Patanjali Sastri, J.-

This is a reference by the Income-tax Appellate Tribunal Madras, under section 66(1) of the Indian Income-tax, 1922.

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 John 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 Inccme-tax Appellate Tribunal who considered that the administration of the testator’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 Commissioner 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. 30,124 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 o

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