1. This is an appeal filed by Justice G. Ramanujulu Naidu against the order of the AAC for the assessment year 1981-82.
2. The appellant is a HUF and Shri G. Ramanujulu Naidu, who is a Judge of the High Court, is its karta. A plot admeasuring 1,198 sq. yds. in Jubilee Hills was purchased from Co-operative Housing Society for Rs. 9,452 by a sale deed executed on 2-2-1980. A house at a cost of Rs. 2,24,000 (excluding land) was constructed between 3-12-1979 and 10-12-1980. The sources of investment were as under: Rs.Sale of Salur property belonging to family 15,000Loan amount obtained by the karta as housing loan fromthe Government 80,000Amount withdrawn from the Government provident fundby the karta 37,693Loan from Miss G. Purnima (daughter of Shri G. RamanujuluNaidu) 6,350Loan from Smt. G. Ramadevi (wife of Shri G. RamanujuluNaidu) 66,675Moneys provided by Shri G. Ramanujulu Naidu out of DAarrears, savings and agricultural income 20,000 The property was shown as belonging to the family and a loss of Rs. 4,255 (revised) was returned therefrom. The ITO presumed blending of personal funds and was of the view that the income from the property was to be treated as belonging to the individual Shri G. Ramanujulu Naidu inasmuch as Rs. 80,000 (housing loan from the Government), Rs. 37,693 (GPF amount) and part of Rs. 20,000 (DA arrears and agricultural income) emanated from the karta, admittedly, out of his individual funds. The assessee's plea that it was in the nature of loan and did not constitute blending was found unacceptable, because the ITO was of the view that housing loan, GPF advance and savings out of arrears were personal funds of the karta and that the use of the funds in an admittedly family investment constituted 'transfer' within the meaning of Section 64(2) of the Income-tax Act, 1961 ('the Act'). All the same, the ITO completed the assessment as a 'protective one' considering the entire income in the assessee's hands. Interest of Rs. 6,298 in respect of alleged loan by the karta to the extent of Rs. 80,000 was disallowed in this assessment with the result that the income came to be computed at Rs. 2,430.
3. The first appellate authority, on the assessee's appeal, upheld the ITO's view that Section 64(2) was attracted 'for the reasons stated by the ITO in the assessment order at issue'. However, he held that there was no justification for considering that the entire income from the property was includible in the hands of individual. After finding that Rs. 12,500 out of Rs. 20,000 supplied by the karta would represent savings from salary and DA arrears, he worked out personal moneys at Rs. 1,30,193 and balance of Rs. 1,04,977 to be treated as moneys from the HUF (either as family moneys or borrowings by the family). This ratio was approximately 26:21. He was of the view that 26/47ths part of the property income is liable to be assessed in the hands of the individual under Section 64(2). The assessee was not satisfied with this relief and has come up in second appeal.
4. In the second appeal, the assessee reiterates the consistent stand that the karta has not 'blended' or otherwise 'transferred' his personal funds to the family and has always considered the same as a loan by him in his individual capacity to the family. He has categorically stated so in his letter dated 22-7-1982. Shri Y.V.Anjaneyulu, the learned Counsel for the assessee, pointed out that the assessee's letter dated 20-2-1982 giving the details of the sources, has clearly demarcated personal and family funds while pointing out that the building was treated as that of the family by the assessee.
The only two other adult male members of the family were associated with the mortgage of the house against housing loan. The house was leased out to the Government in his capacity as the karta of the family as is evident from the lease deed. Insurance for the house was also done in the same capacity. The property income is credited to a bank account in the name of the family. The karta is not disputing and cannot dispute; that the property belongs to the family as there is ancestral nucleus. He has also returned the income as that of the family. At the same time, he has in his second letter, in response to a specific enquiry, has categorically stated that the moneys provided by him out of his personal funds continued to belong to him in his individual capacity. He claimed that the affidavits filed by the sons in connection with house mortgage also amply confirm the assessee's stand. He cited authorities for the proposition that the property can only be family property in view of ancestral nucleus. Since there was no blending, he argued that Section 64(2) had no application. He also sought to develop a theory on the basis of some authorities that where there is blending at source, there is no impressing the property with joint family character so as to attract Section 64.
