Patanjali Sastri, J.
1. This is a reference by the Income-tax Appellate Tribunal, Madras, under Section 66(1) of the Indian Income-tax, 1922.
2. One Mr. S. Ramsay Unger (hereinafter called the assessee) was assessed to income-tax for the year 1942-43 on a total income of Rs. 70,766 in which was included a sum of Rs. 46,061 as income derived from the business of ice manufacture and cold storage carried on by him under the name of 'Ramsay & Co.' He claimed before the Income-tax authorities a deduction of a sum of Rs. 22,108 as being interest paid to the estate of his father, the late Jehn Ramsay Unger, on capital said to have been borrowed from the estate for the purposes of his business. The claim was disallowed except to the extent of only Rs. 1,984 on the ground that, in the circumstances hereinafter mentioned, the assessee had become the sole owner of the residuary estate subject to certain pecuniary legacies payable under his father's will and that, therefore, except in regard to the aforesaid sum of Rs. 1,984 representing the interest payable to such legatees, the deduction claimed was in truth in resrect of a payment to himself. The assessee appealed to the Income-tax Appellate Tribunal who considered that the administration of the testater's estate had not been completed and the residue ascertained and that it was still in the hands of the assessee in his capacity as executor and had rot become his property. The Tribunal accordingly allowed the appeal and directed the exclusion of the balance of Rs. 20,124 also from the assessment. Thereupon the Cemmissioner of Income-tax, Madras, applied to the Tribunal to state the case and refer it to this Court, claiming that a question of law arose out of its order, and the Tribunal, agreeing that a point of law was involved referred to this Court for its decision the following question:
Whether on the facts and in the circumstances of the case, the sum of Rs. 20,124 was allowable as a deduction as interest on borrowed capital within the meaning of Section 10(2)(iii) of the Act.
'Ramsay & Co.' was founded by the late John Ramsay Unger and the assessee joined the business as a partner in 1916. Under the articles of partnership entered into between the parties on the 25th February, 1921, it was provided, inter alia, that the assessee should become the sole proprietor of the business at the end of the year 1935 or on the death of his father if it happened earlier, and that the large amount of capital standing to the credit of the father in the books of the firm should continue in the firm for 20 years after the termination of the partnership or for such shorter or longer period as the assessee might require, bearing interest at six per cent, per annum. John Ramsay Unger died in July 1929, leaving him surviving his widow, four sons including the assessee and one daughter. He made a will on the 13th May, 1926, which was later supplemented by a codicil dated the 6th November, 1928. By the said will he confirmed and ratified the provisions of the partnership agreement of the 25th February, 1921, declared that his estate consisted of a sum of Rs. 3,22,111-14-4 standing to his credit in the books of Ramsay & Co., on the 31st December, 1925, and certain lands and buildings more particularly described in the will and appointed his sons Sherrard Ramsay Unger (the assessee) and Oscar Ramsay Unger as executors. He then proceeded to bequeath certain pecuniary legacies to his wife and others which he directed his executors to pay in instalments as follows:
No. I. Rs. 48,000 (forty-eight thousand rupees) with annual interest at the rate of 6 per centum accruing thereon to my wife Emile Unger by monthly instalments of Rs. 400 (four hundred rupees) on the 1st day of each month after my decease.
No. II. Rs. 36,000 (thirty-six thousand rupees) with annual interest at the rate of 6 per centum accruing thereon to Mary (May) Elizabeth Unger (widow of my brother William Alender Unger) as a token of my appreciation of her unfailing care of me for many years by monthly instalments of Rs. 300 (three hundred rupees) on the 1st day of each month after my decease.
No. III. Rs. 15,000 (fifteen thousand rupees) with annual interest at the rate of 6 per centum accruing thereon to my son, Cyril Ramsay Unger by monthly instalments of Rs. 125 (one hundred and twenty-five) rupees on the 1st day of each month after my decease.
No. IV. Rs. 15,000 (fifteen thousand rupees) with annual interest at the rate of six per centum accruing thereon to my son, Kennard Ramsay Unger by monthly instalments of Rs. 125 (one hundred and twenty-five rupees) on the 1st day of each month after my decease.
Then follow the provisions regarding the disposal of his residuary estate, on the interpretation and effect of which the present controversy largely turns. They are as follows:
After the death (and not till then) of the aforementioned Emile Unger and Mary (May) Elizabeth Unger (legatees numbers I and II) I direct my executors to close the accounts of my estate and after setting apart sufficient money or fund or property to disburse and discharge completely the aforementioned legacies numbered I to IV, to divide the balance or residue of my estate into three equal shares to be distributed as follows:
One share of the residue to be paid or given to my son, Oscar Ramsay Unger (Captain, Indian Medical Service) or his heirs ;
One share to be paid or given to my daughter, Tessa Ramsay Bartley (wife of W.K. Bartley) or to her heirs ; one share to be paid or given to my son, Sherrard Ramsay Unger or to his heirs.
