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Judgment
Kania, J.—In this case, eight applications u/s 256(1) of the Income Tax Act, 1961, were made by the assessee and the other eight applications were filed by the Commissioner of Income Tax (Central), Bombay. On these applications, the following questions have been referred to us for our determination in this reference u/s 256(1) of the said Act :
"(1) Whether, on the facts and in the circumstances of the case, interest paid on borrowings utilised in the purchase of shares in the names of the wife and minor child of the assessee were allowable in computing his taxable income for the assessment years 1963-64 to 1970-71 ?
(2) Whether the Tribunal erred in law in holding that it was only income that arose from assets transferred directly or indirectly to the spouse or minor child of the individual that could come in for consideration u/s 64 of the Income Tax Act, 1961, and that the assessee could not claim for adjustment of losses under that section ?
(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the share of income of the assessee''s wife, Gitadevi, from the firms of M/s. Ramkumar & Co. and M/s. Birla Cotton Mills and Cloth Shop were not includible in the assessment of the assessee for the assessment years 1963-64 to 1970-71 ?"
The first two questions have been referred to us at the instance of the assessee and the third question has been referred to us at the instance of the Commissioner.
As far as question No. (3) is concerned, it is common ground that it is covered against the Revenue and in favour of the assessee by the decision of a Division Bench of this court in Commissioner of Income Tax (Central) Vs. Tolaram Jalan and Others, (See Appendix infra) (income tax Reference No. 50 of l967 decided by Tulzapurkar and Desai JJ., on December 16, 1976). In view of this, that question will have to be answered in the affirmative and in favour of the assessee. We do not propose to set out the facts in so far as they pertain to that question.
The assessee is an individual and the assessment years involved are 1963-64 to 1970-71, both inclusive. The relevant accounting periods are the accounting years, Samvat years 2018 to 2025. The assessee borrowed certain amounts from M/s. Amarchand Dharamchand and utilised a part of these amounts in acquiring shares in his own name and the rest of them in acquiring shares in the names of his wife and minor son, respectively. In the relevant previous years, certain amounts were debited as interest payments to M/s. Amarchand Dharamchand, being on account of interest payable on the amounts borrowed. The assessee claimed these amounts as deductions permissible u/s 57(iii) of the Income Tax Act, 1961, as being the expenditure laid out and expended for the purpose of earning income chargeable under the head "Income from other sources". The Income Tax Officer disallowed the claim in respect of all the above amounts, as there was no corresponding source of income and on the ground that it was not explained as to how the withdrawals from M/s. Amarchand Dharamchand had been utilised. The assessee filed appeals against the decision of the Income Tax Officer to the aforesaid effect in the said assessment years. The assessee placed before the Appellate Assistant Commissioner the details of investments which showed that a part of these amounts had been invested by the assessee in purchasing shares in his own name and the balance in purchasing shares in the names of his wife and minor son respectively as set out above. The Appellate Assistant Commissioner found that the assessee had utilised a part of the borrowings from M/s. Amarchand Dharamchand for purchasing shares in the names of his wife and minor son. He allowed a deduction in respect of interest on the amounts borrowed from the said firm and utilised by the assessee for investment in purchase of shares in his own name. As far as the amounts utilised for purchasing shares in the names of wife and minor son were concerned, he allowed deduction of interest only against and to the extent of the dividend income received by the wife and the minor son which was included in the income of the assessee u/s 64 of the Income Tax Act, 1961. This decision of the Appellate Assistant Commissioner was confirmed by the Income Tax Appellate Tribunal on appeals filed by the assessee. It is the correctness of this decision of the Tribunal which is sought to be challenged by way of questions referred to us.
The submission of Mr. Dalvi, learned counsel for the assessee, is that the amounts earned by the wife and minor son of the assessee from dividends on shares which were purchased by the assessee in their names were liable to be included in the income of the assessee under the provisions of section 64(iii) of the Income Tax Act, 1961. The provisions of section 64(iii) read with the other relevant provisions of the Income Tax Act, 1961, show that, for the purposes of the Income Tax Act, the income of the wife and the minor son from the shares purchased as aforesaid was liable to be treated as the income of the assessee and hence any expenditure laid out by the assessee for earning that income must be allowed by way of deduction. In order to examine the correctness of these submissions, it is necessary to refer to certain provisions of the Income Tax Act, 1961. Section 57 of that Act deals with deductions. The relevant provisions of that section, at the relevant time, ran as follows :
"57. The income chargeable under the head ''Income from other sources'' shall be computed after making the following deductions, namely : - ......
(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income."
The relevant provisions of section 64, as it stood at the relevant time, read thus :
"64. (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly - ......
(iii) subject to the provisions of clause (i) of section 27 to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart;
(iv) Subject to the provisions of clause (i) of section 27, to a minor child, not being a married daughter of such individual, from assets transferred directly or indirectly to the minor child by such individual otherwise than for adequate consideration; and..."
