S.M.A. Siddique vs Commissioner of Income Tax, Madras

Balasubrahmanyan, J.—This tax reference concerns a claim for deduction of interest in the computation of the property income of an

assessee''s wife and minor children which is included as part of the assessee''s total income. The facts are not in dispute. The assessee, one

Siddique by name, borrowed money at interest and with the aid of the borrowed money purchased items of house property in the names of his

wife and his minor children intending those acquisitions to be for their absolute benefit. Section 64(1)(iv) and (v) of the I.T. Act, 1961, lays down

that in computing the total income of an individual, there shall be included any income arising directly or indirectly from assets which that individuals

has transferred directly or indirectly to his wife or minor children, otherwise than for adequate consideration. Apparently because of the wide

language of this provision, the assessee, in this case, did not object to the inclusion in his own assessment of the income from the house properties

purchased by him in the names of his wife and minor children. He, however, made a claim that in the computation of the income so included, the

interest paid by him on money borrowed for the purchase of the house properties was admissible deduction. For claiming this allowance the

assessee relied on s. 24(1)(vi) and s. 27(i) of the Act. All the authorities, including the Income Tax Appellate Tribunal, rejected the claim for

deduction.

In this reference brought at the instance of the assessee, this court''s advisory jurisdiction has been invoked to express it opinion on the

admissibility of the deduction claimed in the assessments for 1967-68 and 1970-71, the interest payment deduction being Rs. 4,270 and Rs. 7,778

respectively. The following question of law brings out the point at issue clearly

Whether, on the facts and in the circumstances of the case, the assessee was entitled to a deduction of interest amounting to Rs. 4,270 and Rs.

7,778 for the assessment years 1967-68 and 1970-71, respectively, on monies borrowed against the income from property included in the

assessee''s hands u/s 64 of the Income Tax Act, 1961, for these two years ?

The question provoked a wide range of argument on both sides with profuse citation of case law. We, however, feel that the discussion turns

within a narrow compass, and on certain basic provisions of the I.T. Act. Under s. 64(1)(iv) and (v) of the Act, what is to be included in the

assesee''s total income is ""income"" from assets transferred by him to his spouse and minor children. This provision is necessarily general in

character. It applies to transfers of any and every kind of income-yielding assets. The assets may be shares and securities; they may be other

movables; or they may be items of immovables such as house property; what is to be included in the transferor''s total income is the income arising

from the assets transferred, whatever the nature of the assets be. Under the scheme of the Act, ""Income"" is classified, for purposes of computation,

under several heads, such as income from

business, income from securities, income from house property, and so on. Hence, for the purpose of applying s. 64 of the Act, the income from the

transferred assets, which has to be included in the transferor''s total income, will have to be computed according as the income to be so included

falls under one or the other of the (several) heads of income. For example, if the transferred assets are securities, then the interest income derived

from the transferred securities will have to be computed in accordance with the relevant provisions in ss. 19 to 21 of the Act. In this case, the

assets transferred by the assessee to his wife and minor children happened to be items of house property. It follows, therefore, that in applying s.

64(1)(iv), and (v),the income from the house properties in question will have to be arrived at by applying the computation provisions falling under

the head, ""Income from house property."" This computation is governed by ss. 22 to 27 grouped under sub-chapter C of Chap. IV. Section 22

provides that the income under the head ""House property"" shall be taken to be the annual value of the property. Section 23 provides how the

annual value has got to be determined. Section 24 sets down various deductions from the annual value. Clause (vi) of s. 24(1) lays down that

where the house property had been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest

payable on such capital, shall be an admissible deduction. It is under this operative provision that the assessee in this case claimed to deduct the

interest of Rs. 4,274 and Rs. 7,778 for the two years in question.

