Commissioner of Income Tax vs Mridu Hari Dalmia

S. Ranganathan, J.—This income tax reference at the instance of the Commissioner raises an interesting question. It arises out of the assessment of Shri Mridu Hari Dalmia (hereinafter referred to as "the father") for the assessment year 1970-71, the corresponding previous year which ended 31-3-1970. While completing the assessment of the father for the assessment year in question, the ITO noticed that a sum of Rs. 3,542 had been earned by way of interest on a deposit of Rs. 40,000 made with Industrial Credit Co. Ltd. ("ICC", for short) in the name of the assessee''s minor son Gaurav Dalmia (hereinafter referred to as "the minor son"). There was an account of the minor in the books of the father. This showed various amounts as having been advanced by the father to the minor son from time to time. The father had issued cheques in favour of the minor son as follows:

Rs.

17-1-1969

37,000

7-5-1969

13,000

9-6-1969

15,000

27-10-1969

1,000

66000

A sum of Rs. 26,000 had been shown as returned by the minor son on 3-9-1969, leaving a balance of Rs. 40,000, as remaining due from the minor son to the father as on 31-3-1970. These cheques were immediately deposited in an account in the name of the minor son with Dena Bank Ltd. Cheques in favour of ICC were made out on this bank account as below:

Rs.

17-1-1969

30,000

7-5-1969

14,000

9-6-1969

21,000

1-7-1969

5,000

27-10-1969

3,000

The following amounts had been received back from the ICC:

Rs.

6,000 on

22-8-1969

Rs.

26,000 on

3-9-1969.

It will be seen that the deposit of Rs. 30,000 with the ICC had been made out of the sum of Rs. 37,000 given by the assessee; the deposit of Rs. 14,000 on 7-5-1969 included the sum of Rs. 13,000 given by the assessee; the sum of Rs. 21,000 had been deposited on 9-6-1969 out of Rs. 15,000 given by the assessee and other amounts received by the minor by way of dividends; and Rs. 3,000 had been deposited on 27-10-1969 utilising the sum of Rs. 1,000 given by the assessee along with certain other sums such as interest on deposit, dividends, sale proceeds of shares, etc., standing in the name of the minor. The ICC issued cheques for Rs. 3,681.91 during the financial year 1969-70 in favour of the minor which were credited to his accounts with the Dena Bank and the Bank of Tokyo. Out of this, a sum of Rs. 3,542 has been taken as the interest attributable to the funds derived from the father and this is not in dispute.

The ITO was of opinion that the deposits with the TCC had been made out of moneys belonging to the assessee and that therefore the interest thereon belonged to him though shown as having accrued or arisen to the minor. He, therefore, included the interest in the assessee''s total income.

On behalf of the assessee, it was claimed that the interest earned by the minor on the deposits could not be included in the assessee''s total income as the concerned deposits had been made not by the assessee but by the minor out of moneys which had been lent to him free of interest by his father. It was urged that the assessee, as the guardian of the minor son, had full power to act for his benefit: that, having regard to the statutory provisions contained in sections 60 to 64 of the Income- tax Act, 1961, he had so arranged matters that the transaction did not fall within the purview of these sections; and that, therefore, the interest could not be included in his hands. The ITO did not accept this version of the assessee. He pointed out that the transaction did not reflect a "loan", particularly as there could be no relationship of lender and borrower between the assessee and his minor son. According to him, the theory of a so called advance or loan by the father to the minor son was merely a make-believe, a sham and colorable transaction, a collusive arrangement and a farce. The assessee had only attempted by a device to evade the proper levy of tax. It was open to the taxing authorities to unravel the device employed by the assessee and determine the true character of the relationship. Having regard to the facts here, the minor son was not the real owner of the deposits but was only a benamidar or nominee of the assessee. In this view of the matter the ITO included in the assessment of the father the sum of Rs. 3,542 which had arisen byway of interest on the deposits with the ICC.

