1. IT Appeal No. 341 (Mad.) of 1983 is an appeal by the assessee and IT Appeal No. 512 (Mad.) of 1983 is an appeal by the revenue, both relating to the assessment year 1978-79.
2. The appeal preferred by the assessee, that is, IT Appeal No. 341 (Mad.) of 1983 is barred by limitation by one day. We have perused the application for condonation of delay and have heard the learned departmental representative, the delay primarily occurred due to pressure of work in the office of the counsel. In view of this, we condone the delay and admit the appeal.
3. For the assessment year 1978-79, now under consideration the assessment is made in the status of an 'individual'. This was the status shown while filing the return of income. The returned income shown was Rs. 45,423. While arriving at the aforesaid income which was from fixed deposits, the assessee had claimed deduction of Rs. 18,857 which represented interest paid to the bank. The ITO did not allow the deduction claimed stating that a similar claim made in the earlier year was negatived. He, therefore, added back the amount of Rs. 18,857.
4. In appeal, the assessee raised a contention for the first time that the interest income really belonged to a HUF and, therefore, should not have been assessed in her hands. The AAC observed that the assessee and her husband were both doctors. They were practising at Flint, Michigan, USA. Amounts were earned by them and deposited in joint names in banks.
When they came back to India, the amounts were transferred and deposited in Indian banks in joint names. The assessee's husband passed away on 9-11-1975. Subsequently, all the deposits were transferred to the name of the assessee. In the estate duty assessment made in relation to the property left behind by late Dr. S. Kannan, it was claimed that half the deposits by that time in Indian banks alone, belonged to the deceased and the other half belonged to the assessee.
The assessee, it was mentioned, clarified before the AAC that the claim of HUF status was being claimed only in respect of 50 per cent of the total deposits, that is, that portion which was considered as belonging to the husband prior to his demise. The AAC stated that the assessee was legatee under a will executed by Dr. S. Kannan dated 21-2-1975 whereby his entire estate was bequeathed on her. He went on to examine whether the assessee's claim that the interest should be excluded from her assessment as the deposits should be considered those of the HUF of her late husband was tenable. The assessee had pleaded that late Dr. S.Kannan was a member of a HUF which owned certain lands and, therefore, there was ancestral nucleus and hence the moneys earned by Dr. S.Kannan in his individual capacity, therefore, belonged and partook of the character of HUF funds and devolved thereafter on the assessee. The assessee had relied upon the following decisions-CIT v. RM. AR. AR.Veerappa Chettiar  76 ITR 467 (SC), Savitri Devi v. CIT  104 ITR 385 (Pat.), Bajrang Lal v. CIT  108 ITR 245 (All.) and CIT v. Ghansham Dass Mukim  118 ITR 931 (Punj. & Har.).
According to the AAC, the decisions did not help the contention of the assessee. He stated that the late Dr. S. Kannan did not impress his individual property with the character of joint family and, therefore, it continued to be his individual property. The bank deposits did not partake of the nature of HUF properties by blending with the ancestral lands. He also stated that only the ancestral lands were subjected to partition and the assessee obtained certain portion of the lands and only in respect of such lands she would constitute a HUF with her minor daughter. Eventually, the AAC upheld the assessment of interest income in the hands of the assessee-individual.
5. Coming to the claim for deduction of interest of Rs. 18,857, the AAC found that the assessee was entitled to receive interest on fixed deposits of Rs. 55,500 and against this, the assessee claimed deduction of interest paid to the bank on overdraft, amounting to Rs. 18,857. The AAC accepted the contention of the assessee that the amount in question, that is Rs. 18,857, was never earned as interest. In coming to this conclusion, the AAC observed as under : I consider that the appellant's claim is well founded on an examination of the nature of the transaction. The appellant had certain fixed deposits in the State Bank and to meet certain obligations, she required money and for this purpose, borrowed moneys on the security of these fixed deposits, on which the interest was paid. It must be remembered that this borrowal was effected only against the assessee's own deposits, or in other words, the effect of interest was reduced and the consequent reduction in income is reflected as separate transaction, as if interest was paid to bank. Thus, what is exhibited as interest paid to bank truly represents the interest that was not earned by the-appellant at all. To put it differently, the income earned by the appellant was only the net interest and not gross. If the amounts so withdrawn from bank for which interest was paid, were never kept in fixed deposit at all initially but were kept separately and utilised, the appellant would be assessable only in respect of the interest on the balance of the deposits, for that alone would earn the interest. If supposing the appellant had kept all her moneys in current account, instead of in fixed deposit and the appellant bad drawn certain moneys for her use from this current account, then the amount of interest that would be credited to her account would be on the net deposits and in that case her earnings by way of interest would be the net amount and this alone would be assessable. No distinction in assessabi-lity can raise just because the amount was kept in fixed deposit. The real and true income of an assessee is alone assessable. It is well-settled that tax is exigible on income earned in reality. Therefore, what was not earned can never be taxed. The amount claimed as deduction, viz., Rs. 18,857 was, in effect, not earned at all. If this is disallowed and taxed as has been done by the ITO, it would virtually amount to taxing an income that was not earned and will be repugnant to the doctrine of real income.
