1969 (12) TMI 1 - SC - Income Tax

Estate Duty - Once the income was received by the joint family, the amount lost its character of income; it became merged in the joint family assets and became the capital of the family. The share received by the assessee was therefore a share in the capital of the family. The share in the joint family property which included interest on the estate duty was not of the nature of revenue and not taxable - Revenue's appeal is dismissed

Summary

Issues:
1. Liability to income-tax on the share of interest paid on estate duty refunded by the Ceylon Government.
2. Characterization of the interest received as capital or revenue.
3. Taxability of the interest accrued before and after February 17, 1947.

Analysis:
The case involved a dispute regarding the liability to income tax on the share of interest paid on estate duty refunded by the Ceylon Government. The assessee, an adopted son in a joint Hindu family, received a share in the estate after a settlement among the widows and adopted sons. The Income-tax Officer initially taxed the interest received by the assessee, considering it as revenue. However, the Income-tax Appellate Tribunal held that the interest was of a capital nature and, therefore, not taxable. The High Court of Madras determined that the interest attributable to the period before February 17, 1947, was not taxable, but the share related to the period after that date was taxable.

The High Court reasoned that the interest on estate duty accrued before February 17, 1947, was not of a revenue nature and, therefore, not taxable. It was held that upon severance of the joint family status in 1947, each member received a share in the estate as capital. The court emphasized that the interest, once received by the joint family, lost its character as income and became part of the joint family's capital. Consequently, the share received by the assessee was deemed a share in the family's capital and not taxable.

The Supreme Court affirmed the High Court's decision, stating that the interest accrued before February 17, 1947, was not taxable as it was considered part of the joint family's capital. However, the court did not express an opinion on the taxability of the interest accrued after that date. The appeal was dismissed, upholding the ruling that the interest received by the assessee was of a capital nature and not subject to income tax.

In conclusion, the judgment clarified the distinction between revenue and capital nature of the interest received, emphasizing the impact of joint family status on tax liability. The ruling provided clarity on the tax treatment of interest on estate duty in the context of joint Hindu family properties and settlements among family members.