5. Shri S.R. Deshpande, the learned departmental representative, claimed that the housing loan was personal to the karta. It cannot be diverted for family investment. Mortgage deed in respect of the property pursuant to the terms of the loan also indicated only this.
The fact that the sons filed affidavits offering additional security, according to him, was a gratuitous act which had no legal effect. He claimed that in these circumstances, the karta continued to be owner of the property or, at least, a co-owner to the extent of his contribution. In that case, the income is assessable in individual hands either wholly or to the extent confirmed by the first appellate authority. Alternatively, there is clear blending or transfer to justify the application of Section 64(2). He pointed out that Section 64(2) contemplates 'converting' of personal property into family property either by "impressing such separate property with the character of property belonging to the family or throwing it into common stock of the family" or even by 'transferring' by the individual to the family 'directly or indirectly'. These words are of widest import and would, according to the learned departmental representative, comprehend the type of arrangement in the assessee's case. He was also not impressed by the argument that there was an arrangement in the nature of loan as between the karta in his individual capacity and his sons as members of the family. There could not be an enforceable contract when the same person acts in two capacities. In this proposition, he was supported by the decision of the Delhi High Court in the case of CIT v. Mridu Hari Dalmia  133 ITR 550. The learned departmental representative also laid great stress on the decision of the Punjab and Haryana High Court in S.P. Jaiswal v. CIT  130 ITR 643 where it was held that a transfer by the assessee to his wife and children in the facts and circumstances of the case constituted an arrangement to be treated as transfer within the meaning of Section 63(b) of the Act, though described as advance.
6. The learned Counsel for the assessee, in reply, claimed that it is futile to argue that there was no enforceable loan arrangement as in this case the agreement to return the amount is between the karta and his two adult sons as is implicit in their affidavits regarding mortgage. He further distinguished the Delhi High Court decision by pointing out that it was a case of actual transfer of moneys banked in the name of the minor. Although he had serious misgiving about the correctness of the proposition, if it is taken to be wide enough to stipulate that there can never be any transaction in the nature of a loan between two entities where the same person is entitled to act on behalf of both, and that, if there is, such a person cannot get the money back. He pointed out that such is not the import of the decision which, according to him, was rendered in the context of the facts in that case. He pointed out that the very decision referred to an earlier decision of the Madras High Court in the case of R.K. Murthi v. CIT  42 ITR 379, where it was pointed out that the loan cannot be treated as a transfer. This was also, according to him, an answer to the argument of the learned departmental representative based on the Punjab and Haryana High Court's decision in S.P. Jaiswal's case (supra).
7. We have carefully considered the records as well as the arguments.
The return was filed by the family. It disclosed a loss from property at Rs. 4,255 (revised). The ITO, by disallowing the interest amount in respect of Government housing loan of Rs. 6,298, converted it into income of Rs. 2,430 which was below the taxable limit. The assessment was stated to be a protective one. A protective assessment implies an undertaking on the part of the ITO to modify the same in line with the principal assessment when that reaches finality. It is for this reason that no appeal need be filed by an assessee against such a protective assessment especially when, in a case like this, there is also no demand. Even when a protective assessment comes up in appeal, it normally does or should come along with the principal assessment so that they travel together in appeal and thereby inconsistent or contradictory positions in two different assessments are avoided. The difficulty about taking up a protective assessment in appeal before the principal assessment is that the finding in the protective assessment is not strictly binding on the ITO making the principal assessment with the result that it may turn out to be a needless exercise. There cannot also possibly be an appeal where the income offered by the assessee is accepted since the assessee cannot be aggrieved with such an order.
