Judgement Appeal (No. 69 of 1945) from a judgment and order of the High Court (January 27, 1944) delivered and made on a reference made thereto under s. 66, sub-s.1, of the Indian Income-tax Act, 1922 (as amended by the Indian Income-tax (Amendment) Act, 1939) by the Income-tax Appellate Tribunal, Calcutta Bench, on July 28, 1942. The respondent, a public company incorporated and registered under the Indian Companies Act, 1913, owned land and buildings situate in Calcutta. On July 27, 1920, it issued a series of second lien debentures, payable to bearer, of Rs. 500 each, of the total value of Rs. 9 lacs, bearing interest at the rate of 7 per cent, per annum. The payment of those debentures and the interest thereon was secured by a deed of mortgage, dated July 27, 1920, of certain of the companys properties executed by the respondent in favour of trustees for the holders of the debentures. Some years before the assessment in question in this appeal the respondent bought from the then holders 1,470 debentures, of the total nominal value of Rs. 7,35,000. For the purpose of such purchase the respondent borrowed the requisite moneys by overdraft on its current account with the Allahabad Bank, Ld., at interest at the rate of 3^ per cent, per annum, and, as security for the payment of the overdraft, deposited in pledge with the bank the debentures so purchased. During the year ended April 4, 1939, the respondent made default in payment of the interest on all of the debentures issued by it, but paid to the bank the interest on the overdraft. The Income-tax Officer, in assessing the respondent to tax and super-tax in respect of its income for the year 1938-39 disallowed a claim by the respondent for deduction of the interest due in respect of the debentures purchased by it and pledged with the bank, amounting to Rs. 51,450. On appeal by the respondent, the Appellate Assistant Commissioner and, on further appeal, the Income-tax Appellate Tribunal, Calcutta Bench, allowed the claim for the deduction. 51,450. On appeal by the respondent, the Appellate Assistant Commissioner and, on further appeal, the Income-tax Appellate Tribunal, Calcutta Bench, allowed the claim for the deduction. The following questions were then referred for the opinion of the High Court (1) Whether in the facts and circumstances of the case the debentures have been kept alive for the purposes mentioned in s. 127, sub-s. 3, of the Indian Companies Act; and (2.) if the answer to the first question should be in the affirmative, whether interest was due and payable in respect of these debentures and should be treated as an allowable deduction under s. 9, sub-s.1 (iv.), of the Income-tax Act? The reference was heard by McNair and Gentle JJ., when it was conceded by the appellant that the answer to the first question should be in the affirmative. The court answered the second question in the affirmative and passed an order accordingly. 1947. Feb. 17. Tucker K.C. and Megaw for the appellant. The provisions of s. 9 of the Income-tax Act show that, so far as the owner of property is concerned, the scheme is to charge him with tax only on the net income from the property remaining after deducting, inter alia, any interest on any principal sum secured by a mortgage of such property. Equally the pro visions of ss.8 and 18, sub-s.3, of the Act show that, so far as the person beneficially entitled to any such interest payable by a company on a mortgage debenture charged on the companys property is concerned, the scheme is to treat the interest as the income of such person, and to impose the tax on that interest ultimately on him. It would not be sensible to hold that a person can pay himself a sum of money so as to constitute that sum a separate item of income in his own hands, and himself or his own property the source of such income. Accordingly, s. 9, sub-s. 1 (iv.), of the Act should be construed as applying at the most only to payments of interest which, when paid, would be sums to which some person other than the owner of the property would be beneficially entitled. The deposit by the company of the second debentures purchased by it with the bank, as security for the Law Rep. 74 Ind. App. The deposit by the company of the second debentures purchased by it with the bank, as security for the Law Rep. 74 Ind. App. 155 ( 1946- 1947) Commissioner of Income Tax v. C howringhee Properties 104 companys overdraft, amounted either to a pledge or a mortgage of the debentures and of all sums payable by the company by virtue of such debentures, or as a deposit of such debentures by way of collateral security for such overdraft. On any view as to the true nature of such transaction of deposit, any sums, whether of principal or interest, which were in fact paid by the company in respect of such debentures while they were still held by the bank as security, would not belong beneficially to the bank, but would be held by the bank with an obligation to account to the company for the same, and the banks rights in respect of any such sums so paid would be no more than a right to apply any such sums in or towards satisfaction of the companys own liability to the bank in respect of the overdraft and the interest thereon. Any such sums if and when paid by the company in respect of the deposited debentures would thus become applicable solely for the benefit of the company and not of the bank. Further, on the facts and circumstances of this case the money was not interest at all; it would be a sum paid by the company for its own benefit; it could be called interest, but in the circum stances as the money was going out of its own pocket to its own credit it was not interest at all either in fact or in law. The second question referred should have been answered in the negative. W. W. K. Page K.C. and T. B. W. Ramsay for the respondent. The interest which accrued due during the year of account on the debentures reissued to and pledged with the bank was payable to the bank as the holder of the debentures throughout such period. The second question referred should have been answered in the negative. W. W. K. Page K.C. and T. B. W. Ramsay for the respondent. The interest which accrued due during the year of account on the debentures reissued to and pledged with the bank was payable to the bank as the holder of the debentures throughout such period. The interest was so payable both in terms of the debentures and in terms of the trust deed of July 27, 1920, by which a mortgage on properties of the respondent was created to secure payment of the debentures and the interest thereon, and was therefore interest on a mortgage of properties of the respondent within the meaning of s. 9, sub-s.1 (iv.), of the Act. It was rightly decided by the High Court that interest accrued due and was payable during the year of account in respect of the debentures and should be treated as an allowable deduction under the section. Tucker K.C. replied. April 22. The judgment of their Lordships was delivered by LORD UTHWATT. This is an appeal by the Commissioner of Income-tax, Bengal, from a judgment and decree of the