1974 (7) TMI 42 - HC - Income Tax

Trustees' Interest on Loan for Estate Duty Deductible under Indian Income-tax Act

Commissioner Of Income-Tax, Bombay City I Versus HH. Maharani Shri Vijaykuverba Saheb Of Morvi And Others

Commissioner Of Income-Tax, Bombay City I Versus HH. Maharani Shri Vijaykuverba Saheb Of Morvi And Others - [1975] 100 ITR 67 Issues Involved:1. Whether interest paid by trustees on a loan obtained for the payment of estate duty chargeable on trust property is an admissible deduction under section 12(2) of the Indian Income-tax Act, 1922.Issue-wise Detailed Analysis:1. Admissibility of Interest as Deduction under Section 12(2):The central issue in this case is whether the interest paid by the trustees on a loan taken to pay estate duty can be deducted from the trust's income under section 12(2) of the Indian Income-tax Act, 1922, for the assessment years 1959-60, 1960-61, and 1961-62.Facts:- A trust was created by the Maharaja of Morvi in favor of his son, comprising shares and securities.- Upon the Maharaja's death, estate duty was levied on the trust property.- Trustees borrowed Rs. 8,25,000 from Bank of India Ltd. to pay the estate duty and repaid it over three years, incurring interest expenses.- Trustees claimed these interest payments as deductions from their income under sections 'Dividends' and 'Interest on securities.'Tribunal's Findings:- The Tribunal allowed the deduction, finding that the borrowing was directly related to the source of income and was necessary to preserve it.Revenue's Argument:- The Revenue contended that the trustees' liability to pay estate duty was personal, and the borrowings were not made 'solely for the purpose of making or earning such income' as required by section 12(2).- Referenced the Gujarat High Court decision in Commissioner of Income-tax v. Mrs. Indumathi Ratanlal, which held that interest on money borrowed to pay estate duty was not deductible.Assessee's Argument:- The assessee argued that the borrowings were necessary to preserve the trust's income and avoid selling shares at an unfavorable time.- Cited Bai Bhuriben Lallubhai v. Commissioner of Income-tax, where it was held that expenditure incurred to preserve an income source is deductible.Court's Analysis:- The court examined section 12(2), which allows deductions for 'any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income.'- Emphasized that the expression 'earning such income' includes preserving the income source.- The court found that the trustees had no option but to borrow funds to meet the estate duty liability, thereby preserving the trust's income source.- Referenced the test from Bai Bhuriben Lallubhai v. Commissioner of Income-tax, which states that there must be a connection between the expenditure and the income earned.Conclusion:- The court concluded that the interest paid on the borrowings was incurred solely for the purpose of earning the trust's income and maintaining the income at its old level.- The expenditure had a direct nexus with the income earned from the trust property.- The court also noted that under section 74(2) of the Estate Duty Act, the trust property was charged with the estate duty liability, further supporting the deduction.Judgment:- The question was answered in the affirmative, allowing the interest paid by the trustees as a permissible deduction under section 12(2) of the Act.- Revenue was directed to pay the costs of the reference to the assessee.Summary:The High Court of Bombay ruled that the interest paid by trustees on a loan taken to pay estate duty is an admissible deduction under section 12(2) of the Indian Income-tax Act, 1922. The court emphasized that the borrowings were necessary to preserve the trust's income source and maintain the income at its old level. The decision was based on the principle that expenditure incurred to preserve an income source is deductible, and the trust property was charged with the estate duty liability under section 74(2) of the Estate Duty Act. The question was answered in favor of the assessee, and the Revenue was ordered to pay the costs.