1. This income-tax reference at the instance of the Commissioner of Income-tax raises an interesting question. It arises out of the assessment of Shri Mirdu Hari Dalmia (hereinafter referred to as 'the father father') for the assessment year 1970-71, the corresponding previous year for which ended on March 31, 1970.
2. While completing the assessment of the father for the assessment year in question, the ITO noticed that a sum of Rs. 3,542 had been earned by way of interest on a deposit of Rs. 40,000 made with the Industrial Credit Company Ltd. (ICC, for short) in the name of the assessed's minor son, Gaurav Dalmia (hereinafter referred to as 'the minor son'). There was an account of the minor in the books of the father. This showed various amounts as having been advanced by the father to the minor son from time to time. The father had issued cheques in favor of the minor son as follows :
3. A sum of Rs. 16,000 had been shown as returned by the minor son on September 3, 1969, leaving a balance of Rs. 40,000, as remaining due from the minor son to the father as on March 31, 1970. These cheques were immediately deposited in an account in the name of the minor son with the Dena Bank Ltd. Cheques in favor of ICC were made out on this bank account as below :
4. The following amount had been received back from the ICC :
5. Rs. 6,000 on 22-06-1969 26 22-06-1969 26 ,000 on 03-09-1969
6. It will be seen that the deposit of Rs. 30,000 with the ICC had been made out of the sum of Rs. 37,000 given by the assessed; the deposit of Rs. 14,000 on May 7, 1969, included the sum of Rs, 13,000 given by the assessed; the sum of Rs. 21,000 had been deposited on June 9,1969, out of Rs. 25,000 given by the assessed and other amounts received by the minor by way of dividends; and Rs. 3,000 had been deposited on October 27,1969, utilising the sum of Rs. 1,000 given by the assessed along with certain other sums such as interest on deposits, dividends, sale proceeds of shares, etc., standing in the name of the minor. The ICC issued cheques for Rs. 3,681.91 during the financial year 1969-70 in favor of the minor which were credited to his accounts with the Dena Bank and the Bank of Tokyo - out of this, a sum of Rs. 3,452 has been taken as the interest attributable to the funds derived from the father and this is not in dispute.
7. The ITO was of opinion that the deposits with the ICC had been made out of the monies belonging to the assessed and that, thereforee, the interest thereon belonged to him though shown as having accrued or arisen to the minor. He, thereforee, included the interest in the assessed's total income.
8. On behalf of the assessed, it was claimed that the interest earned by the minor on the deposits could not be included in the assessed's total income as the concerned deposits had been made not by the assessed but by the minor out of monies which had been lent to him free of interest by his father. It was urged that the assessed, as the guardian of the minor son, had full power to act for his benefit : that having regard to the statutory provisions contained in ss. 60 to 64 of the I. T. Act, 1961, he had so arranged matters that the transaction did not fall within the purview of these section, and that, thereforee, the interest could not be included in his hands. The ITO did not accept this version of the assessed. He pointed out that the transaction did not reflect a 'loan', particularly a there could be no relationship of lender and borrower between the assessed and his minor son. According to him, the theory of a 'so-called' advance or loan by the father to the minor son was merely a make believe, a sham and colourable transaction, a collusive arrangement and a farce. The assessed had only attempted by a device to evade the proper levy of tax. It was open to the fixing authorities to unravel the device employed by the assessed and determine the true character of the relationship. Having regard to the facts here, the minor son was not the real owner of the deposits but was only a benamidar or nominee of the assessed. In this view of the matter, the ITO included in the assessment of the father the sum of Rs. 3,542 which had arisen by way of interest on the deposits with the ICC.
