1981 (10) TMI 39 - HC - Income Tax

Summary

Issues Involved:
1. Whether the interest earned by the minor son on deposits made from funds given by the father should be included in the father's total income.
2. The nature of the transaction between the father and the minor son - whether it constitutes a loan or a transfer of assets.
3. Applicability of Sections 60, 61, 62, and 64 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Inclusion of Interest in Father's Total Income:
The Income Tax Officer (ITO) included the interest earned by the minor son on deposits in the father's total income, asserting that the deposits were made from the father's funds and thus the interest belonged to him. The Appellate Assistant Commissioner (AAC) upheld this view, considering the transaction as a collusive arrangement. The Income-tax Appellate Tribunal (ITAT), however, ruled in favor of the assessee, viewing it as legitimate tax planning and not a transfer of assets under Section 64.

2. Nature of the Transaction:
The ITO and AAC both contended that the transaction was not a genuine loan but a sham and collusive arrangement. They argued that a minor cannot be a party to a loan contract, making the transaction invalid. The ITAT disagreed, considering it a legitimate loan from the father to the minor son, not falling within the purview of Sections 60 and 64. The High Court, however, rejected the assessee's argument, stating that a loan implies an enforceable agreement to repay, which cannot exist between a father and his minor son due to the minor's incapacity to contract.

3. Applicability of Sections 60, 61, 62, and 64:
The High Court examined the statutory provisions:
- Section 60: Income arising from a transfer without transferring the asset should be included in the transferor's income.
- Section 61: Income from a revocable transfer of assets is taxable in the transferor's hands.
- Section 62: Exceptions to Section 61 for irrevocable transfers.
- Section 63: Definitions of "transfer" and "revocable transfer."
- Section 64: Inclusion of income of a minor child from assets transferred by the parent.

The Court concluded that the interest income arose from assets transferred by the father to the minor son, falling within the scope of Section 64(1)(v). The Court rejected the argument that the transaction was a loan, emphasizing that a loan requires a valid contract, which is not possible between a father and a minor son.

Conclusion:
The High Court held that the interest of Rs. 3,542 earned by the minor son on the deposits should be included in the father's total income. The Tribunal's view was overturned, and the question referred was answered in the negative, favoring the revenue. The revenue was entitled to costs, with counsel's fee set at Rs. 250.