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

V. 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 income tax Act, 1961 (''the Act''), 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 individual 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 sections 24(1)(vi) and 27(i) of the Act. All the authorities, including the 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 its opinion on the admissibility of the deduction claimed in the assessments for 1967-68 and 1970-71, the interest payment deductions being at Rs. 4,274 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 in interest amounting to Rs. 4,274 and Rs. 7,778 for the assessment years 1967-68 and 1970-71, respectively, on moneys 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 arguments 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 Act. u/s 64(1)(iv) and (v), what is to be included in the assessee''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 of income, such as income from business, income from securities, income from house property and so on. Hence, for the purpose of applying section 64, 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 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 sections 19 to 21 of the Act. In this case, the assets transferred by the assessee to his wife and minor children happen to be items of house property. It follows, therefore, that in applying section 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 sections 22 to 27 of the Act grouped under sub-Chapter C of Chapter IV. Section 22 provides that the income under the head ''Income from house property'' shall be taken to be the annual value of the property. Section 23 provides how annual value has got to be determined. Section 24 sets down various deductions from the annual value. Clause (vi) of section 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 concurred 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 section 24 (1)(iv) 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 borrowing. This construction follows on the wording of section 24(1)(iv) in the context of the charge u/s 22. But section 22 and 22 (1)(iii) cannot be read in isolation. In the context of the present case, section 27(i) must also be read as part of the provisions of sections 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 be ''deemed'' to be the owner of the house property so transferred for the purposes of sections 22 to 26. As if this were not enough, it is further enacted in section 64(1)(iv) and (v) that these provisions will have to be read subject to section 27(i). The Tribunal overlooked 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 house had to be included in the assessee''s total income u/s 16(3) of the Indian income tax Act, 1922 (''the 1922 Act''). The Court, however, observed that the measure of the income so to be included would be subject to the first provision of section 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 percent of the owner''s total income. In the 1922 Act, there was no provision comparable to section 27(i) of the 1961 Act. 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 percent of that total income. According to the learned Judges, the limitation under the proviso to section 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 percent of the assessee''s total income, because it was in his total income the said property income was to be included by the application of section 16(3). The following passage from the Court''s judgment contains the basis of their reasoning:

...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 Ganesan''s case (supra), however, need some explanation. The following is one:

...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:

...It may be said in a manner of a 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 income tax Act, 1961. As we earlier mentioned, one is section 27(i) which deems the property income of the transferee u/s 64(1)(iv) and (v) to be the property income of the transferor for the purposes of computation. The other is section 64(1)(iv) and (v) which on the language of these very clauses is expressly made subject to the provisions of section 27(i).

The principle in Ganesaris case (supra) 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 judicially noticed the Madras High Court''s 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 u/s 16(3)(a) (iii). The question was whether the first proviso to section 9(2), which places a ceiling on property income at 10 percent 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 inter-relation between section 16(3)(a) (iii) of the 1961 Act and section 9 of the 1922 Act in the following passage:

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 purposes mentioned in section 16(3)(a) (iii), income from that source 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....

The Supreme Court proceeded to observe:

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 percent of the total income to 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 Maharaj Kumar Kamal Singh''s case (supra), the Supreme Court were engaged in construing and applying the relevant provisions of the 1922 Act, but they had occasion to refer to the comparable provisions of the 1961 Act, 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 broad approach of the Supreme Court in that decision to a consideration of the problem in the present case. We would construe section 24(1)(vi), section 27(i) and section 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 at interest was made by him and not by his wife and minor children.

Mr. Jayaraman, for the revenue, urged that section 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 to as to deem even the borrowing by the transfer or as a borrowing by the transferee. We do not think that the fiction in section 27(i) can be garbled in this manner. This provision has to be read with section 24(1)(vi) for purposes of application of section 64(1)(iv) and (v). This is not only because of the very force of section 27(i) but also because section 64 itself mentions section 27(i) in clauses (iv) and (v). On a combined application of all these provisions, we think the conclusion is inescapable that the transferor and the transferee u/s 64 are interchangeable expressions wherever appropriate provisions occur elsewhere in the Act and call for due application. It may be that section 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 any assets. But the fiction in section 27(i) which makes the transferor continue to be the owner of the assets transferred, itself comprehends the conception that the borrowing by the assessee must be so regarded and given effect to so 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 extent 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 the words ''subject to the provisions of clause (i) of section 27'' in section 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 deducibility 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 got 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 it would have been if no transfer at all was made in favour 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 section 64(1)(iv) and (v) and comparable provisions in the earlier 1922 Act, 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''s concerned in a much worse position than they would have been if they had not adopted those unavoidance measures. A Bench of this Court, while considering similar provisions in section 4(1)(a) of the Wealth-tax Act, 1957, referred to this aspect as an important factor in statutory construction S. Naganathan Vs. Commissioner of Wealth Tax, . They observed with reference to section 4 as follows:

.....Section 4 is thus intended only to prevent any evasion or avoidance of tax by resorting to transfers and taking the properties out 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 what 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 u/s 5(1)(iv) of the Wealth-tax Act to a residential house property for the simple 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 section 4(1)(a). In the course of the judgment, the Court discountenanced the idea that granting the exemption u/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 statute.

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 borrow ed 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 u/s 64 (1)(iv) and (v), sections 24(1)(vi) and 27(i).

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 provisions of section 52(2) cannot be invoked in the assessee''s case to tax the 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 favour of the assessee and against the depart ment. The assessee will have his costs. Counsel''s fee Rs. 500 (one set).