I direct these three residuary shares to be paid by my executors by annual instalments which shall be not less than one-twentieth in any event but such instalments may be more than one-twentieth in every or any year according as it suits the convenience of the said Sherrard Ramsay Unger.
I specially direct payment of all these legacies and residuary shares by instalments spread over a series of years in order that the withdrawal of moneys may not in any way incommode the House of Ramsay & Co.
The codicil which was executed with a view to avoid any controversy or contention 'and' as a measure of abundant caution does not materially affect the dispositions under the will, and it is unnecessary to refer to its terms in detail.
3. There is no dispute that all debts, funeral and testamentary expenses were paid, and the real properties were sold and the proceeds added to the fund credited to the estate in the books of Ramsay & Co., as directed in the will, long before the year of account, 1941-42. On the 30th March, 1931, the assessee obtained by transfer from his sister Tessa Ramsay Bartley all her past, present and future interests under the said will and codicil including her right, title, interest, claim and demand to and in her share of the residuary estate in consideration of a sum of Rs. 40,000 paid to her. Similarly, he obtained under another instrument of transfer dated the 26th June, 1931, the right, title and interest past, present and future of Oscar Ramsay Unger in his share of the residuary estate on payment to him of Rs. 50,000. The assessee has thus purported to acquire the entire residue of his father's estate subject to the four pecuniary legacies payable under the will. As, however, some instalments of these legacies still remained to be paid and the executors were directed under the will to close the accounts of my estate and to distribute the residue after the deaths and not till then of the legatees numbered I and II who are alive, the assessee has been maintaining separate accounts for the estate as executor duly crediting therein the interests received from Ramsay & Go., and debiting the instalments of legacies paid from time to time. The Appellate Tribunal has found that the assessee has been doing so bona fide in accordance with the directions contained in the will and not as a device for avoiding due assessment to tax, and that finding has not been questioned before us. It may be mentioned here that till the year 1942-43 when the assessment now in question came to be made, the assessee had all along been maintaining his accounts on the same basis, claiming deduction every year of the interest debited to the estate in the assessment of his personal income and returning such interest for assessment as income received by him as executor of his father's estate, and the Income-tax authorities had been making assessments accordingly.
4. The relevant provisions of the Indian Income-tax Act, 1922, are as follows:
Section 10(1): The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, namely:
* * * * *(iii) in respect of capital borrowed for the purposes of the business, profession or vocation, * * * * the amount of the interest paid.
The question is whether, on the facts stated above, the interest debited in the books of Ramsay & Co., to the estate of the late John Ramsay Unger could be said, apart from the sum of Rs. 1,984 payable in respect of the few remaining instalments of the four pecuniary legacies, to have been 'paid' on capital 'borrowed.' Obviously not, if the residue of such estate had, before the year of account, become the property of the assessee, for, there could be no borrowing from or payment to himself. Mr. Rama Rao Sahib for the Commissioner of Income-tax submitted that that was the true position, and that the maintenance of separate accounts for the 'estate' and the crediting of the interest therein should not be allowed to obscure the realities of the situation. He drew attention to illustration (ii) to Section 333(2) of the Indian Succession Act, 1925, and urged that the assessee, having commenced to pay the instalments of the legacies, must be deemed to have assented to the whole of the legacies with the result that the legatees' title to their respective legacies was perfected and thereafter the assessee held the moneys payable to them merely as trustee or debtor and not as executor. As the entire estate of the testator at the relevant period consisted only of moneys invested in the assessee's business, and the necessary funds to meet the legacies could easily be calculated and set apart, the residue, it was said, must be taken to have been ascertained and appropriated by the assessee who had acquired by transfer the right, title and interest of the other sharers, all testamentary expenses having admittedly been paid long ago. The argument proceeded, as did the reasoning of the Appellate Tribunal to the contrary, on the assumption that the sharers of the residuary estate took vested interests immediately on the testator's death, distribution alone being postponed. Mr. Sitarama Rao for the assessee, however, contended before us (although the contention might, in certain events, imperil the transfers obtained by the assesee) that, on a true construction of the provisions relating to the residue, the gifts were contingent on the person first named in each case being alive at the period of distribution, that is, at the death of the survivor of Emile Unger and Mary (May) Elizabeth Unger. As these two persons are still alive, there could be no question as to the residue having become the property of the assessee. We are of opinion that this contention must prevail.