The assessee preferred an appeal to the AAC. But the appeal was not successful- The AAC was of the view that since a minor cannot be a party to a contract of Joan, the ITO''s conclusion that the entire transaction was in the nature of a collusive arrangement was well borne out by the facts. The act of advancing an amount free of interest to the minor and the act of depositing the same amount in a company in which the assessee was a director were inter-connected and inter-related acts which formed parts of the same transaction. The essence of the whole transaction was that moneys belonging to the assessee had been deposited with a company of which the assessee was a director in the name of his minor son, the minor son''s name being put in merely to show that the deposit belonged to him whereas in fact it did not.

The assessee preferred a further appeal to the Appellate Tribunal and this time he was successful. The Tribunal repelled the contentions of the departmental representative that the assessee''s version of a loan to the minor son could not be accepted because the assessee could not possibly contract with himself, that in any case even the loan was a "transfer" within the meaning of section 64 and that in any case the interest was earned in the name of the minor son from the assets which were not transferred by the assessee and was, by virtue of section 60, assessable in the father''s hands. The Tribunal viewed this as an instance of tax planning by the assessee. It held that there was nothing to stop the assessee from transferring some of his funds to himself as the guardian of the minor by way of loan which being free of interest was clearly not to the detriment of the minor. There was no suggestion that any part of the interest was enjoyed or utilised by the assessee himself for his own benefit and so it was not possible to treat the minor as the assessee''s benamidar in regard to this amount. Section 64 did not apply to the case because there was no transfer of ownership or title to the assets in question. Section 60 was also not applicable despite the extended definition of the word "transfer" as given in section 63(b) because it was not possible to read in a trans action of loan any "settlement, trust, covenant agreement or arrangement" in respect of the income derived from the investment of the loan. It was pointed out. that the guardian of the minor could have kept the amounts borrowed from the father idle at home or invested the same in unproductive investments or frittered them away. The transaction could not be so stretched as to mean that there was an agreement or arrangement whereby some income was to be derived there from and that income was to be appropriated by the minor at the behest or according to the wishes of the lender. The Tribunal held that, as between the assessee and his minor son, it was a transaction of loan and there was no question of any agreement or arrangement and, therefore, section 60 was not applicable to the transaction.

The Commissioner has come up to this Court on reference and at his instance the Tribunal has referred for our decision the following question of law:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the interest of Rs. 3,542 was not assessable in the hands of the assessee.

It is necessary, at the outset, to dispose of one of the contentions raised by Shri Wazir Singh, learned counsel for the department. He contended that the transaction should be considered as a simple case of investment by the assessee-benami in the name of his minor son. He characterised the alleged version of a loan having been advanced to the son as totally incredible and unacceptable. According to him all the relevant entries in the books and the balance sheet were sham and collusive and had to be ignored. We are, however, unable to entertain this contention. As pointed out by Shri Harihar Lal, the learned counsel for the assessee, the Tribunal has found the transaction to be genuine and characterised it as a legitimate attempt at tax avoidance. This finding of fact by the Tribunal has not been challenged by the department by seeking reference of an appropriate question of law as to the sustainability of such a finding. Moreover, the fact of the advance having been given by the assessee to his minor son has been sought to be supported by entries in the accounts of the minor appearing in the assessee''s books. There is also on record a balance sheet of the various transactions of the minor son. These documents show that the minor son had not only these items of transactions but also several others. He had also his own sources of income. The resources of the minor could legitimately be operated upon by the assessee as the natural guardian of the minor son and this is what is reflected by the accounts. In these circumstances, the finding of the Tribunal that the assessee had indeed purported to lend the sums in question to his son is a finding of fact which is no longer in issue and we are concerned in this reference only with the legal consequences flowing from such a transaction.

We shall extract the relevant statutory provisions to give an idea of the background against which the arguments have been addressed:

Transfer of income where there is no transfer of assets. --All income arising to any person by virtue of a transfer whether revocable or not and whether effected before or after the commencement of this Act shall, where there is no transfer of the assets from which the income arises, be chargeable to income tax as the income of the transferor and shall be included in his total income."