High Court of Judicature at Bengal, the matter coming before the High Court on a reference under s. 66, sub-s.1, of the Indian Income-tax Act, 1922 (as amended), made by the Income- tax Appellate Tribunal, Calcutta Bench. The question at issue is whether it was rightly decided by the High Court that the respondent company, on an assessment under that Act to tax on its income from buildings, was entitled to an allowance in respect of interest payable under certain debentures issued by it to the Allahabad Bank, Ld. The facts are simple, the relevant statutory provision is free from ambiguity, and the point is short. Exceptionally the nut is not scattered on emerging from its shell. Prior to the tax year 1937- 1938, the company deposited with the bank certain of its bearer debentures (forming part of a large series) as security for the moneys for the time being owing by it to the bank on overdraft. The debentures con tained the common form of agreement to pay to the bearer the principal and, on stated dates, the interest. The debentures con tained the common form of agreement to pay to the bearer the principal and, on stated dates, the interest. The debentures were entitled to the benefit of a trust deed under which properties of the company, including the buildings mentioned, stood as security for the payment of the principal and interest of the debentures. The Indian Income-tax Act (s. 9, sub-s. 1) provides that tax shall be payable in respect of the annual value of property consisting of buildings subject to certain allowances. The allowance to be considered is contained in head (iv.) of s. 9, sub-s. j, and is as follows " Where the Law Rep. 74 Ind. App. 155 ( 1946- 1947) Commissioner of Income Tax v. C howringhee Properties 105 property is subject to " a mortgage or other capital charge, the amount of any " interest on such mortgage or charge.” In the relevant year, 1938- 1939, the company, while paying interest on its overdraft, paid no interest on the debentures held by the bank. The companys claim is that the interest on the debentures is deductible. Its contention was as follows. The buildings were under the debentures mortgaged to secure a capital charge (i.e., the debenture debt) the sum sought to be deducted was therefore interest on a mortgage and in light of In re Behari Lal Mullica (( 1927) I. L. R. 54 C. 630.) interest payable, though not paid, was interest within the meaning of the quoted provision. The result was obvious. This contention failed before the Income-tax Officer but found favour with the Appellate Assistant Commissioner, the Income-tax Appellate Tribunal, Calcutta Bench, and the High Court. The contention of the appellant, the Commissioner of Income-tax, is just as simple. The debentures were and remained, subject to the charge, an asset of the company. That asset consisted of a bundle of rights against the company in the hands of the bank. The right to receive interest is one of those rights. One does not owe or pay interest to ones self. In their Lordships view, the solution to the question at issue depends on a proper appreciation of the nature and effect of the transaction between the company and the bank. That transaction is completely stated by saying that the debentures in the hands of the bank are charged with the moneys owing on overdraft. In their Lordships view, the solution to the question at issue depends on a proper appreciation of the nature and effect of the transaction between the company and the bank. That transaction is completely stated by saying that the debentures in the hands of the bank are charged with the moneys owing on overdraft. The debts for principal and interest which are created as secured debts by the issue of the debentures to the bank, are in this transaction treated as property of the company vested in the bank which the company is at liberty to charge and in fact does charge. It is elementary that while the company can charge its own property, it cannot charge the banks property. The debt for interest payable thus forms part of the companys property. It is a segregated asset of the company in the hands of the bank. It follows that the interest, when paid, becomes part of the property charged. When received it is applicable by the bank only for the purpose of being applied in reduction of the overdraft. Until so applied, the only course open to the bank is to carry it to the credit of the company in some other account. It is not the banks free property. The right to demand payment of the debenture interest indeed can be exercised by the bank to the extent necessary for reduction or extinction of the overdraft, but otherwise that right is not available to the bank, and if nothing is owing on overdraft, no payment of interest can be required. The result is that although the interest payable under the debentures is undoubtedly interest secured by the mortgage contained in the debentures, that interest is accurately described as interest receivable by the bank as being part of charged property belonging to the company and, by virtue of the charge, so receivable as the companys mandatory to apply it in a particular way. Interest payable to such a mandatory is clearly not deductible. Interest received or receivable from the company under its debentures charged to the bank in truth stands from the banks point of view in no different position from interest received or receivable by it from debentures of an outside concern lodged by the company as security. The interest belongs to the company subject to the charge and to the mandate inherent in the transaction. The interest belongs to the company subject to the charge and to the mandate inherent in the transaction. Their Lordships would add that the views which they have stated for their conclusion throw no doubt on the position of banks holding debentures as cover. That position is well settled. By virtue of the charge on the debentures to secure the overdraft, the bank may, subject to any express or implied terms regulating that charge, realize the debentures by sale. The debentures in this respect stand in no different position from any other chose in action lodged as security with the bank. The nature of the property held as security, gives the bank other rights against the company. Subject again to the terms of the bargain regulating the charge to secure the overdraft, the bank may sue for and recover principal and interest and otherwise enforce the Law Rep. 74 Ind. App. 155 ( 1946- 1947) Commissioner of Income Tax v. C howringhee Properties 106 debentures. But whatever is thereby received becomes part of the property charged to secure the overdraft and is not receivable or held by the bank otherwise than for that purpose (cf. In re Regents Canal Ironworks Co. (( 1876) 3 Ch. D. 43.)). Their Lordships will therefore humbly advise His Majesty that this appeal should be allowed and that the second question referred to the High Court should be answered in the negative, the order of the High Court being varied accordingly. The respondents will pay the costs of this appeal and of the proceedings in the High Court.