However, in this case, we are informed that the principal assessment, i.e., the assessment of the karta in his individual capacity is yet to be made. We are informed that the ITO has not taken up the individual assessment awaiting the outcome of these proceedings. There is also a dispute about admissibility of deduction of Rs. 6,298 being interest on the Government housing loan and this dispute will require independent consideration. The first appellate authority has also dealt with the issue on merits. It is under these circumstances that we are deciding this appeal against a protective assessment on merits.
8. There were arguments by both sides on the question whether the property belongs to the Hindu joint family. The assessee points out that there had admittedly been ancestral nucleus. The assessee has acquainted the Government that the loan has been utilised in investment treated as family investment by associating his adult sons, Shri G.Venkata Ramana Murthy and Shri G. Pardesi Naidu, who are the only other two male members in the family, in the bond for securing repayment of the loan. The lease document and the insurance policy both indicate that Shri Ramanujulu Naidu has acted as the owner of the property in his capacity as the karta of the Hindu joint family. The rental income has also been credited in a separate bank account under the name and style of the assessee as a joint family. The property income has also been returned by the assessee in the capacity of the karta of the Hindu joint family describing the status of the assessee as such. Neither the ITO nor the AAC appear to dispute the claim that it is joint family property. The very fact that Section 64(2) is sought to be invoked shows that the departmental contention is that there is conversion of separate funds into joint family property or that there is transfer of such funds to the joint family. It is also pertinent to point out that the revenue has not come in appeal against the order of the first appellate authority holding that only a part of the family income attributable to investment by the karta from separate funds is excludible in the assessee's hands by application of Section 64(2) which authorises the assessment of such income in the hands of the person converting or transferring his separate assets into family assets. Hence, there cannot be any dispute at this stage on the fact that it is family property. It is in this context that we are unable to appreciate the argument of the learned departmental representative that the loan being personal to him, as is evident from the normal conditions of housing loan advanced to the Government servants and mortgage deed, the property should be treated as belonging to the assessee personally. In the first place, it is a matter between Shri Naidu and the Government as to how the Government loans are utilised.
Secondly, we are not aware of any prohibition to the Government servant not to use the proceeds of loan for building the house for the benefit of family. After all, Sri Naidu had made no secret of the use of the funds as his communications to the Government at the time of mortgage show. Thirdly, even assuming that there is any irregularity in this regard, it cannot vitiate the personal right of a Hindu under the Hindu law to make investments on behalf of the family with or without use of his individual funds. Hence, nothing turns on the fact that the loan was given to Shri Ramanujulu Naidu in his individual capacity when we consider the question whether the property belongs to the family or the individual. Since there is an ancestral nucleus and the property has also been treated as joint family property consistently in respect of borrowing from the Government, in respect of lease of property to the Government, in respect of insurance of the property to the insurer and in respect of enjoyment of income in the family account, there cannot be any doubt that it is family property. There is, therefore, no possibility of considering the property either as individual or property co-owned by the individuals constituting the family.
9. Hence, the only issue to be considered is whether there has been conversion or transfer of individual, property to the family so as to attract application of Section 64(2) with the consequence that a part of the income attributable to funds so converted or transferred will become assessable in the hands of individual and, therefore, excludible in the hands of the assessee. Section 64(2) reads as under: Where, in the case of an individual being a member of a Hindu undivided family, any property having been the separate property of the individual has, at any time after the 31st day of December, 1969, been converted by the individual into property belonging to the family through the act of impressing such separate property with the character of property belonging to the family or throwing it into the common stock of the family or been transferred by the individual, directly or indirectly, to the family otherwise than for adequate consideration (the property so converted or transferred being hereinafter referred to as the converted property), then, notwithstanding anything contained in any other provision of this Act or in any other law for the time being in force, for the purpose of computation of the total income of the individual under this Act for any assessment year commencing on or after the 1st day of April, 1971,-- (a) the individual shall be deemed to have transferred the converted property, through the family, to the members of the family for being held by them jointly; (b) the income derived from the converted property or any part thereof shall be deemed to arise to the individual and not to the family; (c) where the converted property has been the subject-matter of a partition (whether partial or total) amongst the members of the family, the income derived from such converted property as is received by the spouse or minor child on partition shall be deemed to arise to the spouse or minor child from assets transferred indirectly by the individual to the spouse or minor child and the provisions of Sub-section (1) shall, so far as may be, apply accordingly: Provided that the income referred to in Clause (b) or Clause (c) shall, on being included in the total income of the individual, be excluded from the total income of the family or, as the case may be, the spouse or minor child of the individual.