There can be no doubt that these two amounts represent interest on money borrowed for the acquisition of the house properties. Nevertheless,

the Tribunal concerned with the departmental view that interest should not be allowed, because the borrowing in question happened to have been

effected, not by the assessee''s wife or his minor children who are the owners of the house property, but by the assessee. There might have been

something to be said for this view of the Tribunal if s. 24(1)(vi) were to be read alone. For, since the income to be computed is income from the

house property owned by the assessee, the interest on borrowing also would fall to be allowed only if the owner of the property had effected the

borrowings. This construction follows on the wording of s. 24(1)(vi) in the context of the change under ss. 22. But s. 22 and 24(1)(vi) cannot be

read in isolation. In the context of the present case, s. 27(i) must also be read as part of the provisions of ss. 22 and 24(1)(vi). Section 27(i)

declares that an individual who transfers otherwise than for adequate consideration any house property to his spouse or to his minor child shall be

deemed"" to be the owner of the house property so transferred for the purposes of ss. 22 to 26 of the Act. As if this were not enough, it is further

enacted in s. 64(1)(iv) and (v) that these provisions will have to be read subject to s. 27(i). The Tribunal had overloaded all these relevant and

important provisions.

In R. Ganesan Vs. Commissioner of Income Tax, Madras, , one Ganesan, being assessed to Income Tax in the status of an individual, gave a

gift to his wife of Rs. 75,000 for constructing a house for herself. This court held that the income from the house had to be included in the

assessee''s total income under s. 16(3) of the Indian I.T. Act, 1922. The court, however, observed that the measure of the income so to be

included would be subject to the first proviso to s. 9(2) of that Act. This proviso laid down that the income from house property in the occupation

of an owner shall, in no case, exceed 10% of the owner''s total income. In the Indian I.T. Act, 1922, there was no provision comparable to s. 27(i)

of the I.T. Act, 1961. Nevertheless, the court held that the income from property which is transferred to the assessee''s wife or minor child and

which has to be included in the assessee''s total income cannot exceed 10% of that total income. According to the learned judges, the limitation

under the proviso to s. 9(2) was a ceiling on the income from the house property which has been transferred to the wife or minor child without

adequate consideration. The court held that this ceiling must be applied with reference to 10 per cent. of the assessee''s total income, because it

was in his total income the said property income was to be included by the application s. 16(3) of the Act. The following passage from the court''s

judgment contains the basis of their reasoning (p. 419) :

We are unable to see how in so far as the assessment of the assessee is concerned or the computation of his total income by the application of

section 16(3) of the Act, requires, any higher income in respect of the property could be brought in, than what the law by a particular mode of

computation determines as the income from that property. Whether it is in the assessment of the owner of the property or the assessment of the

assessee in respect of the income from that property by reason of section 16(3) of the Act, the mode of determination of the income from the

property is equally applicable.

Two other passages from the court''s reasoning in R. Ganesan Vs. Commissioner of Income Tax, Madras, , however need some explanation.

The following is one (p. 417) :

Firstly, we may point out that it is not a deemed income at all that is dealt with u/s 16(3), that is to say, the law does not say that the income of the

wife shall be ''deemed'' to be the income of the assessee. What in effect it provides for is that an income received by the wife in certain

circumstances shall be taxed in the hands of the assessee.

In a subsequent passage in the same judgment, however, the learned judges observed (p. 417) :

It may be said, in a manner of speaking that the income of the wife is deemed to be that of the husband, but the section itself does not say so.

We may reconcile the above two passages by saying that the court had in those passages fairly anticipated the two new provisions which have

been enacted in the present I.T. Act, 1961. As we earlier mentioned, one is s. 27(i) which deems the property income of the transferee under s.

64(1)(iv) and (v) to be the property income of the transferor for the purpose of computation. The other is s. 64(1)(iv) and (v) which on the

language of these very clauses is expressly made subject to the provisions of s. 27(i).

The principle in R. Ganesan Vs. Commissioner of Income Tax, Madras, , has been upheld by a later decision of the Supreme Court in

Commissioner of Income Tax, Bihar and Orissa Vs. Maharaj Kumar Kamal Singh, , arising under the 1922 Act, although the Supreme Court have

not judicial noticed the Madras decision. The assessee before the Supreme Court was the holder of an impartible estate.He gave to his wife, as a

grant, a residential house in Calcutta. The point arose in the computation of that house property income in connection with inclusion in the

impartible holder''s income under s. 16(3)(a)(iii). The question was whether the first proviso to s. 9(2), which places a ceiling on property income

at 10 per cent. of the assessee''s total income, would apply to such a case. The Supreme Court answered the question in the affirmative. In the

course of their judgment, the Supreme Court dealt with the interrelation between s. 16(3)(a)(iii) and s. 9 of the Indian I.T. Act, 1922, in the

following passage (p. 5) :

