1997 (3) TMI 4 - SC - Income Tax

Addition on account of interest in respect of the assessee's children and his wife - Assessee, MD of a company who was having deposit with the company, transfers it to the credit of the firm, in which his children are partners - Such a paper transaction intended merely to reduce the tax liability cannot be held to be a loan - addition of interest on deposit in respect of the assessee's children are justified

Summary

Issues Involved:
1. Whether the Tribunal was right in law in deleting the addition on account of interest in respect of the assessee's children and wife for the assessment years 1967-68 to 1970-71.
2. Whether the add back of Rs. 15,814 for the assessment year 1963-64 is justified in law.
3. Whether the High Court was justified in interfering with the Tribunal's finding that the transaction was a loan transaction.

Detailed Analysis:

Issue 1: Deletion of Addition on Account of Interest
The Tribunal had deleted the addition on account of interest in respect of the assessee's children and wife for the assessment years 1967-68 to 1970-71. The High Court, however, reversed this decision, concluding that the interest income derived from the amount transferred to the assessee's children could be taxed in the hands of the assessee. The High Court held that the transaction was not a genuine loan but a paper adjustment designed to reduce tax liability, thus attracting the provisions of section 61 of the Income-tax Act, 1961. The Supreme Court upheld the High Court's decision, agreeing that the transaction was not a genuine loan but a device to reduce the tax burden.

Issue 2: Add Back of Rs. 15,814 for Assessment Year 1963-64
For the assessment year 1963-64, the assessee had shown the interest derived from the so-called loan amount in his return but later filed a revised return deleting the amount. The Assessing Officer included the interest income in the assessee's income, a decision upheld by the Appellate Assistant Commissioner and the Tribunal. The High Court also affirmed this, concluding that the transaction was not genuine and the interest income should be taxed in the assessee's hands. The Supreme Court agreed with this conclusion, noting that the transaction was merely a paper adjustment and not a genuine loan.

Issue 3: High Court's Jurisdiction in Interfering with Tribunal's Finding
The assessee argued that the High Court exceeded its advisory jurisdiction under section 256 of the Income-tax Act by interfering with the Tribunal's finding that the transaction was a loan. The Supreme Court, however, held that the High Court was justified in its interference. The Court cited previous judgments, including CIT v. Calcutta Agency Limited and Patnaik and Co. Ltd. v. CIT, to emphasize that while the Tribunal's findings on facts are generally final, the High Court can interfere if there is no evidence for the Tribunal's conclusions. The Supreme Court found that the High Court's interference was warranted because the transaction was not a genuine loan but a paper device to reduce tax liability.

Conclusion:
The Supreme Court upheld the High Court's judgment, concluding that the transaction in question was not a genuine loan but a paper adjustment designed to reduce the tax burden. Consequently, the interest income derived from the amount transferred to the assessee's children was rightly taxed in the hands of the assessee. The Court dismissed the appeals, affirming that the High Court did not exceed its advisory jurisdiction and there was no error in its judgment.