5. It is to be noted that there are no words of gift of the residue in the will apart from the direction for its distribution after the deaths of the two persons aforementioned. The rule of construction applicable in such cases is thus stated in Jarman on Wills:
A leading distinction is that if futurity is annexed to the substance of the gift the vesting is suspended ; but if it appears to relate to the time of payment only the legacy vests instantor (VII edition, Vol. II, page 1373)....It should seem too, that, where the only gift is in the direction to pay or distribute at a future age, the case is not to be ranked with those in which the payment or distribution only is deferred, but is one in which time is of the essence of the gift. (Page 1376.)
And the learned author cites, among others, Re Eve Belton v. Thompson 93 L.T. 235 as illustrating the rule. There a testator directed his trustees to pay a legacy of 1,000 'six years after my decease.' The legatee died within 3 years after the testator's death. Kekewich, J., held that, there being no gift except in the direction to pay, everything depended upon the expiration of six years, and that, the legatee not having survived this period after the testator's death, his estate did not take the 1,000. In the present case, as will be seen from the provisions quoted above, the executors are directed to distribute the residue 'after the deaths (and not till then)' of Emile Unger and Mary (May) Elizabeth Unger. As there are no words of gift apart from this direction to distribute, the testator must, according to the rule cited above, be taken to have intended that not only the distribution but also the vesting of the residuary shares should be postponed.
6. Mr. Rama Rao Sahib referred us to Browne v. Moody (1936) A.C. 635 as showing that their Lordships of the Judicial Committee did not favour the distinction pointed out by Mr. Jarman. We do not understand the decision in that sense. No doubt, their Lordships reversed the decision of the Supreme Court of Canada which held, following the rule referred to by Mr. Jarman, that certain legatees of a fund which was directed to be distributed among them after the death of the testator's son who was given the income of the fund during his life, did not take a vested interest on the death of the testator. But their Lordships said nothing to throw doubt upon the rule. They only recognised and gave effect to a limitation on the application of the rule which Mr. Jarman himself has stated in his book:
Even though there be no other gift than in the direction to pay or distribute in future, yet if such payment or distribution appear to be postponed for the convenience of the fund or property, the vesting will not be deferred until the period in question. (Volume II, page 1377.)
As, in the case before their Lordships, there was, in effect, a life interest in the fund given to the son so that the fund could not be divided or paid over until his death, that is to say, the distribution was postponed 'for the convenience of the fund', their Lordships held that the legacies became vested on the death of the testator. They observed,
The distinction between a present gift coupled with a postponement of the date of payment and a direction to pay at a future date without any words of present gift, is no doubt an important distinction, and is, in certain circumstances, an element in determining whether vesting a morte testatoris has or has not taken place, as where conditions of survivorship and the like are adjected to the direction to pay. But where there is a direction to pay the income of a fund to one person during his lifetime and to divide the capital among certain other named and ascertained persons on his death, even although there are no direct words of gift either of the life interest or of the capital, the rule is that vesting of the capital takes place a morte testatoris in the remaindermen.
No life interest is interposed in the present case. The persons after whose deaths the residue is to be distributed might die before or after all the instalments of their pecuniary legacies are paid and it cannot, therefore, be said that the distribution has been deferred for the convenience of the fund. The case thus calls for the application of the rule and not of the exception stated by Mr. Jarman.
7. The contingent character of the gifts is emphasised by the bequest in the alternative to the 'heirs' of the first named legatee in each case. Ordinarily, an alternative gift is intended to take effect only in the contingency of the first named legatee dying in the testator's lifetime, but, if such legatee survives the testator, he acquires a vested and indefeasible interest and the alternative gift does not take effect. But, as pointed out by Mr. Jarman (Volume II, page 1288) citing Girdlestone v. Doe (1828) 2 Sim. 225 : E.R. 773 and other cases, where the words of substitution are applied to a bequest, which may not take effect in possession at the testator's death (as in the present case), the first named legatee, though he survives the testator, does not take a vested and indefeasible interest unless he survives also the pericd of distribution. The vesting is in suspense and if he dies in the interval, the bequest to him lapses and 'his heirs' will take as the alternative legatees. This rule is embodied in Section 96 of the Indian Succession Act, 1925, illustration (vi) which seems to be based on Girdlestone v. Doe : AIR1943Mad409 .
8. It follows that the gifts of the residue are contingent on the first named legatee in each case surviving Emile Unger and Mary (May) Elizabeth Unger. As both of them are alive, the residue cannot be said to have become vested in the primary legatees named in the will, but remains still as the testator's estate in the hands of the assessee as executor. The testator having authorised his executors to keep in Ramsay & Co. the moneys belonging to my estate, the amount credited to the estate in the books of the company must be regarded as borrowed capital and the whole of the interest debited must be allowed as interest paid on such capital.
9. We answer the question referred, accordingly, in the affirmative. The assessee will have his costs which we fix at Rs. 250.