1. This is a reference under sub-section (1) of section 66 of the Income-tax Act. The assessee is Shri Ramnath A. Podar, sole surviving executor of the will of Seth Anandilal Bansidhar Podar. We are concerned with the assessment years 1947-48 to 1956-57.
2. One Anandilal Bansidhar Podar died testate on 6th May, 1940, leaving behind him two sons, Ramdev and Ramnath. He had left a will of date 18th March, 1940, and considerable property. It appears that Anandilal (whom we would hereafter refer as the testator) had, during his lifetime, lost his wife and two sons by name, Rambilas and Ramniranjan. The testator, with a view of obtaining spiritual benefit to his late wife, his late sons and himself, made certain dispositions by his will and they are contained in paragraph 11 of the will. The directions given by the testator in paragraph 11 are : That one lakh of rupees each for his deceased wife and two deceased sons be set apart for being spent towards charitable objects. He further directed that two lakhs of rupees be set apart for the ultimate good of himself. In short the testator directed that charities to the extent of five lakhs of rupees be effected. Paragraph 11 further receipts that for the purpose of achieving ultimate good for his wife and his two deceased sons, he had in his lifetime started making donations towards charities and had utilised a good portion of three lakhs of rupees set apart for the ultimate good of his wife and the two deceased sons, though accounts in respect of them had not been made and written. The testator, had further undertaken several responsibilities of making donations to charitable objects for the ultimate god of his wife and his two deceased sons, but they had yet remained to be discharged. One of the principal responsibilities undertaken by the testator was getting buildings built for an Ayurvedic college and an Ayurvedic hospital constructed in accordance with the agreement with the Bombay Government. The will recites that during his lifetime he would, as far as possible, carry out his desires, but, in case he was not able to do so, he gave the following directions :
'In case the aforesaid amounts are not fully appropriated during my lifetime and I do not get rid of my said responsibilities then my executors should get the said responsibilities discharged out of my personal estate but they should not exceed the amounts hereinbefore stated. In case more capital is required is required to discharge my responsibilities as hereinabove stated my executors should get the deficit made up out of my said capital of rupees two lakhs which is earmarked for charity and which I intend setting apart for the ultimate food of myself and to which I have already referred to above. But even after discharging all my said responsibilities if out of the amounts ear-marked for charity for the ultimate good of my wife and my late son, Rambilas, and my late son, Ramniranjan, as hereinabove stated, some amount there out remain unspent, then my executors shall, having set apart the same, will, in future, appropriate the same towards objects like the spread of education, dispensaries and hospitals, relief to orphans, aid to students, distribution of food and clothing, sports, etc., or towards any other charitable object in such proportion and in such manner as my executors may think expedient. Thus after appropriating such amount out of the said capital of rupees two lakhs set apart for charity for the ultimate good of myself as may be required in discharging my responsibilities in respect of the charities undertaken by me for the ultimate good of my wife, my late son, Rambilas and my late son, Ramniranjan, whatever amounts remain in the charity account for the ultimate good of myself in respect of such amounts I hereby authorise my executors to appropriate the same in charitable objects according to their own free will. If out of my said personal estate and in accordance with my charitable disposition of five lakhs of rupees hereinabove mentioned all the said amounts are appropriated or spent during my lifetime then it will not be necessary for my executors that the should set apart further amounts in order to fulfill any of my aforesaid wishes.'
3. It is not necessary to refer to the other bequests made by the testator in his testament. It would, however, be necessary to state that the executors appointed by the testator by this will were his two living sons, Ramdev and Ramnath. Ramdev died sometime after the death of Anandilal, the testator, and the sole surviving executor of the will of the testator is Ramnath Anandilal Podar, the assessee before us.