We find that the question before us has been dealt with by the decision of a Division Bench of this court in Kevalchand Nemchand Mehta Vs. Commissioner of Income Tax (Central), Bombay, . The law applicable in that case was the Indian Income Tax Act, 1922. But we find that the principles laid down in that decision are clearly applicable to the case before us. The facts in that case were that on December 16, 1955 (S.Y. 2012), the assessee withdrew from his account with a firm a sum of Rs. 3,75,000 and deposited it with a limited company on the same day in the name of his minor son to whom he admittedly gifted the amount. There were similar transactions in the two succeeding years. In the last Samvat year, namely, S.Y. 2014, there was a large debit balance against the assessee in his account in the firm from which he had withdrawn the amounts and he paid interest of Rs. 26,197 to that firm on account of his excess withdrawals. This interest was payable in the assessment year 1959-60. In his return for that assessment year, the assessee included in his income the amount of interest of Rs. 25,375 which his minor son had received from the limited company in which the amounts withdrawn by him from the said firm had been deposited as aforesaid, but claimed as deduction the interest which he had paid to the said firm on the aforesaid withdrawals. It was held by the Division Bench that the income which was included by any provision of the Indian Income Tax Act, 1922, in the income of the assessee would be a source of income in his hands taxable under the head "Income from other sources" inasmuch as section 12(1) of the Indian Income Tax Act, 1922, clearly treats an income which was included in the assessee''s income as his income. The interest earned on the amounts invested by the assessee in his minor son''s name was his income and as the assessee had made the withdrawals for the purpose of earning that income, though his ultimate motive might have been to help his son or provide income for him, the necessary condition for the grant of the allowance contemplated in section 12(2) of that Act was fulfilled and the assessee was entitled to set off the interest paid to the firm against the interest earned from the company. The relevant provisions of section 12 of the Indian Income Tax Act, 1922, were as follows :
"12. (1) The tax shall be payable by an assessee under the head ''Income from other sources'' in respect of income, profits and gains of every kind which may be included in his total income (if not included under any of the preceding heads)."
The relevant provisions of section 16 of the Indian Income Tax Act, 1922, were as follows :
"16. (3) In computing the total income of any individual for the purpose of assessment, there shall be included -
(a) so much of the income of a wife or minor child of such individual as arises directly or indirectly - ...
(iv) from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration."
We find that although these provisions are not identically worded as in the relevant provisions of section 57 and section 64 to which we have referred earlier, they are in pari materia. In fact, it appears that the provisions of section 64 are similar to the provisions of section 16(3) of the Indian Income Tax Act, 1922. Although it is not specifically stated as to under what head the income referred to in section 64 is to be placed in the return of the assessee, it is quite clear that that income would have to be included under the head "Income from other sources". Thus, the principles laid down by the aforesaid Division Bench judgment are clearly applicable to the case before us. We may mention at this stage that had the matter been res integra, we might have been persuaded to take a view different from the one which we have taken, because, it appears to us that, in the present case, the wife and the minor son did not pay any interest and laid out no expenditure for earning the interest in question and, as far as the assessee-husband is concerned, the expenditure laid out or incurred by him was not for earning income for himself but for earning income for his wife and minor son, which was not his income as such, but was liable to be included in his taxable income for the purposes of the Income Tax Act, 1961. However, we do not propose to consider that question ourselves in any detail. We make it clear that we should not be taken to say that we disagree with the aforesaid decision of the Division Bench. On the other hand, as judicial discipline requires, we propose to follow the said decision in accordance with the normal practice.
Mr. Jetly, learned counsel for the Commissioner, submitted that there was a material difference between the facts of the case before us and the facts of the case before the Division Bench which decided the case of Kevalchand Nemchand Mehta Vs. Commissioner of Income Tax (Central), Bombay, . We are unable to see any difference which is material for the purpose of determining the construction of the provisions before us and hence minor differences of facts which is bound to occur between one case and another is of no relevance. It was next submitted by Mr. Jetly that in the case before us, there is no close proximity between the amounts invested by the assessee in purchasing shares in the names of his wife and minor son and the interest which the assessee had to pay on the borrowed amounts which were invested as aforesaid, as no dividend has been earned on the aforesaid shares. According to him, there might have been such a close proximity had the said shares so purchased earned any dividend but not in a case like this where no dividend had become payable. We are at a total loss to understand this argument. If any assessee borrows an amount and invests it in the names of his wife and sons, we fail to see how it can be said that there is no close proximity between the two. We find it still more difficult to understand how it could be said that there would be no such close proximity in a case where the shares in which the said amounts were invested earned a dividend, but that close proximity would cease in any year in which the dividends were not earned on the said shares. Either there is a close proximity or not and we fail to see how it can be said that the close proximity would come into existence if dividends were earned on those shares, but would disappear in a year when the shares earned no dividend. We do not propose to refer to the two decisions cited by Mr. Jetly because, in our view, they have nothing to do with the question before us.
In the result, the questions referred to us are answered as follows :
Question No. (1) in the affirmative.
Question No. (2) in the affirmative.
Question No. (3) in the affirmative.
All the questions are answered in favour of the assessee.
The Commissioner to pay the costs of this reference to the assessee.