V.S. Desai, J.
1. The question referred to us on this reference under section 66(1) of the Indian Income-tax Act arises out of the assessments made on the original assessee, Mathuradas Canjee Matani, who has died during the tendency of the reference and is represented by his heirs and legal representatives, relating to the assessment years 1955-56, 1956-57 and 1957-58, the previous years for which were Samvat Years 2010, 2011 and 2012. The assessee was carrying on business in kirana goods under the name and style of Messrs. Canjee Dwarkadas as its sole proprietor till the end of the Samvat Year 2005, i.e., till 21st October, 1949. In the year 1944 he purchased a property at Waudby Road for a sum of Rs. 3,70,000. As the funds for the said property came out of the business, he opened an account in his books of account in the name of 'Waudby Road Property Account' and debited the purchase price to that account. In the same year, it appears, the assessee made an arrangement to take an overdraft from the Central Bank of India limited and for the purpose of securing the said overdraft, he created an equitable mortgage on the Waudby Road property by depositing the title deeds with the bank. From the beginning of Samvat Year 2006, i.e., from 22nd October, 1949, the assessee took his three sons into partnership with him and converted his proprietary business into a business of the partnership of himself and his three sons. But even after the constitution of the firm, the overdraft arrangement with the Central Bank of India Ltd. continued as before. On the 15th of November, 1951, the assessee made a declaration to the bank that the Waudby Road property belonged to him absolutely; that it was not encumbered in any way; that it was not the subject-matter of any litigation and there was no notice from the municipality or local body for acquisition, set back or repairs in respect of the property and that all municipal and ground rent bills etc., in respect of the property had been paid and there was no arrear in respect thereof. He further stated that he was making the said declaration knowing that in the faith thereof in believing the same to be true, the bank would grant the firm of Messrs. Canjee Dwarkadas overdraft facility applied for by him. On the 17th of November, 1951, the assessee also wrote a letter to the Central Bank of India informing it that he had opened a new current account since he had taken his three sons in partnership with him in business and requesting it to assign the limit of the overdraft to the new account. He also informed the bank that the debit balance in his personal overdraft account and the security held therein should also be transferred to the new account. On the same day all the four partners of the partnership firm also wrote a letter to the bank informing it that they were partners of the firm 'Canjee Dwarkadas' and that they were jointly and severally responsible to the bank for the liabilities of the firm with the bank and the bank would be entitled to recover its claims from the estate of any or all of the partners of the firm.
2. Now, in the firm's account after its commencement there were more than one account of the assessee. One of them was the 'Waudby Road Property Account' and another in which the assessee's yearly profit or loss was adjusted as also his yearly drawings, and which may be called the capital account. At the end of Samvat Year 2009 up to which time these two separate accounts continued, there was a debit balance of Rs. 2,91,257 in the property account whereas there was a credit balance of Rs. 88,699 in the capital account. During the four years of Samvat Years 2006 to 2009 no interest had been charged to the assessee in respect of the debit balance in the property account. Nor was any interest credited to him in respect of the credit balance in the capital account. By the end of Samvat Year 2009, the position of the overdraft account with the Central Bank of India was that it disclosed a deposit of Rs. 30,152 to the credit of the firm. From the commencement of Samvat Year 2010, i.e., from 7th November, 1953, the two separate accounts of the assessee in the firm's account books were merged and converted into a single account. Thus, for all the three years with which we are concerned in the present case, viz., Samvat Years 2010, 2011 and 2012, there was only one account of the assessee in the firm. This account showed at the end of Samvat Year 2010 a debit balance of Rs. 2,44,439, at the end of Samvat year 2011 a debit balance of Rs. 2,73,740 and at the end of Samvat Year 2012 a debit balance of Rs. 3,16,826. The position of the firm in its overdraft account with the Central Bank of India at the end of each of these three years was as follows :
At the end of Credit balanceRs.S. Y. 2010 1,57,122' 2011 1,63,179' 2012 1,58,581
3. Although, as we have stated, no interest was charged by the firm to the assessee in the years prior to Samvat years 2010, for these years interest was charged at 4 1/2 % for the Samvat year 2010 and at 6 % for the following two years. On the overdraft of the bank was all along paying interest at 6 %. The position of the interest charged by the firm to the assessee and the interest charged by the bank to the firms was as follows :
S. Y. Interest charged to the Interest paid to the bankassessee by the firm by the firmRs. Rs.2010 9,115 1,1612011 16,000 4,1732012 18,636 5,790
4. In the assessment of the assessee for these three years, the assessee claimed that the amounts, which the firm had charged to him by way of interest for these three years should be deducted in computing the income from his property which was the Waudby Road property under section 9, sub-section (1)(iv), of the Act. His contention was that the said amounts were paid by way of interest on a mortgage or a charge on the property. The claim was negatived by the income-tax authorities and also by the Tribunal on the ground that there was no mortgage or charge of the said property by the assessee to the firm, which had charged interest to the assessee and the amounts, therefore, could not be deducted as being interest on mortgage or charge of property under section 9(1)(iv). At the instance of the assessee the Tribunal has drawn up a statement of the case and referred to this court the following question :
'Whether in computing the income from Waudby Road property under section 9, the assessee-owner thereof is entitled to an allowance of Rs. 9,115, Rs. 16,000 and Rs. 18,636 for the assessment years 1955-56, 1956-57 and 1957-58, respectively, under section 9(1)(iv), the said amounts representing interest charged to the assessee-owner-partner by the firm on the amounts overdrawn by him from it and which are not secured by a 'mortgage of other capital charge' on the said property.'