4. To give effect to the aforesaid disposition in the will of the said Anandilal Bansidhar Podar, the executors debited Rs. 5,00,000 to the personal account of the testator and credited one lakh of rupees to the charity account of his wife, one lakh of rupees to the charity account of each of his two deceased sons and two lakhs of rupees to the charity account of the deceased, Anandilal. The credit balance that was left to the personal account of the testator, after debiting these amount to the respective four accounts, was Rs. 6,94,547. At the commencement of Samvat Year 1998, i.e., at the close of Diwali of the year 1940, the said Anandilal Podar charity account showed a credit balance of Rs. 2,18,395. On the same day, two debits were made in this account, viz., Rs. 35,477 paid to Ramniranjan Podar Charity account and Rs. 1,20,373 to Ayurvedic College and Hospital account, and on the same day, two sums were credited that the account (Seth Anandilal Podar charity account) by the two living sons of Anandilal, Ramdev contribution Rs. 1,00,000 and Ramnath contribution Rs. 37,455. Thus, at the commencement of Samvat Year 1999, i.e., at the close of Diwali of 1941, the amount standing to the credit of Seth Anandilal Podar Charity account was Rs. 2,13,000. The Income-tax Officer, in dealing with the assessment cases of the trusses, fund that before the beginning of Samvat year 1999, the total amount expended on charitable purposes amounted to Rs. 5,32,124. According to him, the maximum amount embarked by the testator for charitable purposes amounted only to Rs. 5,00,000. He therefore held that the balance of Rs. 2,13,000 remaining in the charity account of Anandilal Podar did not have the character of property held under trust. It was, according to him, only a reserve (residue of the estate of the deceased) created and, therefore, interest credited in that account on that sum was liable to be taxed in the hands of the executors. In this view of the matter, the Income-tax Officer served notices under section 34 of the Act, on the sole surviving executor reopening assessments for the assessment years 1947-48 to 1956-57. The assessee challenged the validity of the notices issued under section 34. He also contended that the amounts of Rs. 1,00,000 and Rs. 37,455 were introduced in the Anandilal Podar Charity account by the two executors out of their personal funds and, therefore, cannot be treated as part of the estate of the deceased and, consequently, the assessee in his capacity as the execute was not liable to pay tax thereon. The contentions of the assessee were overruled by the Income-tax Officer and the interest on the said amount of Rs. 2,13,000 during all these years was taxed in the hands of the assessee in his capacity as the executor in those respective years. The assessee took appeals against the orders of the Income-tax Officer for all those years. The Appellate Assistant Commissioner accepted the contention raised by the assessee. He held that Rs. 1,00,000 and Rs. 37,455 could not become part of the trust created under the will of Anandilal Podar inasmuch as the courses from which they were introduced in the charity account were clearly known. The sources were the personal funds of the two sons. On these facts, in his opinion, these two sums represented the reserves created by the two partners of Anandilal Podar inasmuch as the sources from which they were introduced in the charity account were clearly known. The sources were the persona funds of the two sons. On these fact, in this opinion, these two sums represented the reserves created by the two partners of Anandilal Podar & Co., who were the sons of Seth Anandilal Podar. Interest accrued and credited on these sums in the books of the firm was actually interest on reserves created by the sums on these in the books of the firm. It, therefore, amounted to payment of interest by the firm to its partners. On these findings, he held that the action taken under section 34, having been taken against the assessee in his capacity as executor, was not justified. In this view of the matter, he allowed the appeals and cancelled the assessments under section 34. The Commissioner took appeals to the Tribunal against these order of the Appellate Assistant Commissioner. Before the Tribunal the department made a concession and it is recorded by the Tribunal in the following terms :
'In the appeals before us, the departmental representative contended that the two items of expenditure totalling Rs. 1,55,850 (Rs. 35,477-7-9 paid to Ramniranjan Podar Charity account and Rs. 1,20,373-1-0 paid to Ayurvedic College and Hospital account) could have come possible either out of Rs. 2,18,395-5-3 (opening balance of Anandilal Charity account of S. Y. 1998) or partly out of the two donations totalling Rs. 1,37,455-3-6 (Rs. 1,00,000 by Ramdev and Rs. 37,455-3-6 by Ramnath) and partly out of the opening balance. Although the Income-tax Officer took the latter view, the departmental representative frankly conceded that, according to this instructions, the former possibility was acceptable to the department.'