9. The assessed preferred an appeal to the AAC. But the appeal was not successful. The AAC was of the view that since a minor cannot be a party to a contract of loan, the ITO's conclusion that the entire transaction was in the nature of a collusive arrangement was well borne out by the facts. The act of advancing an amount free of interest to the minor and the act of depositing the same amount in a company in which the assessed was a director were interconnected and inter-related acts which formed part of the same transaction. The essence of the whole transaction was that moneys belonging to the assessed had been deposited with a company of which the assessed was a director in the name of his minor son, the minor son's name being but in merely to show that the deposit belonged to him whereas in fact it did not.
10. The assessed preferred a further appeal to the Income-tax Appellate Tribunal (ITAT) and this time he was successful. The ITAT repelled the contentions of the departmental representative that the assessed's version of a loan to the minor son could not be accepted because the assessed could not possibly contract with himself, that in any case even the loan was a 'transfer' within the meaning of s. 64, and that, in any case, (even if) the interest was earned in the name of the minor son from the assets which were not transferred by the assessed and was, by virtue of s. 60, assessable in the father's hands. The Tribunal viewed this as an instance of tax-planning by the assessed. It held that there was nothing to stop the assessed from transferring some of his funds to himself as the guardian of the minor by way of loan which being free of interest was clearly not to the detriment of the minor. There was no suggestion that any part of the interest was enjoyed or utilised by the assessed himself for his own benefit and so it was not possible to treat the minor as the assessed's benamidar in regard to this amount. Section 64 did not apply to the case because there was no transfer of ownership or title to the assets in question. Section 60 was also not applicable despite the extended definition of the word 'transfer' as given in s. 63(b) because it was not possible to read in a transaction of loan any 'settlement, trust, covenant agreement or arrangement' in respect of the income derived from the investment of the loan. It was pointed out that the guardian of the minor could have kept the amounts borrowed from the father idle at home or invested the same in unproductive investments or frittered them away. The transaction could not be so stretched as to mean that there was an agreement or arrangement whereby some income was to be derived there from and that the income was to be appropriated by the minor at the behest or according to the wishes of the lender. The Tribunal held that, as between the assessed and his minor son, it was a transaction of loan and there was no question of any agreement or arrangement and, thereforee, s. 60 was not applicable to the transaction.
11. The Commissioner has come up to this court on a reference and at his instance the Tribunal has referred for our decision the following question of law :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the interest of Rs. 3,542 was not assessable in the hands of the assessed ?'
12. It is necessary, at the outset, to dispose of one of the contentions raised by Shri Wazir Singh, learned counsel for the department. He contended that the transaction should be considered as a simple case of investment by the assessed benami in the name of his minor son. He characterised the alleged version of a loan having been advanced to the son as totally incredible and unacceptable. According to him all the relevant entries in the books and the balance-sheet were sham and collusive and had to be ignored. We are, however, unable to entertain this contention. As pointed out by Sri Harihar Lal, the learned counsel for the assessed, the Tribunal has found the transaction to be genuine and characterised it as a legitimate attempt at tax avoidance. This finding of fact by the Tribunal has not been challenged by the department by seeking a reference of an appropriate question of law as to be supported by entries in the accounts of the minor appearing in the assessed's books. There is also on record a balance-sheet of the various transactions of the minor son. These documents show that the minor son had not only these items of the transactions but also several others. he had also his own sources of income. The resources of the minor could legitimately be operated upon by the assessed as the natural guardian of the minor son and this is what is reflected by the accounts. In these circumstances, the finding of the Tribunal that the assessed had indeed purported to lend the sums in question to his son is a finding of fact which is no longer in issue and we are concerned in this reference only with the legal consequences flowing from such a transaction.
13. We shall extract the relevant statutory provisions to give an idea of the background against which the arguments have been addressed :
'60. Transfer of income where there is no transfer of assets. - All income arising to any person by virtue of a transfer whether revocable or not and whether revocable or not and whether effected before or after the commencement of this Act shall, where there is no transfer of the assets from which the income arises, be chargeable to income-tax as the income of the transferor shall be included in his total income.
61. Revocable transfer of assets. - All income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income-tax as the income of the transferor and shall be included in his total income.