6. In the appeal of the assessee before us, it was urged that the AAC erred in not accepting the claim that the correct status of the assessee was that of a HUF and in any event the learned counsel submitted that that portion of the fixed deposits which belonged to the assessee's husband and devolved on the assessee on his demise partook of the nature of the HUF property of the assessee and her minor daughter who was adopted by the assessee and her husband in January 1975. In support of the adoption, a copy of the deed of adoption which is stated to have been executed on 20-1-1975 and to which signatures are shown to have been affixed on 18-1-1975 was filed. The learned counsel submitted that the assessee's husband was educated out of funds belonging to his joint family and, therefore, he stated that amounts earned by the husband, really partook the nature of HUF funds. He relied upon certain observations of the Supreme Court in the case of CIT v. Kalu Babu Lal Chand  37 ITR 123 where referring to the decision of the Madras High Court in the case of CIT v. S.N.N.Sankaralinga Iyer  18 ITR 194, the Supreme Court observed : ...With great respect to the learned Judges, it appears to us that they overlooked the principles laid down by the Judicial Committee in Gokul Chand v. Hukum Chand Nath Mal  LR 48 IA 162, where it was pointed out that there could be no valid distinction between the direct use of the joint family fund and the use which qualified the member to make the gains on his own efforts. The member of the joint family entered into the Indian Civil Service no doubt by reason of his intelligence and other attainments. He certainly entered into a personal agreement with the Secretary of State in Council and he received his salary for rendering his personal service. But all that was made possible by the use of the joint family funds which enabled him to acquire the necessary qualification and that fact made his earnings part of the joint family properties....(p. 130) The submission of the learned counsel is that these observations occurred in the judgment delivered in May 1957, that is several years after the Hindu Gains of Learning Act, 1930 ('the 1930 Act') came into effect and, hence, an inference could be drawn that where a person was educated with funds belonging to the HUF, his subsequent earnings would be considered to be joint family property. The learned departmental representative, on the other hand, opposed the plea and submitted that whatever income was earned by the late Dr. S. Kannan, it was because of his personal relationship with particular patients and, hence, there was no question of any portion of the income belonging to the HUF.7. We have considered the rival submissions. The observations relied upon by the learned counsel only contain a reference to the decision of the Privy Council to the effect that there could not be a valid distinction between a direct user of the joint family funds and the indirect user which qualified a member and which enabled him to acquire the earnings. In each case, it has to be decided on facts whether income would be HUF income or not with reference to the applicable principles. On the scope of Section 3 of the 1930 Act, the following commentary appears in Mulla's Hindu Law, 15th edition, 1982 Article 231A : Gains of learning-gains of science.-By the Hindu Gains of Learning Act it is provided that notwithstanding any custom, rule or intepretation of the Hindu law, no gains of learning shall be held not to be the exclusive and separate property of the member of the joint family who acquires them merely by reason of- (a) his learning having been, in whole or in part, imparted to him by any member, living or deceased, of his family, or with the aid of joint funds of his family, or with the aid of the funds of any members thereof, or (b) himself or his family having, while he was acquiring such learning been maintained or supported, wholly or in part, by the joint funds of his family, or by the funds of any member thereof.
'Learning' is defined in the Act as meaning education, whether elementary, technical, scientific, special or general and training of every kind which is usually intended to enable a person to pursue any trade, industry, profession or avocation in life.
'Gains of learning' are defined as meaning all acquisitions of property made substantially by means of learning, whether such acquisitions be made before or after the commencement of the Act and whether such acquisitions be the ordinary or the extraordinary result of such learning.
Before the Hindu Gains of Learning Act, 1930, it was established law that income earned by a member of a joint family by the practice of a profession or occupation requiring special training was joint family property, if such training was imparted at the expense of joint family property. (pp. 302-303) The established law referred to in the aforesaid discussion includes the ratio of the decision in Gokul Chand v. Hukum Chand Nath Mal  LR 48 IA 162. After coming into force of the 1930 Act, no gains of learning shall be held to be not the separate and individual property of the member of the joint family who acquires his learning with the aid of the joint family funds. In this regard, it would be relevant to set out the contents of the affidavit filed by the assessee before the Assistant Controller of Estate Duty and which was accepted by him for holding that 50 per cent of the deposits alone belonged to the assessee's late husband.