'property' includes any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale thereof and where the property is converted into any other property by any method, such other property.
It is clear that the section contemplates aggregation of income attributable either to conversion by impressing the separate property with joint family character or throwing it into common stock. Either of these processes is often described as 'blending'. For and from 1980-81, this provision authorises aggregation where there is also a transfer without consideration (gift) as it was realised that Section 64(2), as it stood, covered only unilateral act of conversion and left a loophole inasmuch as gifts by karta or members to the family had been omitted to be covered. The result is that aggregation is now possible of family income in individual hands to the extent there is either blending or gift of separate property. We have now to consider whether the amounts of Rs. 80,000 (Government loan), Rs. 37,693 (provident, fund withdrawals) and Rs. 12,500 (savings from salary and allowances) used by the assessee in construction of property fall into either the category of blending or gift so as to attract the application of Section 64(2). It may be that the affidavits of sons while binding themselves voluntarily for repayment of the loan, do not categorically state that they or the joint family were under obligation to return the amount to their father in their proportionate shares. But such a statement was not necessary in the context it was made. It is also true that the assessee had not spelt out the nature of the transaction clearly as loan in his first letter, dated 20-2-1982, where he was more concerned with answering the ITO's query as to the source of funds. It is, however, seen that this letter nowhere suggests blending or gift.
When the ITO specifically asked the assessee as to the precise nature of the transaction, the assessee had clearly stated that it was intended to be in the nature of a loan by him to the family. It is true that this was stated clearly only in the second letter and that the assessee had not clearly demarcated the separate and family funds in respect of an amount of Rs. 20,000 (out of which Rs. 12,500 was estimated by the first appellate authority as personal). But that does not, in our opinion, justify rejection of the assessee's case on facts.
In matters like this, where the karta deals with the affairs of family involving his sons (in contradistinction to brothers), it is not reasonable to expect him to decide immediately as to how he is going to treat the funds advanced by him to the family. As for Rs. 80,000, the Government loan, it does appear that he expected to clear it out of the income from property itself. The fact that the sons filed affidavits and were sought to be made parties to the mortgage though not called upon to do so either by the rules or otherwise, in our opinion, clearly indicates that the loan though personal to the karta was being directed along with obligation to return the same with interest to the family.
The position regarding the other amounts drawn from savings or provident fund also does not appear to be otherwise. It must be remembered that once the statement is made that the family has obligation to return his personal funds, it has consequences in respect of the karta's liabilities of other direct taxes inasmuch as it will be his wealth for wealth-tax purposes as long as the obligation continues and liability to gift-tax will arise if such obligation is waived with obvious consequences for estate duty purposes as well. It is because we have an integrated scheme of taxation. In other words, the authorities may not be justified in taking too narrow a view and reject the assessee's statement as to his precise relationship with his family members merely because the rate of tax on such income for income-tax purposes will be somewhat less in the near future. Again, when a taxpayer claims that he has advanced the money as a loan and not by way of blending or gift, we do not think that such a claim should be disbelieved merely because the immediate tax effect of such a claim appears to be slightly adverse to the revenue. When a person gives his personal funds either to family or a stranger for an investment, the normal presumption, we should imagine, is that such funds are liable to be returned and not meant to be appropriated. There is no material in this case to rebut such normal presumption.
