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TMI Blog1983 (7) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... f Shri G. Ramanujulu Naidu) 66,675 Moneys provided by Shri G. Ramanujulu Naidu out of DA arrears, savings and agricultural income 20,000 ------------------- 24,718 (sic) ------------------- The property was shown as belonging to the family and a loss of Rs. 4,255 (revised) was returned therefrom. The ITO presumed blending of personal funds and was of the view that the income from the property was to be treated as belonging to the individual Shri G. Ramanujulu Naidu inasmuch as Rs. 80,000 (housing loan from the Government), Rs. 37,693 (GPF amount) and part of Rs. 20,000 (DA arrears and agricultural income) emanated from the karta, admittedly, out of his individual funds. The assessee's plea that it was in the nature of loan and did not constitute blending was found unacceptable, because the ITO was of the view that housing loan, GPF advance and savings out of arrears were personal funds of the karta and that the use of the funds in an admittedly family investment constituted 'transfer' within the meaning of section 64(2) of the Income-tax Act, 1961 ('the Act'). All the same, the ITO completed the assessment as a 'protective one' considering the entire income in the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal funds continued to belong to him in his individual capacity. He claimed that the affidavits filed by the sons in connection with house mortgage also amply confirm the assessee's stand. He cited authorities for the proposition that the property can only be family property in view of ancestral nucleus. Since there was no blending, he argued that section 64(2) had no application. He also sought to develop a theory on the basis of some authorities that where there is blending at source, there is no impressing the property with joint family character so as to attract section 64. 5. Shri S.R. Deshpande, the learned departmental representative, claimed that the housing loan was personal to the karta. It cannot be diverted for family investment. Mortgage deed in respect of the property pursuant to the terms of the loan also indicated only this. The fact that the sons filed affidavits offering additional security, according to him, was a gratuitous, act which had no legal effect. He claimed that in these circumstances, the karta continued to be owner of the property or, at least, a co-owner to the extent of his contribution. In that case, the income is assessable in individual hands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the very decision referred to an earlier decision of the Madras High Court in the case of R.K. Murthi v. CIT [1961] 42 ITR 379, where it was pointed out that the loan cannot be treated as a transfer. This was also, according to him, an answer to the argument of the learned departmental representative based on the Punjab and Haryana High Court's decision in S.P. Jaiswal's case. 7. We have carefully considered the records as well as the arguments. The return was filed by the family. It disclosed a loss from property at Rs. 4,255 (revised). The ITO, by disallowing the interest amount in respect of Government housing loan of Rs. 6,298, converted it into income of Rs. 2,430 which was below the taxable limit. The assessment was stated to be a protective one. A protective assessment implies an undertaking on the part of the ITO to modify the same in line with the principal assessment when that reaches finality. It is for this reason that no appeal need be filed by an assessee against such a protective assessment especially when, in a case like this, there is also no demand. Even when a protective assessment comes up in appeal, it normally does or should come along with the principal a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ily property or that there is transfer of such funds to the joint family. It is also pertinent to point out that the revenue has not come in appeal against the order of the first appellate authority holding that only a part of the family income attributable to investment by the karta from separate funds is excludible in the assessee's hands by application of section 64(2) which authorises the assessment of such income in the hands of the person converting or transferring his separate assets into family assets. Hence, there cannot be any dispute at this stage on the fact that it is family property. It is in this context that we are unable to appreciate the argument of the learned departmental representative that the loan being personal to him, as is evident from the normal conditions of housing loan advanced to the Government servants and mortgage deed, the property should be treated as belonging to the assessee personally. In the first place, it is a matter between Shri Naidu and the Government as to how the Government loans are utilised. Secondly, we are not aware of any prohibition to the Government servant not to use the proceeds of loan for building the house for the benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mencing on or after the 1st day of April, 1971,---- (a) the individual shall be deemed to have transferred the converted property, through the family, to the members of the family for being held by them jointly ; (b) the income derived from the converted property or any part thereof shall be deemed to arise to the individual and not to the family ; (c) where the converted property has been the subject-matter of a partition (whether partial or total) amongst the members of the family, the income derived from such converted property as is received by the spouse or minor child on partition