1. These appeals by the revenue are directed against the orders of the Commissioner (Appeals) deleting the disallowance made under Section 40(b) of the Income-tax Act, 1961 ('the Act') in respect of the firm and also deleting the corresponding additions made in the hands of the partners.
2. The admitted facts are as follows: The firm called 'Mangalore Ganesh Beedi Works' was constituted with 13 partners. Of them, five partners, namely, Shri M. Ananda Rao, Shri M. Vishwanatha Rao, Shri M. Suresh Rao, Shri M. Janardhana Rao and Shri M. Vinoda Rao, had withdrawn the funds lying in the capital account of the firm which were not earning any interest and advanced the same to their respective wives, minor children and joint families at a nominal interest of 1 per cent per annum. Thereafter the same funds were deposited with the firm by the wives, minor children and joint families, and the firm has paid interest to them at the rate of 15 per cent per annum.
3. The contention of the revenue was (a) that a loan transaction is a transfer within the meaning of Section 64(1)(vii) of the Act so that the income accruing therefrom was to be taken as the income of the partner himself, (b) that under Section 64(2) the income accruing to the joint family should be deemed to have accrued to the partner, (c) in the alternative, the loan was not a transfer at all so that the income accruing to the wives, minor children and joint families should be deemed to be the income of the partners under Section 64(1), /60 of the Act, and (d) consequently, Section 40(b) applied to the facts of the case and the income which accrued or should be deemed to have accrued to the partner should be added to the income of the partner and, consequently, should be disallowed in computing the total income of the firm.
4. We find that these contentions had been raised in the case of one of the partners Shri M. Anandarao for the assessment years 1969-70 and 1970-71 and when the matter came up before the Tribunal in IT Appeal Nos. 415 and 416 (Bang.) of 1971-72, the Tribunal by its order dated 1-8-1972 rejected all these contentions. Although we allowed the revenue to argue the case elaborately, we are not persuaded to differ from the decision of the Tribunal cited above. It is also pertinent to note that that order has become final since the revenue had not challenged it by way of a reference. Since the partners had advanced the money in consideration of the payment of interest of 1 per cent there is obviously no transfer without consideration in respect of which Section 64 could apply. Similarly, there is no transfer of the income alone within the meaning of Section 60, because the interest of 15 per cent which accrued to the wives, minor children and joint families could not have been transferred by the partners as it did not exist at the time of the granting of the loan and there could be a transfer only of an existing property and not a future property. Hence, we are convinced that apart from the reasons given in the order of the Tribunal, the contentions of the revenue for applying the provisions of Sections 64 and 60 are untenable.
5. In the alternative, it was contended by the revenue that at least in respect of granting of a loan by the individual partner to his minor children and his joint family where there were no other adult coparceners, the transaction was itself non est in law, because a loan envisages a contract between two persons, and in the situation where there were no such two persons existing, there could not be such a contract and, hence, the alleged loan itself was invalid in law.
Reliance was placed on the decision of the Delhi High Court in the case of CIT v. Mridu Han Dalmia  133 1TR 550. Reliance was also placed on the observations in Salmond's Jurisprudence, Twelfth edn., p. 304, paragraph 65 to the effect that a man having two or more capacities does not have the power to enter into a legal transaction with himself.
But, as pointed out on behalf of the assessees, this statement of the English law may not be appropriate to the Indian scene. Under Section 5 of the Transfer of Property Act, 1882, transfer of property means an act by which a living person conveys property in present or future, to one or more other living persons or to himself and one or more other living persons. Since it is statutorily recognised that a person can transfer a property to himself obviously in different capacities, the transaction of a loan by the individual partner to his minor children or to the HUF cannot be disregarded. He contracts with himself on behalf of the minors to repay the amount with interest and certainly, the minors could enforce such contract when they come of age especially when the transaction is for their benefit. There seems to be no legal disability in the transaction and, hence, it cannot be ignored as non est.
6. The last argument of the revenue was that since there appeared to be a scheme to avoid the application of Sections 40(b) and 64 and thereby reduced the incidence of tax, the entire transaction should be viewed as one carried out by the partner himself and the income as accruing to the partner completely disregarding the transaction carried out by him and others. This argument has only to be stated to be rejected because there is no provision in the Indian income-tax law analogous to the Australian law whereby, merely because the incidence of tax is reduced by arranging the affairs of the assessee in a particular manner, such a transaction could be ignored to impose a higher burden on him. Quite the contrary, it is well recognised that the assessees in India could lawfully arrange their affairs in such a manner as to reduce the incidence of tax. It is not the case of the revenue that these transactions were either sham or fraudulent, in which event alone those transactions could be avoided by the revenue. Nor is it the case of the revenue that the wives, minors or the joint families were the benamidars of the individual partners since there is no material to suggest that the income accruing to them were, in fact, enjoyed by the individual partners. In the circumstances, we are convinced that in spite of the valiant efforts of the revenue, the orders off the Commissioner (Appeals) deleting the additions made to the total income of the individual partners have to be confirmed.
7. In the case of a firm, the provisions of Section 40(b) could be applied only if it is established that income arose to the partner.
When, in fact, we have found that income accrued only to the wives, minors and joint families, such income could not be taken to be interest paid to the partner so as to apply the provisions of Section 40(b). Explanations 2 and 3 have been introduced to Section 40(b) only to set at rest such a controversy as noticed by the Andhra Pradesh High Court in the case of N.T.R.'s Estate v. CIT 22 Taxman 194. It could be that income accruing to the spouse may be added to the total income of the individual partner under Section 64, but it remains the income of the spouse and not that of the individual partner so that even in such a case, the provisions of Section 40(b) cannot be applied.
Disallowance made under Section 40(b) includes interest paid to the wife of another partner Shri M. Ramanath Shenoy in whose individual case, there is no appeal and, hence, the position in his assessment is not clear. The facts as obtaining in the case of the firm learly rule out the applicability of Section 40(b) even in respect of interest paid to his wife. In the circumstances, we have to confirm the orders of the Commissioner (Appeals) deleting the disallowance made under Section 40(b) also.