10. There are also certain other aspects of Hindu law which require consideration. What constitutes blending is a matter which has been well settled.
Property which was originally the separate or self-acquired property of a member (coparcener) of a joint family may, by operation of the doctrine of blending, become joint family property, if it has been voluntarily thrown by him into the common stock with the intention of abandoning all separate claims upon it. . . . [Emphasis supplied] (Article 227 of Mulla's Hindu Law, 15th edn., p. 295).
It further proceeds to state: ". . . .A clear intention to waive his separate rights must be established, and it will not be inferred from the mere fact of his allowing the other members of the family to use it conjointly with himself nor from the fact that the income of the separate property was used to support a son nor from the mere failure of a member to keep separate accounts of his earnings . . . ." (Section 227 of Mulla's Hindu Law, pp. 295-96) 15th edn.
The clear intention of waiver as a pre-condition of blending was recognized by the Supreme Court in the case of Lakkireddi Chinna Venkata Reddi V. Lakkireddi Lakshmana AIR 1963 SC 1601. In the case of B. Subha Reddy v. B Nagi Reddy  AAP 184, mere description of the property as 'our property', it was held, did not spell out such intention of abandonment of separate right. The Andhra Pradesh High Court in Venkataraju v. Yedukondalu  AAP 147, pointed out that the burden of proving such blending is a heavy one. In the assessee's case, the karta has clearly stated that he intends to treat it as a loan. There is also no other circumstance to show that he had intended blending. Even the adult sons have no say in the matter and their acknowledgement actually obtained in respect of a loan of Rs. 80,000 is not really necessary because Shri Naidu's intention alone is relevant.
If he has no intention of abandoning his separate rights, the mere fact that the funds went to finance the property partly would not lose him his right to recover such moneys or to appropriate the income from the property or such other funds of the family for recouping his personal funds in his capacity as the manager of the family. It is for this reason, we are not impressed by the argument of the authorities that there has been blending merely because the funds have been physically mixed, while the act of blending under Jaw would require mental intention to abandon separate rights. At the same time Section 64 would get attracted even if there be transfer without consideration, i.e., gift. Transfer is a bilateral act where there is also a donee. There is nothing in Hindu law which prohibits a Hindu from making a gift of his separate property to the family. But the gift also involves the same requirement of the donor giving up his right over the property gifted.
The only difference between blending and gift is that one is unilateral while the other is not. Since the karta in this case has asserted his right to recoup himself and this right has not been disputed by any member of the family, there is neither blending nor gift so as to attract Section 64(2) in the facts and circumstances of the assessee's case.
11. We have yet to meet two more objections to our conclusion. The first one is that there cannot be an enforceable contract of loan between one and the same person in two capacities as observed by the Delhi High Court in the case of Mridu Hari Dalmia (supra). It was a case where funds had been transferred to a minor and invested in his name. Application of Section 64 was resisted on the ground that the transfer was for adequate consideration as the moneys were advanced not as a gift but as a loan. The revenue questioned the genuineness of the claim itself. The High Court found that there was transfer of funds by way of issue of cheques which were encashed and that there was no enforceable contract in the nature of loan as the minor by himself had no contracting capacity and that the guardian who is the father cannot enter into a contract with himself in two capacities, one as individual in his own right and the other as guardian of minor child. In the assessee's case the moneys belonging to the individual were utilised for investment in property held by such individual in his name but in his representative capacity as the karta and manager of the family. The question of 'transfer' itself, therefore, does not arise and, hence, the further question whether it was for adequate or inadequate consideration becomes academic. Secondly, it is the assessee's case that the karta and the two other male members, who are adults, have understood the arrangement to be a loan as is evidenced by the affidavits of the members filed in connection with mortgage of the house unlike the situation in the case before the High Court where the alleged transaction was between father in his own capacity with himself as guardian of the minor who has no capacity of his own to contract.