5. After making this concession the only contention raised on behalf of the Commissioner was that the balance of Rs. 62,544-12-6 would form the corpus of the estate of the deceased testator and that interest on this balance was taxable as income of the estate. In short, the contention on behalf of the department was that on making payment of Rs. 35,477-7-9 to Ramniranjan Podar Charity account and of Rs. 1,20,373-1-0 of Ayurvedic College and Hospital account, the entire charity fund of Rs. 5,00,000 was exhausted and, therefore, the balance of Rs. 62,544-12-6 ceased to bear the character of trust property or the trust fund and was, in fact, part and parcel of the estate of the deceased testator. The department, therefore, contended before the Tribunal that the interest therein would be interest earned by the estate of the deceased testator and therefore would be liable to be taxed in the hands of the assessee in this capacity as the execrator of the estate of the deceased, Anandilal. The Tribunal rejected this contention of the department. The learned Judicial Member and the Accountant Member have written separate judgments, though concurring in the result. The reason given by the Judicial Member is in the following terms :
'The question is whether to the extent of this balance of Rs. 62,544-12-5, there was any trust or not. This would depend on the determination of the question whether the two contributions totalling Rs. 1,37,455-5-6 could form part of the trust or not. We hold that they could form part of the true as donations to the trust fund from the two sons of the testator. That being so, the balance of Rs. 62,544-12-6 also was a part of the trust fund and was actually shown as such in the account of the charity trust. In that view of the matter, this balance would not be taxable in the hands of the executor of the estate of Seth Anandilal Bansidhar Podar. We see no force in these appeals.'
6. The reason given by the Accountant Member is as follows :
'Under the testamentary trust a sum of Rs. 5 lakhs was settled in charity. The moment the executors of the will set apart the amount, they ceased to have any control over it and became trustees of the same. If this original amount later got augmented by reason of interest earned or donations received from outsiders and after meeting he expenditure on charity up to Rs. 5 lakhs, the limit fixed by the testator, there was an excess, such excess did not thereby cease to be trust property and become residuary estate in the hands of the executors. In this view of the matter, therefore, I would hold that the interest earned was by the trustees and not the executors.'
7. On an application under sub-section (1) of section 66 by the Commissioner, the Tribunal has drawn up the statement of the case and has referred the following question of law to us :
'Whether income arising on any amount exceeding the original bequest of Rs. 5 lakhs under the will dated March 18, 1940, of the late Anandilal Podar could be assessed in the hands of the respondent ?'
8. At the outset, it must be said that the question framed by the Tribunal does not, in the form it is framed, arise out of the order of the Tribunal. It has to be noticed that the department has conceded before the Tribunal that the two items of donations totalling Rs. 1,37,455-3-6 could not form part of the estate of the testator and had accepted the finding of the Appellate Assistant Commissioner that no tax could be levied on the income arising out of the said amount of Rs. 1,37,455-3-6, in other words, in respect of the interest earned on the said sum of Rs. 1,37,455-3-6. The only dispute that had remained, therefore, before the Tribunal was as to whether interest earned during these years on Rs. 62,544-12-6 was liable to be taxed in the hands of the executor as income of the estate of the deceased. It is indeed true that both the learned Members of the Tribunal in their orders have made reference to the contributions made by the two sons of Anandilal Podar amounting to Rs. 1,37,455-3-6. But that is beside the point. As already stated, the real question that arises on the order of the Tribunal is whether interest earned on the said amount of Rs. 62,544-12-6 is liable to be taxed in the hands of the assessee in his capacity is the executor as income of the estate of the deceased, Anandilal Podar. We accordingly reframe the question as follows :
'Whether on the facts and in the circumstances on the case, the interest income arising on Rs. 62,544-12-6 could be assessed in the hands of the assessee in his capacity as the sole surviving executor of the will of the late Seth Anandilal Bansidhar Podar ?'
