Merged joint family interest on refunded estate duty was capital on partition, not taxable income.

Interest paid by the Ceylon Government on refunded estate duty, to the extent attributable to the period before severance of a Hindu undivided family, was treated as part of the joint family estate because the duty had been paid from joint family funds and the refund interest had merged into family assets. On partition, the assessee took only a share in the capital of the family estate as it then stood, so the pre-severance portion was not income in his individual hands and was not taxable. The claimed exemption under section 4(3)(vii) of the Income-tax Act, 1922 did not alter that character.

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Issues: Whether the assessee's share in the interest paid by the Ceylon Government on refunded estate duty, to the extent it related to the period before severance of the joint family status, was a capital receipt not liable to tax.

Analysis: The estate duty had been paid out of the joint family fund, and the interest that accrued on the refund also formed part of the joint family property when received by the family. On the severance of the Hindu undivided family, the assessee became entitled only to a share in the family estate as it then stood. The amount received by him was therefore a share in capital and not a receipt in his individual hands with the character of income. The exemption under section 4(3)(vii) of the Income-tax Act, 1922 did not arise for acceptance on this issue, because the receipt itself had ceased to retain the character of income after being absorbed in the joint family assets.

Conclusion: The share attributable to the period ending February 17, 1947 was not taxable and was rightly treated as a capital receipt, in favour of the assessee.

Final Conclusion: The appeal was rejected, and the decision holding the pre-severance share in the refunded estate-duty interest as non-taxable was affirmed.

Ratio Decidendi: Where interest received by a Hindu undivided family is merged in the joint family assets, a member taking a share on severance receives capital and not taxable income in respect of the pre-severance portion.

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