Section 9 deals with only one head of income. Prior to the transfer by the assessee, he, in law, would have been considered as the owner of those

premises for purposes of ascertaining his income from house property and that income would have been taken into account in computing his total

income. In other words, in ascertaining the total income of the assessee for the purpose of assessment that income also would have entered into the

calculation... It must be remembered that an assessee is not separately taxed under each head of income. Hence when a source of income is

transferred by the assessee to his wife, excepting for the two purpose mentioned in section 16(3)(a)(iii), income from that sources has to be

considered as the income of the assessee because an asset of the assessee stands transferred to his wife. Such a conclusion does not amount to

extending the fiction created u/s 9 beyond the purpose for which it is created. It merely gives effect to that fiction.

Supreme Court proceed to observe (p. 6) :

In view of our conclusion that the income of the house property in question should be included in the total income of the assessee, it follows as a

necessary corollary that the annual value of the assessee''s residential house has to be computed at 10% of the total income of the assessee which

income, as already held, includes the income from the house properties transferred to his wife as required by the 1st proviso to section 9(2).

We regard this judgment of the Supreme Court as authority for two important fiscal conceptions relating to the tax treatment of income from

assets transferred to a spouse or a minor child of the assessee. In the first place, the income from the assets transferred must be regarded in the

same way as it would be if the assets had not been transferred. Secondly, the computation of the income from the assets transferred must not lose

sight of the fact that such income has to figure as part of the transferor''s total income.

In Commissioner of Income Tax, Bihar and Orissa Vs. Maharaj Kumar Kamal Singh, , the Supreme Court were engaged in construing and

applying the relevant provision of the Indian I.T. Act, 1922, but they had had occasion to refer to the comparable provision of the I.T. Act, 1961,

as being more or less in the same pattern. Although the observations of the Supreme Court had relevance only to the assessment of the holder of

an impartible estate in the context of a transfer of assets by him to his wife, we would, with respect, follow the board approach of the Supreme

Court in that decision to a consideration of the problem in the present case. We would construe s. 24(1)(vi), s. 27(i) and s. 64(1)(iv) and (v) not

dealing with each one of them in isolation, or in a hyper-literal sense, but on the wholesome manner of interpretation followed by the Supreme

Court. This method would unmistakably lead us to the conclusion that the assessee in this case must be entitled to the deduction of interest in the

computation of the income from property transferred to his wife and minor children, notwithstanding the fact that the borrowing on interest was

made by him and not by his wife and minor children.

Mr. Jayaraman, for the Revenue, urged that s. 27, in terms, only introduces a limited fiction which went no further than to deem the assessee as

the owner of the assets transferred by him to his wife or minor child. He said that the language of the statutory fiction cannot be extended so as to

deem even the borrowing by the transferee. We do not think that the fiction in s. 27(i) can be garbled in this manner This provisions has to be read

with s. 24(1)(vi) for purpose of application of s. 64(1)(iv) and (v). This is not only because of the very force of s. 27(i), but also because s. 64

itself mentions s. 27(i) in cls. (iv) and (v). On a combined application of all these provisions, we think the conclusion is inescapable that the

transferor and the transferee under s. 64 are interchangeable expressions wherever appropriate provisions occur elsewhere in the Act and call for

due application. It may be that s. 27(i), in terms, does not say that the borrowing by the assessee shall be deemed to be the borrowing by the wife

or minor child to whom the assessee transfers the assets. But the fiction in s. 27(i) which makes the transferor continue to be the owner of the

assets transferred, itself comprehends the conception that the computation of the income from the house property transferred by the assessee to his

wife or minor child is arrived at precisely, in the same manner and to the same extends as it would be if the assessee had not transferred the

property at all to the wife or minor children. On no other terms can be words ""subject to the provisions of clause (i) of s. 27"" in s. 64(1)(iv) and (v)

be given effect to. If, instead of borrowing money and purchasing house property for his wife and minor children, the assessee had utilised the

