COMMISSIONER OF INCOME TAX Vs. RAMNATH A PODAR

JUDGEMENT

(1.) THIS is a reference under Sub -S. (1) of S. 66 of the IT Act. The assessee is Shri Ramnath A. Podar, sole surviving executor of the will of Seth Anandilal Bansidhar Podar. We are concerned with the asst. yrs. 1947 -48 to 1956 -57. One Anandilal Bansidhar Podar died testate on 6th May, 1940, leaving behind him two sons, Ramdev and Ramnath. He had left a will of dt. 18th March, 1940, and considerable property. It appears that Anandilal (whom we would hereafter refer as the testator) had, during his lifetime, lost his wife and two sons by name, Rambilas and Ramniranjan. The testator, with a view of obtaining spiritual benefit to his late wife, his late sons and himself, made certain dispositions by his will and they are contained in paragraph 11 of the will. The directions given by the testator in paragraph 11 are : That one lakh of rupees each for his deceased wife and two deceased sons be set apart for being spent towards charitable objects. He further directed that two lakhs of rupees be set apart for the ultimate good of himself. In short the testator directed that charities to the extent of five lakhs of rupees be effected. Paragraph 11 further receipts that for the purpose of achieving ultimate good for his wife and his two deceased sons, he had in his lifetime started making donations towards charities and had utilised a good portion of three lakhs of rupees set apart for the ultimate good of his wife and the two deceased sons, though accounts in respect of them had not been made and written. The testator, had further undertaken several responsibilities of making donations to charitable objects for the ultimate god of his wife and his two deceased sons, but they had yet remained to be discharged. One of the principal responsibilities undertaken by the testator was getting buildings built for an Ayurvedic college and an Ayurvedic hospital constructed in accordance with the agreement with the Bombay Government. The will recites that during his lifetime he would, as far as possible, carry out his desires, but, in case he was not able to do so, he gave the following directions :

(2.) TO give effect to the aforesaid disposition in the will of the said Anandilal Bansidhar Podar, the executors debited Rs. 5,00,000 to the personal account of the testator and credited one lakh of rupees to the charity account of his wife, one lakh of rupees to the charity account of each of his two deceased sons and two lakhs of rupees to the charity account of the deceased, Anandilal. The credit balance that was left to the personal account of the testator, after debiting these amount to the respective four accounts, was Rs. 6,94,547. At the commencement of Samvat Year 1998, i.e., at the close of Diwali of the year 1940, the said Anandilal Podar charity account showed a credit balance of Rs. 2,18,395. On the same day, two debits were made in this account, viz., Rs. 35,477 paid to Ramniranjan Podar Charity account and Rs. 1,20,373 to Ayurvedic College and Hospital account, and on the same day, two sums were credited that the account (Seth Anandilal Podar charity account) by the two living sons of Anandilal, Ramdev contribution Rs. 1,00,000 and Ramnath contribution Rs. 37,455. Thus, at the commencement of Samvat Year 1999, i.e., at the close of Diwali of 1941, the amount standing to the credit of Seth Anandilal Podar Charity account was Rs. 2,13,000. The ITO, in dealing with the assessment cases of the trusses, fund that before the beginning of Samvat year 1999, the total amount expended on charitable purposes amounted to Rs. 5,32,124. According to him, the maximum amount embarked by the testator for charitable purposes amounted only to Rs. 5,00,000. He therefore held that the balance of Rs. 2,13,000 remaining in the charity account of Anandilal Podar did not have the character of property held under trust. It was, according to him, only a reserve (residue of the estate of the deceased) created and, therefore, interest credited in that account on that sum was liable to be taxed in the hands of the executors. In this view of the matter, the ITO served notices under S. 34 of the Act, on the sole surviving executor reopening assessments for the asst. yrs. 1947 -48 to 1956 -57. The assessee challenged the validity of the notices issued under S. 34. He also contended that the amounts of Rs. 1,00,000 and Rs. 37,455 were introduced in the Anandilal Podar Charity account by the two executors out of their personal funds and, therefore, cannot be treated as part of the estate of the deceased and, consequently, the assessee in his capacity as the execute was not liable to pay tax thereon. The contentions of the assessee were overruled by the ITO and the interest on the said amount of Rs. 2,13,000 during all these years was taxed in the hands of the assessee in his capacity as the executor in those respective years. The assessee took appeals against the orders of the ITO for all those years. The AAC accepted the contention raised by the assessee. He held that Rs. 1,00,000 and Rs. 37,455 could not become part of the trust created under the will of Anandilal Podar inasmuch as the courses from which they were introduced in the charity account were clearly known. The sources were the personal funds of the two sons. On these facts, in his opinion, these two sums represented the reserves created by the two partners of Anandilal Podar & Co. who were the sons of Seth Anandilal Podar. Interrest accrued and credited on these sums in the books of the firm actually interest on reserves created by the partners in the books of the firm. It , therefore, amounted to payment of interest by the firm to its partners. On these findings, he held that the action taken under S. 34, having been taken against the assessee in his capacity as executor, was not justified. In this view of the matter, he allowed the appeals and cancelled the assessments under S. 34. The Commissioner took appeals to the Tribunal against these order of the AAC. Before the Tribunal the Department made a concession and it is recorded by the Tribunal in the following terms :

(3.) THE reason given by the Accountant Member is as follows : "Under the testamentary trust a sum of Rs. 5 lakhs was settled in charity. The moment the executors of the will set apart the amount, they ceased to have any control over it and became trustees of the same. If this original amount later got augmented by reason of interest earned or donations received from outsiders and after meeting the expenditure on charity up to Rs. 5 lakhs, the limit fixed by the testator, there was an excess, such excess did not thereby cease to be trust property and become residuary estate in the hands of the executors. In this view of the matter, therefore, I would hold that the interest earned was by the trustees and not the executors." On an application under Sub -S. (1) of S. 66 by the CIT, the Tribunal has drawn up the statement of the case and has referred the following question of law to us :