COMMISSIONER OF INCOME TAX Vs. INDUMATI RATANLAL

JUDGEMENT

(1.) THIS reference arises out of an assessment made upon the assessee as an individual for the asst. yr., 1962-63, the relevant account year being the calendar year 1961. The assessee's husband Ratanlal, died on 17th January, 1957, leaving a will under which he bequeathed, one-half of his estate to the assessee and the other half to his minor son, Pankaj. The estate consisted mostly of shares and securities but there was also an immovable property situate in Ahmedabad which belonged to the estate. Since the estate passed on the death of Ratanlal, estate duty became payable on the principal value of the estate under the provisions of the ED Act and such estate duty came to Rs. 2,78,979.87 Ps. In order 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 assessee 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 properties received by the assessee under the will of her husband. The assessee in the course of her assessment to income-tax for the asst. yr. 1962-63 claimed to deduct in the computation of her assessable income Rs. 15,397 being one-half of the interest paid to the banks on moneys borrowed and utilised in payment of estate duty. The claim was founded on s. 57(iii) of the IT Act, 1961, corresponding to s. 12(2) of the IT Act, 1922. The ITO and the AAC disallowed the claim but on appeal the Tribunal held that the claim was well-founded and allowed the deduction. Hence, the present reference at the instance of the CIT.

(2.) SINCE the claim of the assessee for deduction is based on s. 57(iii), it is necessary first to look at the section itself. Sec. 57(iii) is sub-stantially in the same terms as s. 12(2) of the old Act and, therefore, the decisions on the construction of s. 12(2) must also govern the construction of s. 57 (iii). Sec. 57(iii) provides that income from other sources shall be computed after making allowance for any expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income. The deduction that is permissible under s. 57(iii) is an expenditure laid out or expended wholly and exclusively for the purpose of making or earning the income which is subjected to tax. Therefore, in order to decide whether an expenditure is a permissible deduction under s. 57(iii), we have to examine the nature of the expenditure. The purpose for which the expenditure is incurred must be in order to earn the income and here we must not confuse purpose with motive. What s. 57(iii) emphasized is the purpose for which the expenditure is incurred and the word "purpose" should not be equated with the motive for the transaction. The motive which may have operated on the mind of the assessee in making the expenditure is wholly irrelevant : See Bai Bruriben Lallubhai vs. CIT (1956) 29 ITR 543 (Bom) and Ormerods (India) Private Ltd. vs. CIT (1959) 36 ITR 329 (Bom). The expenditure in order to fall within s. 57(iii) must, therefore, be incurred wholly and exclusively for the purpose of making or earning the income sought to be assessed. There must be a connection between the expenditure and the earning of the income. The 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.

(3.) BUT, apart from this personal liability of every accountable person, a charge is also created on the movable and immovable property passing on the death of the deceased to the extent set out in s. 74. Sec. 74, sub-s. (1) provides that subject to the provisions of s. 19 (which relates, to the collection and incidence of duty under s. 17 in respect of controlled companies) the estate duty payable in respect of property, movable or immovable, passing on the death of the deceased, shall be a first charge on the immovable property so passing, in whomsoever it may vest on his death after the debts and encumbrances allowable under Part VI. So far as movable property passing on the death is concerned, s. 74, sub-s. (2), says that 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. There is thus a charge on movable property also as in the case of immovable property, but the charge extends rateably in proportion to the value of the beneficial interest in possession passing to the person against whom the charge is claimed provided of course he is not a legal representative of the deceased. If the person to whom the movable property passes for a beneficial interest in possession is a legal representative of the deceased, there is no charge and the liability of the legal representative as an accountable person remains a personal liability.