Interest on borrowings to clear estate duty charge on trust assets is deductible when linked to preserving income source.

Interest on borrowings used to discharge estate duty charged on trust property was treated as deductible under section 12(2) of the Indian Income-tax Act, 1922, because the trustees borrowed to avoid immediate sale of shares and securities and thereby preserve the trust's income source. The borrowing had a direct nexus with earning income, and the interest was expenditure incurred solely for that purpose. Section 74(2) of the Estate Duty Act, 1953, which created a first charge on the movable property, also supported the deduction because the borrowing was used to clear the charge and free the property for income generation. The answer to the referred question was in the affirmative, in favour of the assessee.

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Issues: Whether interest paid on borrowings obtained to meet estate duty liability chargeable on trust property was an admissible deduction under section 12(2) of the Indian Income-tax Act, 1922.

Analysis: The trustees borrowed money to discharge estate duty payable on trust assets consisting of shares and securities, instead of selling the assets immediately and thereby reducing the income from the trust. The borrowing was directly connected with preserving the source and level of income, and the expenditure on interest had a real nexus with the earning of such income. Independently, section 74(2) of the Estate Duty Act, 1953 created a first charge on the movable property, so interest paid on moneys borrowed to clear that charge was expenditure incurred to free the property and facilitate the earning of income.

Conclusion: The interest was an allowable deduction under section 12(2) and the answer to the referred question was in the affirmative, in favour of the assessee.

Ratio Decidendi: Interest on borrowings made to discharge a statutory charge on income-yielding trust property is deductible where the borrowing is incurred with a direct nexus to preserving the source or quantum of income and is therefore incurred solely for the purpose of earning such income.

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