borrowed funds for purchasing the house properties for his own benefit, there can hardly be any doubt about the deductibility of the interest on

borrowed capital in the computation of income from house property as part of the assessee''s total income. The Department''s contention is that

while the factum of transfer of the assets by the assessee to his wife and minor children should be ignored for assessment purposes and the income

must be included in the assessee''s total income, the same has go to be looked at differently, when it comes to a question of deduction. This way of

approach really would find the assessee in a much worse position with a transfer of the assets than what it would have been if no transfer at all was

made in favor of his wife and minor children. It would also equate the position of the Revenue to the proverbial horse which would open its mouth

for horse feed but not for the bridle. In our judgment, the whole rationale behind s. 64(1)(iv) and (v) and comparable provisions in the earlier

Indian I.T. Act, 1922, is to act as an anti-tax avoidance measure. The intention obviously was that an individual assessee ought not to be allowed

to create separate subjects of charge to Income Tax with the attendant consequences of taxation at lower average rates, by the simple expedient of

transferring assets to his wife and minor children. The provisions enacted by the Legislature are intended to neutralise the tax effect of avoidance

transactions. They were, by no means, meant to put the assessee concerned in a much worse position than they would have been if they had not

adopted those avoidance measures. A Bench of this court, while considering similar provisions in s. 4(1)(a) of the W.T. Act, 1957, referred to this

aspect as an important factor in statutory construction : Vide S. Naganathan v. CWT [1957] 101 ITR 287. They observed, with reference to s. 4

of the W.T. Act, 1957, as follows (p. 290) :

Section 4 is thus intended only to prevent any evasion or avoidance of tax by resorting to transfers and taking the properties to of the provisions of

the Act. If the intended purpose of section 4(1) is to be achieved, the transferor shall not be allowed to be in a better position than what he would

have been if he had not resorted to such a fraudulent transfer.... But we are not persuaded to hold that by this provision Parliament intended that

the transferor should be put under a worse position or shall be subjected to more liability than that he would have been if the transfer had not taken

place.... Unless there is the clear indication in the provisions of the Act itself, we cannot assume that Parliament intended to impose more onerous

obligation on the assessee than he would have been but for the transfer.

These observations were prompted by a refusal by the wealth-tax authorities in that case to grant an exemption under s. 5(1)(iv) of the W.T.

Act to a residential house property for the simples reason that the property in question in that case had been transferred by the assessee to his wife,

without consideration, and it was included in the total wealth of the assessee only by virtue of the provisions of s. 4(1)(a). In the course of the

judgment, the court discountenanced the idea that granting the exemption under s. 5(1)(iv) to the assessee in that case would amount to extending

the statutory fiction for various other purposes in addition to the one for which it was created. It was, on the contrary, observed that the court was

not extending the fiction beyond the purpose for which it was created by the statue.

The principle of this decision was followed in a later decision of this court in V. VAIDYASUBRAMANIAM Vs. COMMISSIONER OF

WEALTH-TAX, MADRAS., .

For the reasons stated above, we must answer the question of law referred to us by holding that the assessee was entitled to a deduction of the

interest on the money borrowed by him, in the computation of the income from house properties in the names of the assessee''s wife and minor

children, for purposes of inclusion in his total income under s. 64(1)(iv) and (v), s. 24(1)(vi) and s. 27(i) of the Act.

One other question which we are asked to consider in this reference relates to the assessment of capital gains in the assessee''s hands. The

relevant question is as follows :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of section 52(2) cannot be

invoked in the assessee''s case to tax a sum of Rs. 43,000 as capital gains for the assessment year 1970-71 ?

It is unnecessary to go into a detailed discussion for an answer to this question, because the matter is concluded not only by two decisions of

this court in Commissioner of Income Tax Vs. Rikadas Dhuraji and Another, and ADDITIONAL COMMISSIONER OF Income Tax,

MADRAS Vs. P. S. KUPPUSWAMY AND OTHERS., , but by a more recent decision of the Supreme Court in K.P. Varghese Vs. Income

Tax Officer, Ernakulam and Another, .

In the result, the reference is answered in favor of the assessee and against the Department. The assessee will have his costs. Counsel''s fee Rs.

500 (one set).