FIRST INCOME TAX OFFICER v. MANGALORE GANESH BEEDI WORKS
[Citation -1985-LL-0919-8]

Citation 1985-LL-0919-8
Appellant Name FIRST INCOME TAX OFFICER
Respondent Name MANGALORE GANESH BEEDI WORKS
Court ITAT
Relevant Act Income-tax
Date of Order 19/09/1985
Assessment Year 1977-78 TO 1980-81
Judgment View Judgment
Keyword Tags transfer of property • payment of interest • legal transaction • incidence of tax • loan transaction • nominal interest • capital account • interest paid
Bot Summary: The contention of the revenue was that a loan transaction is a transfer within the meaning of section 64(1) of the Act so that the income accruing therefrom was to be taken as the income of the partner himself, that under section 64(2) the income accruing to the joint family should be deemed to have accrued to the partner, 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 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 should be disallowed in computing the total income of the firm. Since the partners has advanced the money in consideration so the payment of interest of 1 per cent there is obviously no transfer without consideration in respect of which section 64 could apply. 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 a existing property and not a future property. The last argument of the revenue was that since there appeared to be a scheme to avoid that application of section 40(b) and 64 and thereby reduced the incidence of tax, the entire himself and the income as accruing to the partner completely disregarding the transaction carried out by him and others. In the circumstances, we are convinced that in spite of the valiant efforts of the revenue, the orders of the Commissioner deleting the additions made to the total income of the individual partners have to be confirmed. 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. Disallowance made under section 40(b) included interest paid to the wife of another partner Shri M. Ramanath Shenoy in whose individual case, there is no appeal and the position in his assessment is not clear.


These appeals by revenue are directed against orders of Commissioner (Appelas) deleting disallowance made under section 40(b) of Income-tax Act, 1961 ('the Act') in respect of firm and also deleting corresponding additions made in hands of partners. 2. admintted facts are as follows: firm called 'Mangalore Ganesh Beedi Works" was constituted with 13 partners. Of them, five parterns, namely Shri M. Anada Rao, Shri M. Vishwanatha Rao, Shri M Suresh Rao, Shri M. Janardhana Rao, and Shri M. Vinoda Rao, has withdrawn funds lying in capital account of firm which were not earning any interest and advanced same to their respective wives, minor children and joint families, at nominal interest of 1 per cent per annum. Thereater same funds we deposited with firm by wives, minor children and joint families, and firm has paid interest to them at rate of 15 per cent per annum. 3. contention of revenue was (a) that loan transaction is transfer within meaning of section 64(1) (vii) of Act so that income accruing therefrom was to be taken as income of partner himself, (b) that under section 64(2) income accruing to joint family should be deemed to have accrued to partner, (c) in alternative, loan was not transfer at all so that income accruing to wives, minor children and joint families should be deemed to be income of partners under section 64(1), /60 of Act, and (d) consequently, section 40(b) applied to facts of case and income which accrued or should be deemed to have accrued to partner should be added to income of partner and, consequently, should be disallowed in computing total income of firm. 4. We find that these contentions had been raised in case of one of partners Shri M. Anandarao for assessment years 1969-70 and 1970-71 and when matter came up before Tribunal in IT Appeal Nos. 415 and 416 (Bang.) of 1971-72, Tribunal by its order dated 1-8-1972 rejected all these contentions. Although we allowed revenue to argue case elaborately, we are not persuaded to differ from decision of Tribunal cited above. It is also pertinent to note that that order has become final since revenue had not challenged it by way of reference. Since partners has advanced money in consideration so 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 income alone within meaning of section 60 , because interest of 15 per cent which accrued to wives, minor children and joint families could not have been transferred by partners as it did not exist at time of granting of loan and there could be transfer only of existing property and not future property. Hence, we are convinced that apart from reasons given in order of Tribunal, contentions of revenue for applying provisions of sections 64 and 60 are untenable. 5. In alternative, it was contended by revenue that at least in respect of granting of loan by individual partner to his minor children and his joint family where there were no other adult coparceners, transaction was itself non est in law, because loan envisages contract between two person, and in situation where there were no such two persons existing, there could not be such contract and, hence, alleged loan itself was invalid in law. Reliance was placed on decision of Delhi High Court in case of CIT v. Mridu Hari Dalmia (1982) 133 ITR 550. Reliance was also placed on observations in Salmond's Jurisprudence, Twelfth end., p. 304, paragraph 65 to effect that man having two or more capacities does not have power to enter into legal transaction with himself. But, as pointed out on behalf of assessee, this statement of English law magnate be appropriate to Indian scene. Under section 5 of Transfer of Property Act, 1882, transfer of property means act by which living person converse 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 recognized that person can transfer property to himself obviously in different capacities, transaction of loan by individual partner to his minor children or to HUF cannot be disregarded. He contracts with himself on behalf of minors to repay amount with interest and certainly, minors could enforce such contract when they come of age especially when transaction is for their benefit. There seems to be no legal disability in transaction and hence, it cannot be ignored as non est. 6. last argument of revenue was that since there appeared to be scheme to avoid that application of section 40(b) and 64 and thereby reduced incidence of tax, entire himself and income as accruing to partner completely disregarding transaction carried out by him and others. This argument has only to be stated to be rejected because there is no provisions in Indian income-tax law analogous to Australian law whereby, merely because incidence of tax is reduced by arranging affairs of assessee in particular manner, such transaction could be ignored to impose higher burden on him. Quite contrary, it is well recognized that assessee in India could lawfully arrange their affairs in such manner as to reduce incidence of tax. It is not case of revenue that these transactions were either sham or fraudulent, in which event alone those transactions could be avoided by revenue. Nor is it case of revenue that wives, minors or joint families were benamidars of individual partners since there is no material to suggest that income accruing to them were, in fact, enjoyed by individual partners. In circumstances, we are convinced that in spite of valiant efforts of revenue, orders of Commissioner (Appeals) deleting additions made to total income of individual partners have to be confirmed. 7. In case of firm provisions of section 40(b) could be applied only if it is established that income arose to partner. When, in fact, we have found that income accrued only to wives, minors and joint families, such income could not be taken to be interest paid to partner so as to apply provisions of section 40(b). Explanations 2 and 3 have been introduced to section 40(b) only to set at rest such controversy as noticed by Andhra Pradesh High Court in case of N. T. R's Estate v. CIT (1985) 22 TAXMAN 194. It could be that income accruing to spouse 64, but it remains income of spouse and not that of individual partner so that even in such case, provisions of section 40(b) cannot be applied. Disallowance made under section 40(b) included interest paid to wife of another partner Shri M. Ramanath Shenoy in whose individual case, there is no appeal and, hence, position in his assessment is not clear. facts as obtaining in case of firm clearly rule out applicability of section 40(b) even in respect of interest paid to his wife. In circumstances, we have to confirm orders of Commissioner (Appeals) deleting disallowance made under section 40(b) also. 8. In result, appeals ar dismissed. *** FIRST INCOME TAX OFFICER v. MANGALORE GANESH BEEDI WORKS
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