9. Mr. Joshi, in the first instance, elaborately argued before us that the contributions made by these two sons to the Seth Anandilal Podar charity fund amounting to Rs. 1,37,455-3-6 could not partake the character of the trust fund. The testator had put a limit of expending Rs. 5 lakhs out of his estate on charities. When that limit was reached and an amount to that extent was expended on charities, the trust ceased to function and came to an end. Any more amount in the hands of the assays with which he purports to deal as a trustee is really the estate of the deceased and this income is the income of the estate of the deceased. Rs. 1,37,455-3-6 came under the control of the assessee. The assessee credited it to the account of Seth Anandilal Podar charity fund, and health with it as if it was a trust fund. The object of the trust had already been achieved on expending Rs. 5 lakhs on charities. No trust remained to be discharged thereafter. The assessee's dealing with the said amount of Rs. 1,37,455-3-6 and the income earned by was of interest on the said sum becomes income of the estate in the hands of the assessee and, therefore, the assessee is liable to pay tax therein and the Appellate Assistant Commissioner and the Tribunal were in error in deciding the cases in favour of the assessee. With respect to Mr. Joshi we may say that it is not open to him to raise this contention before us, inasmuch as the department had conceded before the Tribunal that the two items of donations totalling Rs. 1,37,45-3-6 could not form part of the estate of the testator and had accepted the decision of the Appellate Assistant Commissioner against the revenue so far as is related to that sum. As already stated, the dispute that remained before the Tribunal was only in respect of the interest arising from Rs. 62,544-12-6. That sum is not the balance out of Rs. 1,37,455-3-6, but it is a balance remaining out of the opening balance in the Anandilal Podar Charity account of Rs. 2,18,395-5-3, which sum had no concern whatsoever with the two contributions aggregating to Rs. 1,37,455-3-6. The learned Judicial Member of the Tribunal has observed that the determination of the question whether the assessee is liable to pay tax on the interest earned on Rs. 62,544-12-6 would depend on the on the determination of the question whether the two contributions totalling Rs. 1,37,455-3-6 could form part of the trust or not and had proceeded to decide it. We fail to see how that position arises. As already stated, on the facts of the case, it is clear that the said balance or Rs. 62,544-12-6 had no concern whatsoever with the sum of Rs. 1,37,455-3-6.
10. Now, as regards the amount of Rs. 62,544-12-6, it is not in dispute that it forms part of the interest earned on Rs. 5 lakhs set apart for charities. It is, however, the contention of Mr. Joshi that this interest earned on the amount of Rs. 5 lakhs must go back to the estate of the deceased in view of the directions given by the testator in his will. According to Mr. Joshi, the testator had authorise the expenditure of Rs. 5,00,000 on charities. Nothing more could be expended on the charities. Any balance remaining in the hands of the trustees after the expenditure of Rs. 5 lakhs on charities must go back to the estate. That cannot have type character of trust property and, therefore, interest earned on Rs. 62,544-12-6 is taxable in the hands of the assessee in his capacity as the executor. We are unable to accept their contention of Mr. Joshi. We have read and re-read paragraph 11 of the will and we are unable to find any prohibition contained therein prohibiting the executors from expending anything more than Rs. 5 lakhs on charities. All that is stated is that no amount in excess of Rs. 5 lakhs should be taken from his estate for the purposes of charities. The said amount of Rs. 62,544-12-6 has not been taken by the executors out of the estate of the deceased. On the other hand, it is interest earned on Rs. 5 lakhs taken out from the estate of the deceased and set apart for the purposes of carrying out the charitable objects stated in the will of the testator. Mr. Joshi's contention might have had some force if the executors were not authorised to take out a sum of Rs. 5 lakhs from the estate of the deceased and set it apart for the purposes of charities. But what we find in paragraph 11 of the will is that the testator has given a specific direction to set apart the said sum. To recall, the testator had stated that he wanted to effect charities for the ultimate good of his deceased wife, his two deceased sons and himself; and he intended to expend Rs. 5 lakhs in that respect-one lakh of rupees each for his deceased wife, two deceased sons and Rs. 2 lakhs for the ultimate good of himself. In this lifetime, he had proceeded to expend certain amounts for the ultimate good of his deceased wife and his tow deceased sons. He had in his mind an idea of donating certain amounts towards certain specific charities also. Even though he had expended certain amounts for the ultimate good of his deceased wife and this two deceased sons, account in respect thereof had not been made. He had therefore left a direction in the will that if the work was not completely done by him during his lifetime out of the amounts in respect of the four charities, then the respective amounts be set apart for that purpose. The direction of the testator has been carried out by the executors and amounts had been set apart for the said charities. That being the position, the interest earned thereon cannot be said to be part of the estate of the testator. On the other hand, in our opinion, it is accretion to the fund set apart for charities and, therefore, forms part and parcel of that fund.
11. For the reasons stated above, our answer to the question as reframed is in the negative. The Commissioner shall pay the costs of the assessee.
12. Question answered in the negative.