62. Transfer irrevocable for a specified period. - (1) The provisions of section 61 shall not apply to any income arising to any person by virtue of a transfer -
(i) by way of trust which is not revocable during the lifetime of the beneficiary, and, in the case of any other transfer, which is not revocable during the lifetime of the transferee; or
(ii) made before the 1st day of April,. 1961, which is not revocable for a period exceeding six years :
Provided that the transferor derives no direct or indirect benefit from such income in either case.
(2) Notwithstanding anything contained in sub-section (1), all income arising to any person by virtue of any such transfer shall be chargeable to income-tax as the income of the transferor as and when the power to revoke the transfer arises, and shall then be included in his total income.
63. 'Transfer' and 'revocable transfer' defined. - For the purposes of section 60, 61 and 62 and of this section, -
(a) a transfer shall be deemed to be revocable if -
(i) it contains any provision for the retransfer directly or indirectly of the whole or any part of the income or assets to the transferor, or
(ii) it, in any way, gives the transferor a right to reassume power directly or indirectly over the whole or any part of the income or assets :
(b) 'transfer' includes any settlement, trust, covenant, agreement or arrangement.
64. Income of individual to include income of spouse, minor child, etc. -
(1) In computing the total income any individual, there shall be included all such income as arises directly or indirectly -....
(v) subject to the provisions of clause (i) of section 27, in a case not falling under sub-clause (iii) of this sub-section, 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;....'
14. Arguments have been addressed before us on behalf of the revenue attempting to bring the present case - and, thereforee, every case of loan - under each one of the provisions contained in s.. 60 and 61 particularly by taking advantage of the enlarged definitions of 'transfer' contained in s. 63(b) and of 'revocability' contained in s. 63(a). These are arguments with far reaching consequences and we do not find it necessary to express any opinion on these contentions as the present case can be disposed of on a short ground. In our opinion, the whole clue to the present case is provided by finding out whether the basis, on which the assessed has tried to support the transaction, is maintainable in law. Admittedly, this is a case where interest has accrued to the minor on monies which have been transferred to him by the assessed and then deposited on behalf of the latter, with the ICC. The various entries to which we have made reference clearly show this. Prima facie, thereforee, this is a case where income has arisen to the minor son from assets transferred directly or indirectly by the father to his minor son within the meaning of s. 64(1)(v). The assessed attempts to get out of this provision by pleading that this is not a case of transfer of assets because the assessed had only agreed to lend the moneys to the minor child. A loan, it is argued cannot be said to be a transfer, relying on R. K. Murthi v. CIT : 42ITR379(Mad) . Assuming that the assessed is well founded in this contention, the point for consideration is whether it can be said in the present case that there is a transaction of loan between the assessed and the minor son and it is here we think that the assessed's contention fails to come through.
