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TMI Blog1982 (11) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... id not object to the inclusion in his own assessment of the income from the house properties purchased by him in the names of his wife and minor children. He, however, made a claim that in the computation of the income so included, the interest paid by him on money borrowed for the purchase of the house properties was admissible deduction. For claiming this allowance the assessee relied on s. 24(1)(vi) and s. 27(i) of the Act. All the authorities, including the Income-tax Appellate Tribunal, rejected the claim for deduction. In this reference brought at the instance of the assessee, this court's advisory jurisdiction has been invoked to express its opinion on the admissibility of the deduction claimed in the assessments for 1967-68 and 1970-71, the interest payment deduction being Rs. 4,270 and Rs. 7,778 respectively. The following question of law brings out the point at issue clearly : " Whether, on the facts and in the circumstances of the case, the assessee was entitled to a deduction of interest amounting to Rs. 4,270 and Rs. 7,778 for the assessment years 1967-68 and 1970-71, respectively, oil monies borrowed against the income from property included in the assessee's hands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, the amount of any interest payable on such capital, shall be an admissible deduction. It is under this operative provision that the assessee in this case claimed to deduct the interest of Rs. 4,274 and Rs. 7,778 for the two years in question. There can be no doubt that these two amounts represent interest on money borrowed for the acquisition of the house properties. Nevertheless, the Tribunal concerned with the departmental view that interest should not be allowed, because the borrowing in question happened to have been effected, not by the assessee's wife or his minor children who are the owners of the house property, but by the assessee. There might have been something to be said for this view of the Tribunal if s. 24(1)(vi) were to be read alone. For, since the income to be computed is income from the house property owned by the assessee, the interest on borrowing also would fall to be allowed only if the owner of the property had effected the borrowing. This construction follows on the wording of s. 24(1)(vi) in the context of the charge under ss. 22. But s. 22 and 24(1)(vi) cannot be read in isolation. In the context of the present case, s. 27(i) must also be read as pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e owner of the property or the assessment of the assessee in respect of the income from that property by reason of section 16(3) of the Act, the mode of determination of the income from the property is equally applicable. " Two other passages from the court's reasoning in Ganesan's case [1965] 58 ITR 411 (Mad), however need some explanation. The following is one (p. 417): " Firstly, we may point out that it is not a deemed income at all that is dealt with under section 16(3), that is to say, the law does not say that the income of the wife shall be 'deemed' to be the income of the assessee. What in effect it provides for is that an income received by the wife in certain circumstances shall be taxed in the hands of the assessee. " In a subsequent passage in the same judgment, however, the learned judges observed(p. 417) : " It may be said, in a manner of speaking that the income of the wife is deemed to be that of the husband, but the section itself does not say so." We may reconcile the above two passages by saying that the court had in those passages fairly anticipated the two new provisions which have been enacted in the present I.T. Act, 1961. As we earlier mentioned, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question should be included in the total income of the assessee, it follows as a necessary corollary that the annual value of the assessee's residential house has to be computed at 10% of the total income of the assessee which income, as already held, includes the income from the house properties transferred to his wife as required by the 1st proviso to section 9(2)." We regard this judgment of the Supreme Court as authority for two important fiscal conceptions relating to the tax treatment of income from assets transferred to a spouse or a minor child of the assessee. In the first place, the income from the assets transferred must be regarded in the same way as it would be if the assets had not been transferred. Secondly, the computation of the income from the assets transferred must not lose sight of the fact that such income has to figure as part of the transferor's total income. In CIT v. Maharaj Kumar Kamal Singh [1973] 89 ITR 1, the Supreme Court were engaged in construing and applying the relevant provisions of the Indian I.T. Act, 1922, but they had had occasion to refer to the comparable provision of the I.T. Act, 1961, as being more or less in the same pattern. Alt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s it would be if the assessee had not transferred the property at all to the wife or minor children. On no other terms can the words " subject to the provisions of cl. (i) of s. 27 " in s. 64(1)(iv) and (v) be given effect to. If, instead of borrowing money and purchasing house property for his wife and minor children, the assessee had utilised the borrowed funds for purchasing the house properties for his own benefit, there can hardly be any doubt about the deductibility of the interest on borrowed capital in the computation of income from house property as part of the assessee's total income. The Department's contention is that while the factum of transfer of the assets by the assessee to his wife and minor children should be ignored for assessment purposes and the income must be included in the assessee's total income, the same has got to be looked at differently, when it comes to a question of deduction. This way of approach really would find the assessee in a much worse position with a transfer of the assets than what it would have been if no transfer at all was made in favour of his wife and minor children. It would also equate the position of the Revenue to the proverbial ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntenanced the idea that granting the exemption under s. 5(1)(iv) to the assessee in that case would amount to extending the statutory fiction for various other purposes in addition to the one for which it was created. It was, on the contrary, observed that the court was not extending the fiction beyond the purpose for which it was created by the statute. The principle of this decision was followed in a later decision of this court in V. Vaidyasubramaniam v. CWT [1977] 108 ITR 538. For the reasons stated above, we must answer the question of law referred to us by holding that the assessee was entitled to a deduction of the interest on the money borrowed by him, in the computation of the income from house properties in the names of the assessee's wife and minor children, for purposes of inclusion in his total income under s. 64(1)(iv) and (v), s. 24(l)(vi) and s. 27(i) of the Act. One other question which we are asked to consider in this reference relates to the assessment of capital gains in the assessee's hands. The relevant question is as follows : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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