shall be deemed to arise to the spouse or minor child from assets transferred indirectly by the individual to the spouse or minor child and the provisions of sub-section (1) shall, so far as may be, apply accordingly : Provided that the income referred to in clause (b) or clause (c) shall, on being included in the total income of the individual, be excluded from the total income of the family or, as the case may be, the spouse or minor child of the individual. Explanation 1 : For the purposes of sub-section (2),---- 'property' includes any interest in property, movable or immovable, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see's case on facts. In matters like this, where the karta deals with the affairs of family involving his sons (in contradistinction to brothers), it is not reasonable to expect him to decide immediately as to how he is going to treat the funds advanced by him to the family. As for Rs. 80,000, the Government loan, it does appear that he expected to clear it out of the income from property itself. The fact that the sons filed affidavits and were sought to be made parties to the mortgage though not called upon to do so either by the rules or otherwise, in our opinion, clearly indicates that the loan though personal to the karta was being directed along with obligation to return the same with interest to the family. The position regarding the other amounts drawn from savings or provident fund also does not appear to be otherwise. It must be remembered that once the statement is made that the family has obligation to return his personal funds, it has consequences in respect of the karta's liabilities of other direct taxes inasmuch as it will be his wealth for wealth-tax purposes as long as the obligation continues and liability to gift-tax will arise if such obligation is waived with o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] AAP 147, pointed out that the burden of proving such blending is a heavy one. In the assessee's case, the karta has clearly stated that he intends to treat it as a loan. There is also no other circumstance to show that he had intended blending. Even the adult sons have no say in the matter and their acknowledgement actually obtained in respect of a loan of Rs. 80,000 is not really necessary because Shri Naidu's intention alone is relevant. If he has no intention of abandoning his separate rights, the mere fact that the funds went to finance the property partly would not lose him his right to recover such moneys or to appropriate the income from the property or such other funds of the family for recouping his personal funds in his capacity as the manager of the family. It is for this reason, we are not impressed by the argument of the authorities that there has been blending merely because the funds have been physically mixed, while the act of blending under law would require mental intention to abandon separate rights. At the same time section 64 would get attracted even if there be transfer without consideration, i.e., gift. Transfer is a bilateral act where there is also a done ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the decision lays down a general proposition that there could be no advance of moneys between two distinct entities merely on the ground that only one person was competent to bind both. In other words, it cannot be said that as a general rule a karta, a father, a guardian or a trustee cannot lend to the family, minor son, ward or a beneficiary, respectively, and that, if it is done, it would amount to abandonment of such moneys in favour of the latter. The High Court itself observes that even in case of non-enforceable loan contract, it may be possible for the lender to recover moneys lent by other modes or processes of law. Lastly, we are of the view that there should be conscious abandonment of separate rights or clear intention to waive the right to recover the moneys to constitute blending or gift within the meaning of section 64(2). The absence of an enforceable loan agreement, even if it is presumed to be not enforceable for whatever reason, does not, therefore, ipso facto, attract the aggregation provision in section 64(2). 12. The other argument is that, in view of the decision of the Punjab and Haryana High Court in S.P. Jaiswal's case even a loan would constitute an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... till be a transfer though the destination may be an indirect one. 13. The only other dispute relates to the question of deductibility of interest amount of Rs. 6,298 on Rs. 80,000 against property income. It is the assessee's case that the assessee-family has undertaken to pay the interest out of its income. The other members have agreed to the same. The income is separately credited in a separate account in the name of the family in a bank and that interest is expected to be paid from such account. It is the revenue's case that Shri Naidu has diverted his personal loan to family. It, therefore, follows that either the loan has been adopted by the family as its own or that it has obtained the amount on condition that it pays as interest an amount equivalent to the amount payable by him. In either case, the amount having been utilised for construction of the property, the interest thereon is deductible under section 24(1)(vi) of the Act. Hence, consistent with our finding that there has been no abandonment of separate rights of the karta in respect of moneys advanced or diverted out of his personal funds, interest admittedly payable thereon has to be allowed as a deduction. 14. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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