Contingent residuary bequest left estate unvested, so interest on funds retained in business was deductible as borrowed capital.

A will that postpones distribution of the residue until the deaths of named legatees, without a present gift of the residue, leaves the residuary interest contingent and the estate unvested during that period. On that construction, the executor continues to hold the estate, and money retained in the business under the testator's direction remains estate money rather than the executor's own capital. Interest charged on such retained funds is therefore treated as interest on borrowed capital and is deductible in computing business profits under section 10(2)(iii) of the Indian Income-tax Act, 1922.

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Issues: Whether the sum debited as interest to the estate was allowable as a deduction under section 10(2)(iii) of the Indian Income-tax Act, 1922, on the footing that the amount remained borrowed capital in the assessee's business and had not become his own property.

Analysis: The residue of the testator's estate was directed to be distributed only after the deaths of two named legatees, and no present gift of the residue was made apart from that direction. On the true construction of the will, the residuary gifts were contingent on the primary beneficiaries surviving the period of distribution, so the residue had not vested in them while the named persons were still alive. The estate therefore continued to be held by the assessee as executor, and the money retained in the business under the testator's direction remained money belonging to the estate and not the assessee's own property. In those circumstances, the interest charged in the business accounts was paid on capital borrowed from the estate.

Conclusion: The amount was allowable as a deduction as interest on borrowed capital, and the answer was in favour of the assessee.

Final Conclusion: The reference was answered by holding that the estate had not vested in the assessee absolutely and that the interest claimed was deductible in computing business profits.

Ratio Decidendi: Where a will contains no present gift of residue and postpones distribution until the death of named persons, the residuary interest remains contingent and the estate continues in the hands of the executor; money retained in the business under such directions is borrowed capital for the purpose of the business, and interest paid thereon is deductible.

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