I, Dr. Sarada Kannan, wife of the late Dr. S. Kannan, Hindu, Doctor aged 36, 27 Perumal West Car Street, Tirunelveli Junction, now doing DGO Government Maternity Hospital, Egmore, Madras-8, do solemnly and sincerely affirm and state as follows : I was married to Dr. S. Kannan on 18-6-1967. My husband was a qualified doctor and also passed his MD. He was a specialist in Radiology. I am also a qualified doctor. We were practising together in USA at Flint. We moved to Chicago and again came back to Flint in Michigan State. My husband was not keeping good health. We returned to India on 7-8-1975. My husband expired on 9-11-1975 at Tirunelveli Junction.
While we were in USA we opened either or survivor account with the Citizen and Commercial Savings Bank, Flint and also in Ganesee Bank.
No regular accounts were maintained by us. My husband was meeting all the expenses and was depositing his savings in banks. I was depositing my entire earnings in banks. The deposits in banks, therefore, represented our joint earnings from medical profession.
The proportion of our contributions to the bank deposits will be roughly equal. No other account or documents are available for production to prove exactly the quantum of savings of each of us. My husband belonged to Kayamozhi Village in Tiruchendur Taluk where he owned houses and agricultural lands. I used to stay with my parents at door No. 27, Perumal West Car Street, Tirunelveli Junction. At this distance of time, I could not get any documents to prove exactly our savings. However, as mentioned above, the proportion will be equal.Citizen and Commercial Bank 28-7-1975 38,903.25Citizen and Commercial Bank 28-7-1975 36,716.49Ganesee Bank 31-7-1975 24,881.25 The above amounts were transferred to India to State Bank of India, Tirunelveli, on 18-9-1975. The amount so transferred in Indian currency was Rs. 9,93,681.00. This amount was again reinvested in India in the joint names of myself and my husband in the State Bank of India, Tirunelveli.
In fact, all our investments are only in joint names excepting the small items. In the above circumstances, it will be fair and just to estimate the deceased's share in the deposits at one-half and this amount may be treated as passing on death.
The other half belongs to me both factually and legally and, therefore, this portion of deposit cannot pass on the deceased's death. In the above circumstances, I confirm the figures contained in the estate duty account already filed by me.
This affidavit clearly shows that the deposits were out of the separate earnings of the husband and the assessee and the net savings could broadly be taken as 50 : 50 belonging to the assessee and her husband.
She had categorically stated that the share of the deceased that could be treated as passing on his death could be half of the amount and the other half exclusively belonged to her. The learned counsel for the assessee places his case exclusively on the husband's savings to be considered as HUF funds because the husband was educated at the family cost. According to Section 3, merely because the learning may have been imparted with the aid of the joint family funds, it cannot be held that the subsequent amounts earned by him by exercise of the fruits of his learning were not his individual income. We, therefore, come to the conclusion that the savings of the husband were his individual income which devolved on the assessee in terms of his will dated 21-2-1975 in her individual capacity. The savings do not represent the funds of the assessee and her minor daughter in the capacity as HUF. We have, therefore, to hold that the assessment of the interest income in the hands of the assessee-individual is in order.
8. Coming to the appeal of the revenue, the contention raised is that the AAC erred in holding that the amount of Rs. 18,857 did not represent income of the assessee. The learned departmental representative submitted that receipt of income on fixed deposits was out of one set of transaction and payment of interest on overdrafts Was a result of another set of transaction and, therefore, the assessee should be held to have received the full interest income of Rs. 55,500 and the payment of interest of Rs. 18,857 would be an admissible deduction only if it was permissible under law and it was not so permissible. The learned counsel for the assessee, on the other hand, relied upon the findings of the AAC which we have extracted earlier and submitted that the transaction in effect was one and the same and the AAC was justified in coming to the conclusion that interest to the extent of Rs. 18,857 was not received.
9. We have considered the rival submissions. It is essential in a case like this to ascertain the true nature of the transactions in the first instance. In the text book on Banking Law and Practice in India by M.L.
Tannan, 17th edition, 1979, we find that in India, bank deposits take three different forms, that is, fixed or time deposits, savings deposits and current deposits. The term 'fixed deposits' is explained as under : The term 'fixed deposits' means deposits repayable after the expiry of a certain period which ordinarily varies from three months to five years. Fixed deposits are also received for shorter periods than three months, but generally for not less than a month. In England, the term 'fixed deposits' is not generally used, as the English banks receive deposits repayable subject to fourteen or twenty-one days' notice. In the case of fixed deposits, the period of the deposit is usually fixed at the time of the deposit is made.
The fixing of the period enables the banker to invest the money, or.
otherwise employ it in his business without having to keep a reserve and this is one of the reasons why 'fixed deposits' or term deposits are so popular with bankers in India. The term now in vogue is 'time liabilities' instead of fixed deposits, which means deposits withdrawable subject to a notice and not on demand. In the Banking Regulation Act, 1949, the words 'fixed deposits' are not mentioned anywhere.