15. A transaction of a loan implies an agreement to repay the money that is borrowed. Shri Harihar Lal cited a definition of 'loan' from Corpus Jurisdiction Secundum (Vol. 54, p. 654). According to this passage a loan of money is defined as 'a contract by which one delivers a sum of money to another and the latter agrees to return at a future time a sum equivalent to that which he borrows'; and again as 'the delivery by one party and the receipt by the other party of a given sum of money on an agreement, express or implied, to repay the sum lent with or without interest'. These definitions can be accepted as succinctly summarizing or analysing the ingredients of a loan. They are in line with the definitions enunciated by our Supreme court (vide K. M. S. Lakshmanier and Sons v. CIT : 23ITR202(SC) , Badridas Daga v. CIT : 34ITR10(SC) and other Cases). They make it clear that a loan involves an enforceable agreement between two parties, one of whom is the lender and the other the borrower. The former lends monies to the latter. The latter receives the sum and promises to repay it by an equivalent amount at a future date with or without interest. The essence of a loan is a contract. In our opinion, in the present case, there can be no loan because there can be no contract between two parties in question. If the transaction is viewed as a loan of money by the assessed to his minor son that is clearly unenforceable. It is settled law that a contract by a minor is void. There can, thereforee, be no lawful agreement between the assessed and the minor son whereby the latter can be bound to repay the amount which he has borrowed from the father. The transaction, thereforee, cannot be viewed as a loan between the father and the minor son. Nor can the transaction be viewed as one of loan by the father in his individual capacity to himself acting as the guardian of the minor son. It is quite true, as Shri Harihar Lal points out, that the law recognises different capacities in which as individual can function. An individual may act in certain matter in his own individual capacity. He may act as an agent or a trustee or a guardian or a partner or a shareholder or a director and so on. But the concept of 'capacity' cannot be equated to a concept of 'legal personality.' A contract of loan requires two persons. There cannot be a loan by the same person to himself merely because he functions in two different capacities. Just as there cannot be a contract of a partnership between a person in his individual capacity and in his capacity as a trustee [vide Mohan Lal Shyam Lal's case : 10ITR219(All) ], there can be no transaction of loan by the assessed to himself. In this context the following passage from Salmond's Jurisprudence (12th Edn., p. 304, para. 65) is quite instructive :
'English Law recognises many different capacities in which a man may act. Often he has power to do an act in an official or representative capacity when he would have no power to do the act in his private capacity or on his own account. All sorts of difficult questions arise out of these distinctions : for instance, whether a person on a particular occasion was acting as trustee for fund A or as trustee for B; whether a director has the powers and duties of a trustee; whether an executor has turned into a trustee and so on. These troubles need not concern us here; the only point to be noticed is that the mere fact that a man has two or more capacities does not give him the power to enter into a legal transaction with himself. Double capacity does not connote double personality. For instance, at common law, a man could not sue himself, or contract with himself, or convey property to himself; and it made no difference that he was acting on each side in a different capacity. So rigorous was the rule that, if the same party appeared on both sides of a contract, even though accompanied by different parties in each case, the whole contract was void. In many cases the rule worked hardship, and its consequences had to be mitigated.'
16. The learned author proceeds to refer to a few situations for which statutes make specific provisions in order to get over the above difficulty in principle. In the present case, there are no such specific statutory provisions and the question has to be decided as matter of general jurisprudential principle as to whether a loan, a contended for by the assessed, can be read into the present transaction. The answer to this, we think, can be only in the negative.
17. No doubt, when the assessed, in his capacity as the guardian of the minor, utilises his own funds and the minor as a result thereof obtains certain advantages, it may be that the father might be able to recover the amount from the assets of the minor after the minor has become a major on several equitable grounds. The minor may then have to choose between accepting the transaction and returning the amount or forgoing the amount of interest which he has earned and benefited from in the course of the years. In law there may be various types of recourse available to a creditor in order to recover monies which might have been utilised for the benefit of a minor or which might have become part of his assets. There may be several grounds on which such action could be founded but a contract is not one of them. It is not possible for the father either to sue himself for the recovery of the amount during the minority of the minor or to sue the minor for the recovery of the amount on the basis of a contract. The transaction in law cannot be described as a transaction of loan.
18. It appears to us that once the case put forward by the assessed and his attempt to have this transaction considered as a transaction of loan is rejected, the assessed can have no basis on which to resist the inclusion of the interest income in his assessment. There is a clear transfer of monies by the assessed to the minor son. This transfer and the deposit of those monies with ICC are transactions effected by the same individual contemporaneously. The monies transferred to the minor were intended to be deposited with ICC to earn interest and were so deposited immediately on their receipt from the assessed. The interest has, thereforee, been earned by the minor from assets transferred by the father to him.
19. We are, thereforee, of opinion that the view taken by the Tribunal cannot be accepted and the question referred to us should be answered in the negative and in favor of the revenue. The revenue will be entitled to its costs. Counsel's fee, Rs. 250.