Thirdly, we find it difficult to accept that the decision lays down a general proposition that there could be no advance of moneys between two distinct entities merely on the ground that only one person was competent to bind both. In other words, it cannot be said that as a general rule a karta, a father, a guardian or a trustee cannot lend to the family, minor son, ward or a beneficiary, respectively, and that, if it is done, it would amount to abandonment of such moneys in favour of the latter. The High Court itself observes that even in case of non-enforceable loan contract, it may be possible for the lender to recover moneys lent by other modes or processes of law. Lastly, we are of the view that there should be conscious abandonment of separate rights or clear intention to waive the right to recover the moneys to constitute blending or gift within the meaning of Section 64(2). The absence of an enforceable loan agreement, even if it is presumed to be not enforceable for whatever reason, does not, therefore, ipso facto, attract the aggregation provision in Section 64(2).
12. The other argument is that, in view of the decision of the Punjab and Haryana High Court in S.P. Jaiswal's case (supra) even a loan would constitute an arrangement which would attract the application of the provisions of Section 64. Firstly, the view that even a loan would attract this provision is contrary to the generally accepted view that 'a mere loan or advance is not a transfer of assets' within the meaning of Section 64. The decision of the Madras High Court in the case of R.K. Murthi (supra), taking this view, had not been taken up by the revenue to the Supreme Court and, to our knowledge, this view has not been challenged in any other case before any other High Court.
Secondly, Section 64(2) is an independent clause which deals with conversion of individual property to family property. Such conversion should be by impressing the separate property with joint family character or by throwing such separate property into common stock. No doubt transfer without adequate consideration was also added as another mode of such conversion with effect from the assessment for the assessment year 1980-81. But in all these cases, the conscious abandonment of separate right is the pre-condition for the application of the aggregation provision where conversion is involved. Even for gift, intention to make gift is necessary. If there is no such conscious abandonment or intention to gift, Section 64(2) cannot apply whatever may be the position of law as far as aggregation provisions under other clauses of the section are concerned. Thirdly, the definition of 'transfer' so as to include 'any settlement, trust, covenant, agreement or arrangement' in Section 63 is, as stated in the section itself, for the purposes of Sections 60, 61 and 62 dealing with revocable transfers and irrevocable transfers for periods less than the specified period and not for purposes of transfer under Section 64. In the case before the Punjab and Haryana High Court, the 'loan' arrangement itself was not considered to be genuine and, at any rate, the issue before the High Court was whether it was a transfer within the meaning of Section 60 and/or Section 61 to which provisions the extended definition of 'transfer' in Section 63(b) applied. Hence, the definition of transfer in Section 63(b) cannot be given any extended meaning for purposes of Section 64(2). For purposes of Section 64(2), transfer should be a transfer within the meaning of general law. The argument of the revenue, that it could be an indirect transfer overlooks the fact that there should still be a transfer though the destination may be an indirect one.
13. The only other dispute relates to the question of deducibility of interest amount of Rs. 6,298 on Rs. 80,000 against property income. It is the assessee's case that the assessee-family has undertaken to pay the interest out of its income. The other members have agreed to the same. The income is separately credited in a separate account in the name of the family in a bank and that interest is expected to be paid from such account. It is the revenue's case that Shri Naidu has diverted his personal loan to family. It, therefore, follows that either the loan has been adopted by the family as its own or that it has obtained the amount on condition that it pays as interest an amount equivalent to the amount payable by him. In either case, the amount having been utilised for construction of the property, the interest thereon is deductible under Section 24(1)(vi) of the Act. Hence, consistent with our finding that there has been no abandonment of separate rights of the karta in respect of moneys advanced or diverted out of his personal funds, interest admittedly payable thereon has to be allowed as a deduction.
14. In the result, the appeal is allowed. The entire income from the property is assessable in the hands of the assessee-family. The assessee will be eligible for deduction of Rs. 6,298 under Section 24(1)(vi).