Case: S.P. Jaiswal and Ors Vs. Commissioner of Income Tax

3. The assessee is the Managing Director of the Karnal Distillery Company Limited, Karnal. As per the books of accounts of the company said assessee had a deposit of Rs. 1,74,639.00 on 3.4.1962. The aforesaid amount was debited to the credit of Messers Modern Property Dealers, Karnal, the partnership firm consisting of two sons and daughter of the assessee. The said partners had l/3rd share each in the partnership. The aforesaid amount was shown to the credit of three partners in equal shares, in the books of accounts of Messers Modern Property Dealers. On 1.4.1963 the aforesaid amount was shown in the accounts of Messers Modern Property Dealers to have returned to the assessee and further on the very same day it was also shown that the assessee gave the said amount as loan equally to the three partners of the Messers Modern Property Dealers. During the Assessment Year 1963-64, the assessee had shown the interest derived from the aforesaid so-called loan amount in his return but later on a revised return was filed deleting the aforesaid amount. The Assessing Officer, however, came to the conclusion that the interest derived from the aforesaid amount has to be taken as an income of the assessee and accordingly the assessment order was passed. The assessee challenged the said order in appeal before the Income Tax Appellate Commissioner and then in second appeal before the Tribunal but lost in the forums. The assessee approached the Tribunal for making a reference under Section 256(1) of the Act and the Tribunal having declined, the assessee got the matter referred to by approaching the High Court under Section 256(2) of the Act.4. So far as the subsequent assessment years, however, the Assessing Officer came to the conclusion that the interest income derived has to be assessed in the hands of the assessee and infact no loan had been advanced by the assessee to his children who were said to be the partners of the firm - Messers Modern Property Dealers and the Appellate Assistant Commissioner also confirmed the order of the Assessing Officer. The Tribunal, however, came to the conclusion that the transaction dated 1.4.1963 not being benami in nature, the interest income derived from the said amount cannot be said to be the income of the assessee, and therefore, the said amount cannot be taxed in the hands of the assessee. The Tribunal did consider the earlier order in relation to the assessment year 1963-64 and had held that for that year the assessee himself having indicated in the return filed that the interest income is his income was not entitled to later on wriggle out of the same and for this reason the amount had been taxed in the hands of the assessee. But the Tribunal did make a reference at the instance of the Revenue on being moved under Section 256(1) of the Act as already stated. The High Court on analysis of the entire material came to hold that the transaction cannot be termed to be benami and will not attract the provisions of Section 60 of the Act. The court then on re-examining the facts and circumstances under which the amount of Rs. 1,74,639.00 was transferred to the names of two sons and daughter of the assessee came to hold that the said transaction cannot be considered to be a genuine loan, and therefore, the interest derived from the said amount could be taxed in the hands of the assessee under Section 61 of the Act. With this conclusion the questions posed for different years having been answered in favour of the Revenue and against the assessee, the assessee has moved this Court.

Court's reasoning:
10. The assessee also relied upon the decision of this Court in the case of Commissioner of Income-tax, Punjab, Jammu And Kashmir, and Himachal Pradesh v. 5. Raghbir Singhwherein the question for consideration was whether the assessee who had created a trust in respect of the shares which he had obtained in the partition of the family could be taxed on the income derived from such settlement under the provisions of the first proviso to Section 16(1)(c) of the Indian Income Tax Act, 1922 and this Court came to the conclusion that the assessee not having obtained any benefit from the trust and the trust having been created to discharge an obligation that was on the assessee, the assessee could not have been taxed under Section 16(1)(c) of the Indian Income Tax Act, 1922 as the income from shares would not be deemed to be the income of the assessee. The aforesaid conclusion of this Court was on account of the terms and conditions of the trust deed and it was found that the assets and the income were unmistakably impressed with the obligations arising out of the trust deed. We fail to understand how this decision is of any assistance to the assessee in the case in hand.in the case of Commissioner of Income-tax v. Smt. Pelleti Sridevamma [1995]216ITR826(SC) ,but in the said case Clause (iv) of Section 64(1) of the Income Tax Act, 1961 came up for consideration as to whether in computing the total income of an individual all income which arises directly or indirectly to a minor child can be included or not. It is in that connection this Court had explained the true meaning of the expression that the income must be proximate as observed in Prem Bhai Parekhs case, [1970]77ITR27(SC) : [1970]77ITR27(SC) . But in the case in hand we are not really concerned with Section 64(1) of the Act and the case is, therefore, of no direct assistance.14. In view of the aforesaid decision of this Court, the assessees contention that the children of the assessee have been taxed in respect of the income accruing from the amount is of no relevance. It may be stated at this stage that Mr. Rammurthi, appearing for the Revenue fairly stated that there is no bar for a father to advance loan to his children for carrying on their business and such loan or the income arising from such loan cannot be taxed in the hands of the father but he reiterated that in the case in hand in fact no loan had been advanced and it was merely a paper device invented by the assessee to reduce the tax liability. It would be apt. at this stage to quote the observations of Lord Macmillan in the case of Chamberlain v. Inland Revenue Commissioners (1943) 25 Tax Cas. 317, 329.This legislation is designed to overtake and circumvent a growing tendency on the part of taxpayers to endeavour to avoid or reduce tax liability by means of settlement. Stated quite generally, the method consisted in the disposal by the taxpayer of part of his property in such a way that the income should no longer be receivable by him, while at the same time he retained certain powers over, or interests in, the property or its income. The Legislatures counter was to declare that the income of which the taxpayer had thus sought to disembarrass himself should, notwithstanding, be treated as still his income and taxed in his hands accordingly.15. And this Court in the case of Tulsidas Kilachand and Ors. v. Commissioner of Income-tax, Bombay City [1961]42ITR1(SC) had held that the aforesaid observations apply to the provisions of Indian Income Tax Act and Section 16 thereof which has been enacted with the intent and for the same purpose. Chapter V of the Indian Income Tax Act, 1961 is also designed for the same purpose, and therefore, the aforesaid observations in Chamberlains case (supra) would also apply.16. Admittedly, the transaction between the assessee and the partners of the firm constituted by his children, and the so-called return of money on 1.4.1963 in the books of accounts of the firm of children and re-transfer of the same amount in the names of the children in the books of accounts of the assessees firm is nothing but a paper device designedly made to reduce the tax burden of the assessee and by no stretch of imagination can be held to be a loan transaction by the assessee in favour of his children. This is also apparent from the inconsistent stand taken by the children in the affidavits filed in this Court. Such a paper transaction intended merely to reduce the tax liability and cannot be held to be a loan nor the High Court in the circumstances can be said to have exceeded its advisory jurisdiction in answering the question posed.