Revocable transfer of assets. --All income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income tax as the income of the transferor and shall be included in his total income.

Transfer irrevocable for a specified period. --(1) The provisions of section 61 shall not apply to any income arising to any person by virtue of a transfer--

(i) by way of trust which is not revocable during the lifetime of the beneficiary, and in the case of any other transfer, which is not revocable during the lifetime of the transferee; or

(ii) made before the 1st day of April, 1961, which is not revocable for a period exceeding six years:

Provided that the transferor derives no direct or indirect benefit from such income in either case.

(2) Notwithstanding anything contained in sub-section (1), all income arising to any person by virtue of any such transfer shall be chargeable to income tax as the income of the transferor as and when the power to revoke the transfer arises, and shall then be included in his total income.

''Transfer'' and ''revocable transfer'' defined. -- For the purposes of sections 60, 61 and 62 and of this section,--

(a) a transfer shall be deemed to be revocable if--

(i) it contains any provisions for the retransfer directly or indirectly of the whole or any part of the income or assets to the transferor, or

(ii) it, in any way, gives the transferor a right to reassume power directly or indirectly over the whole or any part of the income or assets;

(b)''transfer'' include any settlement, trust, covenant, agreement or arrangement.

Income of individual to include income of spouse, minor child, etc.-- (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly--

(i) to (iv) ******

(v) subject to the provisions of clause (i) of section 27, in a case not falling under clause (iii) of this sub-section, 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;

(vi) to (vii) ******

Arguments have been addressed before us on behalf of the revenue attempting to bring the present case--and, therefore, every case of loan--under each one of the provisions contained in sections 60 and 61 particularly by taking advantage of the enlarged definitions of "transfer" contained in section 63(b) and of revocability contained in section 63(a) These are arguments with far-reaching consequences and we do not find it necessary to express any opinion on these contentions as the present case can be disposed of on a short ground. In our opinion, the whole clue to the present case is provided by finding out whether the basis on which the assessee has tried to support the transaction is maintainable in law. Admittedly, this is a case where interest has accrued to the minor on moneys which have been transferred to him by the assessee and then deposited on behalf of the latter which the ICC. The various entries to which we have made reference clearly show this. Prima facie, therefore, this is a case where income has arisen to the minor son from assets transferred directly or indirectly by the father to his minor son within the meaning of section 64(1)(v). The assessee attempts to get out of this provision by pleading that this is not a case of transfer of assets because the assessee had only agreed to land the moneys to the minor child. A loan, it is argued, cannot be said to be a transfer, reliving on R. K. Murthi Vs. Commissioner of Income Tax, Madras, Assuming that the assessee is well-founded in this contention, the point for consideration is whether it can be said in the present case that there is a transaction of loan between the assessee and the minor son and it is here we think that the assessee''s contention fails to come through.