5. Mr. B. A. Palkhivala, learned counsel appearing for the assessee, has urged before us that there has been in substance and in effect a mortgage of the Waudby Road property by the assessee to the partnership firm for securing his indebtedness to the firm and consequently the interest which has been charged by the firm to him on the amounts due by him to the firm is interest on the mortgage of his property with the firm.
6. Now, the question as framed by the Tribunal is on the basis that there has been no mortgage or other capital charge on the property by the assessee in favour of the firm. Mr. Palkhivala, however, has contended that the question as framed is not the question which he had asked, and the contention which he had raised and the question which he had asked does involve the contention that there was in effect and substance a mortgage by the assessee in favour of the firm. We would not like to disallow Mr. Palkhivala from raising the contention merely because the question as framed does not permit it to be raised, if the contention had really any substance. We find, however, that the contention has no substance whatsoever. There has been no mortgage of the Waudby Road property by the assessee to the firm at any time. The only mortgage, which he had created, was an equitable mortgage in favour of the bank for securing the overdraft for his business. Even after he converted his proprietary business into a partnership business and permitted the partnership to have the benefit of the overdraft facility, the equitable mortgage with the bank of the property continued as before. The circumstances that the partnership obtained the advantage of the overdraft on the basis of the equitable mortgage together with the further circumstance that if permitted the assessee to withdraw monies from the partnership by way of loans did not constitute or bring about any mortgage of the property in favour of the partnership. Mr. Palkhivala wanted to argue that what should be considered as having happened at the time when the proprietary business was turned into a partnership business and the advantage of the overdraft account with the bank, which had been obtained by the assessee on the security of his property, was passed over to the partnership, was that the assessee closed his overdraft account with the bank, took away the security from the bank, brought the security and the title deeds to the partnership and executed an equitable mortgage in favour of the partnership and the partnership firm in its turn further deposited the title deeds with the bank and started a fresh overdraft account. We do not see how all this could be said to have happened on the facts and circumstances of the case. The only facts, namely, that the facility of the overdraft account was availed of by the partnership and the firm permitted borrowings to be made by the assessee would, in our opinion, be entirely insufficient to accept the theory propounded by Mr. Palkhivala. The first contention of Mr. Palkhivala, therefore, that there was a mortgage by the assessee in favour of the partnership firm cannot be accepted.
7. Mr. Palkhivala has then contended that at any rate to the extent to which interest has been paid by the firm to the bank the said amounts must be taken as being amounts of interest on the mortgage of his property deductible under section 9(1)(iv). Even apart from the consideration that a contention in this form has not been raised before the Tribunal, we do not think that it has any merit in it also. As we have already pointed out, at the commencement of S. Y. 2010, the position of the overdraft account with the bank was that the firm instead of being a debtor to the bank had a deposit to its credit to the extent of Rs. 30,152. The assessee, however, was having an aggregate debit balance with the firm to the extent of Rs. 2,02,558. For the previous four years, i.e., for S. Ys. 2006 to 2009, the assessee on his debit balance to the firm had been charged no interest. In the S. Ys. 2010, 2011 and 2012 the firm paid to the bank interest on its borrowings from the bank, which borrowings were for the purpose of its business. The interest paid by the firm to the bank could not be regarded as interest on the mortgage because the firm had executed no mortgage of the property with the bank. Mr. Palkhivala's argument, however, is that the borrowings from the bank were necessitated because of the withdrawals by the assessee from the firm and since the balance of the firm's borrowings from the bank at any time, the interest which the assessee paid to the firm must include the interest which the firm in turn paid to the bank. Since the borrowings from the firm were secured by the mortgage which the assessee had created on his property and since the interest, which was paid by the firm to the bank was a part of the interest which the assessee paid to the firm, it must be held, according to Mr. Palkhivala, that to the extent to which interest was paid to the bank by the firm, the said interest was paid on the mortgage of the property by the assessee to the bank.
8. We are afraid, we cannot accept this contention. Interest paid by the firm to the bank as well as the interest which the firm charged to the assessee on the accounts maintained by the firm were interest paid on monies borrowed and interest charged for monies learned respectively. The interest, which was paid by the firm to the bank, was interest in respect of its borrowings from the bank and could not be regarded as interest on mortgage because there was no mortgage by the firm in favour of the bank. The interest charged by the firm to the assessee could not, again, be regarded as interest on any loans secured on mortgage by the assessee from the firm because there was no mortgage of any property of the assessee in favour of or with the firm. We are, therefore, unable to accept the contention raised by Mr. Palkhivala and regard either the whole or any part of the interest, which the firm charged to the assessee as being interest on the mortgage of his property by the assessee to the bank.
9. Our answer, therefore, to the question referred to us is in the negative. The assessee shall pay the costs of the department.
10. Question answered in the negative.