries. It took the view that on the death of the settlor, in view of the statute, the assets became subject to the charge and the income from the assets could not 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 therefrom. In this view of the matter the Tribunal allowed the deduction claimed by the assessees. 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.
(3.) Mr. Joshi, appearing for the revenue, has contended before us that under the provisions of the Estate Duty Act, l1953, the liability of the trustees to pay proportionate estate duty was the personal 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 contention he relied upon a decision of the Gujarat High Court in the case of Commissioner of Income-tax v. Mrs. Indumathi Ratanlal. In that case the facts were these. The assessee's husband died leaving a will bequeathing half of his estate to his wife and the other half to his minor son. The estate consisted mainly of shares and securities. For the assessment year 1962-63, the assessee claimed that an amount of Rs. 15,397, being one-half of the interest on money borrowed for payment of estate duty, was deductible under section 57(iii) of the Income-tax Act, 1961, from the dividends derived from the shares and securities. The court held that there was no difference between interest paid on money borrowed to pay income-tax and interest on money borrowed to pay estate duty. Just as the former was not paid for the purpose of making or earning the income, the latter was not made for the purpose of making or earning the estate. If there was a charge on the property received by a person for payment of a liability and moneys were borrowed for clearing that liability, the interest paid on such borrowed moneys would be an allowable expenditure. Mr. Joshi pointed out that in that case two aspects were considered by the Gujarat High Court, one based on personal liability of the accountable person to pay the estate duty and the other based on the charge which is statutorily created on the property passing on the death of an assessee under section 74 of the Estate Duty Act and he pointed out that, so far as the first aspect of the question was concerned, the Gujarat High Court categorically took the view that, if the moneys were borrowed for the ;purpose of meeting personal liability, then the interest paid on such borrowings would not fall within the purview of section 57(iii) of the Income-tax Act, 1961, which is equivalent to section 12(2) of th Indian Income-tax Act, 1922, though he fairly conceded that on the latter aspect the High Court has made the observation to the effect that, if the property was received by an assessee subject to charge for payment of liability and the moneys were borrowed for clearing that liability, the interest paid on such borrowed moneys would be an allowable expenditure. He pointed out that in that particular case the question arising under the second aspect was referred back by the High Court to the lower authority to decide the matter in accordance 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 no 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,;