A transaction of a loan implies an agreement to repay the money that is borrowed. Shri Harihar Lal cited a definition of "loan" from Corpus Juris Secundum (vol. 54, p. 654). According to this passage a loan of money is defined as "a contract by which one delivers a sum of money to another and the latter agrees to return at a future time a sum equivalent to that which be borrows"; and again as "the delivery by one party and the receipt by the other party of a given sum of money on an agreement, express or implied, to repay the sum lent with or without interest". These definitions can be accepted as succinctly summarising or analysing the ingredients of a loan. They are in line with the definitions enunciated by our Supreme Court in Lakshmanier & Sons v. CIT [1953] 23 ITR 202, Badridas Daga Vs. The Commissioner of Income Tax, and other cases. They make it clear that a loan involves an enforceable agreement between two parties, one of whom is the lender and other the borrower. The former lends moneys to the latter. The latter receives the sum and promises to repay it by an equivalent amount at a future date with or without interest. The essence of a loan is a contract. In our opinion, in the present case, there can be no loan because there can be no contract between the two parties in question. If the transaction is viewed as a loan of money by the assessee to his minor son that is clearly unenforceable. It is settled law that a contract by a minor is void. There can, therefore, be no lawful agreement between the assessee and the minor son whereby the latter can be bound to repay the amount which he has borrowed from the father. The transaction, therefore, cannot be viewed as a loan between the father and the minor son. Nor can the transaction be viewed as one of loan by the father in his individual capacity to himself acting as the guardian of the minor son. It is quite true, as Shri Harihar Lal points out, that the law recognises different capacities in which an individual can function. An individual may act in certain matters in his own individual capacity. He may act as an agent or a trustee or a guardian or a partner or a shareholder or a director and so on. But the concept of "capacity" cannot be equated to a concept of "legal personality". A contract of loan requires two persons. There cannot be a loan by the same person to himself merely because he functions in two different capacities. Just as there cannot be a contract of a partnership between a person in his individual capacity and in his capacity as a trustee-- MOHANLAL Vs. SHYAMLAL., , there can be no transaction of loan by the assessee to himself In this context the following passage from Salmond''s Jurisprudence (12th edn., p. 304, para 65) is quite instructive:

English law recognises many different capacities in which a man may act. Often he has power to do an act in an official or representative capacity when he would have no power to do the act in his private capacity or on his own account. All sorts of difficult questions arise out of these distinctions: for instance, whether a person on a particular occasion was acting as trustee for fund A or as trustee for fund B; whether a director has the powers and duties of a trustee whether an executor has turned into a trustee and so on. These troubles need not concern us here; the only point to be noticed is that the mere fact that a man has two or more capacities does not give him the power to enter into a legal transaction with himself. Double capacity does not connote double personality. For instance, at common law a man could not sue himself, or contract with himself, or convey property to himself; and it made no difference that he was acting on each side in a different capacity. So rigorous was the rule that, if the same party appeared on both sides of a contract, even though accompanied by different parties in each case, the whole contract was void. In many cases the rule worked hardship and its consequences had to be mitigated....

The learned author proceeds to refer to a few situations for which statutes make specific provisions in order to get over the above difficulty in principle. In the present case, there are no such specific statutory provisions and the question has to be decided as matter of general jurisprudential principle as to whether a loan, as contended for by the assessee, can be read into the present transaction. The answer to this, we think, can only be in the negative.

No doubt, when the assessee, in his capacity as the guardian of the minor, utilises his own funds and the minor as a result thereof obtains certain advantages it may be that the father might be able to recover the amount from the assets of the minor after the minor has become a major on several equitable grounds. The minor may then have to choose between accepting the transaction and returning the amount or foregoing the amount of interest which he has earned and benefited from in the course of the years. In law there may be various types of recourse available to a creditor in order to recover moneys which might have been utilised for the benefit of a minor or which might have become part of his assets. There may be several grounds on which such action could be founded but contract is not one of them. It is not possible for the father either to sue himself for the recovery of the amount during the minority of the minor or to sue the minor for the recovery of the amount on the basis of a contract. The transaction in law cannot be described as a transaction of loan.

It appears to us that once the case put forward by the assessee and his attempt to have this transaction considered as a transaction of loan is rejected, the assessee can have no basis on which he can resist the inclusion of the interest income in his assessment. There is a clear transfer of moneys by the assessee to the minor son. This transfer and the deposit of those moneys with ICC are transactions effected by the same individual contemporaneously. The moneys transferred to the minor were intended to be deposited with ICC to earn interest and were so deposited immediately on their receipt from the assessee. The interest has, therefore, been earned by the minor from assets transferred by the father to him. We are, therefore, of opinion that the view taken by the Tribunal cannot be accepted and the Question referred to us should be answered in the negative and in favour of the revenue. The revenue will be entitled to its costs: counsel''s fee Rs. 250.