The legal position of the banker vis-a-vis the fixed deposit is stated to be as under : Legal Position.-'The legal position of the banker in connection with fixed deposit is one of a debtor who is not bound to repay the amount before its due date. Some banks reserve to themselves the right to repay deposits before their maturity by giving due notice.
This condition, along with others, is printed on the back of the deposit receipt and when the customer's attention is drawn to it, it governs the contract between the banker and his customer. In the absence of such a stipulation the banker cannot return a fixed deposit before the due date without the consent of his customer. The banker continues to be a debtor, even though the period fixed for the deposit has expired and the deposit is not withdrawn and although the banker may not allow interest after the deposit has matured for payment, he does not become a trustee for the customer of the funds so lying with him [Pearce v. Creswick (1843), 2 Hare 286 and Official Assignee of Mardas v. Smith En. 1908 ILR 32 (Mad.) 68, followed in Subramaniam v. Kadiresan 39 (Mad.) 1081]. A third party has no right to claim the money deposited with a banker by giving notice to him. Such a notice does not create any liability on the part of the banker.
In order to oblige their customers, bankers occasionally allow them to withdraw their fixed deposits before their due dates. In such cases, either the customer foregoes the interest accrued on deposit, or he borrows the amount required against the security of his fixed deposit at a rate of interest which is generally two to two and half per cent higher than the rate allowed on the deposit. When doing so the banker requires the customer to discharge the deposit receipt.
In the latter case, the banker's advance is fully secured, as there can hardly be any security better than the amount due from the banker to the customer.
In a case where a fixed deposit is made with a bank, the banker acts as a borrower from the customer. Where a customer takes a loan against the security of a fixed deposit it is the customer who is the borrower and the bank is a lender.
Generally banks permit an overdraft against the lien of the fixed deposits. In such cases, when an overdraft is granted by a banker, it is a loan given by the banker to the customer. Where the overdraft is secured against lien of the fixed deposits, the deposits are only security for the overdraft. The making of the fixed deposits and grant of overdrafts against the lien of the fixed deposits are two separate transactions and are not part of one and the same transaction. The certificate given by the State Bank of India in the present case regarding interest paid on the fixed deposits and the interest charged on the overdraft current account dated 16-3-19X8 reads as under : As desired by you, we furnish below the interest paid on your term deposit receipts and interest charged on the overdraft current account No. 71060 for the period 1-4-1977 to 31-3-1978 :dated 25-11-1975 1,50,000 13,500.00 --------- Interest charged on the overdraft current account No. 71060 for the period 1-4-1977 to 31-3-1976 :For the quarter ended 30-6-1977 4,334.77For the quarter ended 30-9-1977 4,917.85For the quarter ended 31-12-1977 5,005.05For the quarter ended 31-3-1978 tobe applied in April, 1978 --------------- Total 14,757.67 (sic.) It is clear from the aforesaid certificate that the full amount of Rs. 55,499 was paid and interest of Rs. 18,857 was separately charged in respect of the overdraft balance (the total is Rs. 14,757 as per the above certificate and Rs. 4,099 calculated in respect of the quarter ended 31-3-1978 and separately added). We are conscious of the fact that in effect when an overdraft is taken, the entire interest which comes at the end would be the gross interest received minus the interest paid to the bank. But, legally, the income from the fixed deposits accrues to the assessee in full and the payment in respect of overdraft is a subsequent and independent payment and in law, we would not be justified in holding that the interest of Rs. 18,857 was never received by the assessee.
10. The only question that survives is whether the interest payment can be allowed as a deduction. The loan in the present case was taken for making payments of estate duty and the interest was paid in respect of such loan. The interest income has been brought to tax under the head Income from other sources'. The interest payment would be an admissible deduction only if laid out or expended wholly and exclusively for the purpose of making of earning such income [section 51(iii) of the Income-tax Act, 1961]. The interest paid in the present case is not for earning the interest income. We may state that in the case of CIT v.Malayalam Plantations Ltd.  53 ITR 140 (SC), a question arose whether payment of estate duty in the case of a non-resident company on the death of shareholders not domiciled in India could be considered to be a payment for the purposes of business and the Court had held that the payment had nothing to do with the conduct of business and in that regard had observed that the expression 'for the purposes of business' was wider in scope than the expression 'for the purposes of earning profits' ; but however wide the meaning, its limitations were implicit in it. The provisions of Section 57 are much narrower in scope and certainly interest income paid for borrowing funds for payment of estate duty could never be considered as laid out or expended wholly and exclusively for the purpose of earning interest on other fixed deposits. We, therefore, set aside the finding of the AAC in this regard and hold that no deduction is permissible in respect of the amount of Rs. 18,857.
11. The result is, the appeal of the assessee fails and is dismissed and the appeal of the revenue is allowed.