COMMISSIONER OF INCOME-TAX Vs. SRAMSAY UNGER

JUDGEMENT

(1.) This is a reference by the Income-tax Appellate Tribunal, Madras, under Section 66(1) of the Indian Income-tax, 1922.

(2.) One Mr. S. Ramsay Unger (hereinafter called the assessee) was assessed to income-tax for the year 1942-43 on a total income of Rs. 70,766 in which was included a sum of Rs. 46,061 as income derived from the business of ice manufacture and cold storage carried on by him under the name of "Ramsay & Co." He claimed before the Income-tax authorities a deduction of a sum of Rs. 22,108 as being interest paid to the estate of his father, the late Jehn Ramsay Unger, on capital said to have been borrowed from the estate for the purposes of his business. The claim was disallowed except to the extent of only Rs. 1,984 on the ground that, in the circumstances hereinafter mentioned, the assessee had become the sole owner of the residuary estate subject to certain pecuniary legacies payable under his father's will and that, therefore, except in regard to the aforesaid sum of Rs. 1,984 representing the interest payable to such legatees, the deduction claimed was in truth in resrect of a payment to himself. The assessee appealed to the Income-tax Appellate Tribunal who considered that the administration of the testater's estate had not been completed and the residue ascertained and that it was still in the hands of the assessee in his capacity as executor and had rot become his property. The Tribunal accordingly allowed the appeal and directed the exclusion of the balance of Rs. 20,124 also from the assessment. Thereupon the Cemmissioner of Income-tax, Madras, applied to the Tribunal to state the case and refer it to this Court, claiming that a question of law arose out of its order, and the Tribunal, agreeing that a point of law was involved referred to this Court for its decision the following question: Whether on the facts and in the circumstances of the case, the sum of Rs. 20,124 was allowable as a deduction as interest on borrowed capital within the meaning of Section 10(2)(iii) of the Act. "Ramsay & Co." was founded by the late John Ramsay Unger and the assessee joined the business as a partner in 1916. Under the articles of partnership entered into between the parties on the 25 February, 1921, it was provided, inter alia, that the assessee should become the sole proprietor of the business at the end of the year 1935 or on the death of his father if it happened earlier, and that the large amount of capital standing to the credit of the father in the books of the firm should continue in the firm for 20 years after the termination of the partnership or for such shorter or longer period as the assessee might require, bearing interest at six per cent, per annum. John Ramsay Unger died in July 1929, leaving him surviving his widow, four sons including the assessee and one daughter. He made a will on the 13 May, 1926, which was later supplemented by a codicil dated the 6 November, 1928. By the said will he confirmed and ratified the provisions of the partnership agreement of the 25 February, 1921, declared that his estate consisted of a sum of Rs. 3,22,111-14-4 standing to his credit in the books of Ramsay & Co., on the 31 December, 1925, and certain lands and buildings more particularly described in the will and appointed his sons Sherrard Ramsay Unger (the assessee) and Oscar Ramsay Unger as executors. He then proceeded to bequeath certain pecuniary legacies to his wife and others which he directed his executors to pay in instalments as follows: No. I. Rs. 48,000 (forty-eight thousand rupees) with annual interest at the rate of 6 per centum accruing thereon to my wife Emile Unger by monthly instalments of Rs. 400 (four hundred rupees) on the 1 day of each month after my decease. No. II. Rs. 36,000 (thirty-six thousand rupees) with annual interest at the rate of 6 per centum accruing thereon to Mary (May) Elizabeth Unger (widow of my brother William Alender Unger) as a token of my appreciation of her unfailing care of me for many years by monthly instalments of Rs. 300 (three hundred rupees) on the 1 day of each month after my decease. No. III. Rs. 15,000 (fifteen thousand rupees) with annual interest at the rate of 6 per centum accruing thereon to my son, Cyril Ramsay Unger by monthly instalments of Rs. 125 (one hundred and twenty-five) rupees on the 1 day of each month after my decease. No. IV. Rs. 15,000 (fifteen thousand rupees) with annual interest at the rate of six per centum accruing thereon to my son, Kennard Ramsay Unger by monthly instalments of Rs. 125 (one hundred and twenty-five rupees) on the 1 day of each month after my decease. Then follow the provisions regarding the disposal of his residuary estate, on the interpretation and effect of which the present controversy largely turns. They are as follows: After the death (and not till then) of the aforementioned Emile Unger and Mary (May) Elizabeth Unger (legatees numbers I and II) I direct my executors to close the accounts of my estate and after setting apart sufficient money or fund or property to disburse and discharge completely the aforementioned legacies numbered I to IV, to divide the balance or residue of my estate into three equal shares to be distributed as follows: Residuary Estate. One share of the residue to be paid or given to my son, Oscar Ramsay Unger (Captain, Indian Medical Service) or his heirs ; One share to be paid or given to my daughter, Tessa Ramsay Bartley (wife of W.K. Bartley) or to her heirs ; one share to be paid or given to my son, Sherrard Ramsay Unger or to his heirs. I direct these three residuary shares to be paid by my executors by annual instalments which shall be not less than one-twentieth in any event but such instalments may be more than one-twentieth in every or any year according as it suits the convenience of the said Sherrard Ramsay Unger. I specially direct payment of all these legacies and residuary shares by instalments spread over a series of years in order that the withdrawal of moneys may not in any way incommode the House of Ramsay & Co. The codicil which was executed with a view to avoid any controversy or contention "and" as a measure of abundant caution does not materially affect the dispositions under the will, and it is unnecessary to refer to its terms in detail.

(3.) There is no dispute that all debts, funeral and testamentary expenses were paid, and the real properties were sold and the proceeds added to the fund credited to the estate in the books of Ramsay & Co., as directed in the will, long before the year of account, 1941-42. On the 30 March, 1931, the assessee obtained by transfer from his sister Tessa Ramsay Bartley all her past, present and future interests under the said will and codicil including her right, title, interest, claim and demand to and in her share of the residuary estate in consideration of a sum of Rs. 40,000 paid to her. Similarly, he obtained under another instrument of transfer dated the 26 June, 1931, the right, title and interest past, present and future of Oscar Ramsay Unger in his share of the residuary estate on payment to him of Rs. 50,000. The assessee has thus purported to acquire the entire residue of his father's estate subject to the four pecuniary legacies payable under the will. As, however, some instalments of these legacies still remained to be paid and the executors were directed under the will to close the accounts of my estate and to distribute the residue after the deaths and not till then of the legatees numbered I and II who are alive, the assessee has been maintaining separate accounts for the estate as executor duly crediting therein the interests received from Ramsay & Go., and debiting the instalments of legacies paid from time to time. The Appellate Tribunal has found that the assessee has been doing so bona fide in accordance with the directions contained in the will and not as a device for avoiding due assessment to tax, and that finding has not been questioned before us. It may be mentioned here that till the year 1942-43 when the assessment now in question came to be made, the assessee had all along been maintaining his accounts on the same basis, claiming deduction every year of the interest debited to the estate in the assessment of his personal income and returning such interest for assessment as income received by him as executor of his father's estate, and the Income-tax authorities had been making assessments accordingly.