1. In this case, eight applications under s. 256(1) of the IT Act, 1961 were made by the assessee and the other eight applications were filed by the CIT (Central), Bombay. On these applications, the following questions have been referred to us for our determination in this reference under 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 asst. yrs. 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 under s. 64 of the IT Act, 1961 and that the assessee could not claim for adjustment or 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 firm 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 asst. yr. 1963-64 to 1970-71 ?
The first two questions have been referred to us at the instance of the assessee and that third question has been referred to us at the instance of the Commissioner.
2. As far as question No. 3 is concerned, it is common ground that it is covered againsttt the revenue and in favour of the assessee by the decision of a Division Bench of this Court in IT Ref. No. 50 of 1967 decided by Tulzapurkar and Desai, JJ. on 16-12-1976 (The CIT (Central) Bombay v. Shri Tolaram Jalan, Bombay and Ors.) 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.
3. The assessee in an individual and the assessment years involved are 1963-64 to 1970-71, both inclusive. The relevant accounting periods are the accounting years S. Ys. 2018 to 2025. The assessee borrowed certain amounts from Messrs. 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 Messrs. Amarchand Dharamchand being on account of interest payable on the amounts borrowed. The assessee claimed these amounts as deductions permissible under s. 57(iii) of the IT Act, as being the expenditure paid out and expended for the purpose of earning income chargeable under the head 'Income from other source'. The ITO 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 Messrs. Amarchand Dharamchand had been utilised. The assessed filed appeals againsttt the decisions of the ITO to the aforesaid effect in the said assessment years. The assessee placed before the AAC the details of investments which show that a part of these amounts had been invested by the assessee in purchasing shares in his own name and the balance for purchasing shares in the names of his wife and minor son respectively as set out above. The AAC found that the assessee had utilised a part of the borrowings from Messrs. 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 his wife and minor son were concerned he allowed deduction of interest only againsttt 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 under s. 64. This decision of the - AAC was confirmed by the ITAT 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.
4. The submission of Mr. Dalvi, ld. 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 s. 64(iii). The provisions of s. 64(iii) r/w other relevant provisions of the IT Act 1961, show that, for the purposes of the IT Act the income of the wife and the minor son form 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 IT Act, 1961. Sec. 57 of that Act deals with deductions. The relevant portion of that section, at the relevant time, ran as follows :
'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 portion of s. 64, as it stood at the relevant time, read thus :
'(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 cl. (i) of s. 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 cl. (i) of s. 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
Explanation. - .........................'
We find that the question before us has been dealt with by the judgment of a Division Bench of this Court in Kevalchand Nemchand Mehta v. CIT (Central), Bombay : 67ITR804(Bom) . The law applicable in that case was the Indian IT Act, 1922. But we find that the principle laid down in that decision are clearly applicable to the case before us. The facts in that case were that on 16-12-1955 (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 a debit balance againsttt 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 asst. yr. 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 IT 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' in as much as s. 12(1) of the Indian IT Act, 1922 clearly treats an income which was included in the assessee' income which was included in the assessee's income as his income. The interest earned on the accounts 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 s. 12(2) of that Act was fulfilled and the assessee was entitled to set-off the interest paid to the firm againsttt the interest earned from the company. The relevant portion of s. 12 of the Indian IT Act, 1922 was 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 againstt of every kind which may be included in his total income (if not included under any of the proceeding heads.)
The relevant portion of s. 16 of the IT Act, 1922 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 -
xx xx xx(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 with the relevant provision of s. 57 and s. 64 to which we have referred earlier, they are pari materia. In fact, it appear that the provisions of s. 64 are similar to the provisions of s. 16(3) of the said Act of 1922. Although it is not specifically stated as to under what head the income referred to in s. 64 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 different view than the one which we have taken, be cause, 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 such, but was liable to be included in his taxable income for the purposes of the IT 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.
5. Mr. Jetly, ld. 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 (supra). 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 difference of facts, which are bound to occur between case and case are 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 divided, but not in a case like this where no dividend had become payable. We are at a total loss to understand this argument. If an 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 a close proximity in a case where the shares in which the said amounts were invested earned a divided, but that close proximity would case 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.
6. 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 he questions are answered in favour of the assessee.
Commissioner to pay the costs of this reference to the assessee.