Income Tax Appellate Tribunal - Ahmedabad
Income Tax Officer vs Nalinbhai M. Shah on 17 August, 2004
Equivalent citations: (2005)93TTJ(AHD)107
ORDER
A.L. Gehlot, A.M.
1. This appeal by the Revenue is directed against the order of the CIT(A), dt. 29th April, 2003 for asst. yr. 1997-98. The grounds raised in this appeal by the Revenue read as under:
"1. The learned CIT(A) erred in law and on facts in deleting the addition of Rs. 1,60,000 made on account of transfer of income to spouse, children and HUF.
2. The learned CIT(A) further erred in law and on facts in allowing the disallowance of Rs. 67,000 on account of salary expenses without appreciating the fact that the type of business being carried out by the assessee hardly needs supporting staff."
2. During the assessment proceedings, the AO noticed that the assessee has given loans to the following close relatives :
31-3-1996 31-3-1997
Rs. Rs.
"1. Nalin M. Shah, HUF (A's HUF) 2,85,949 3,04,949
2. Shefali N. Shah, daughter 3,88,508 1,24,225
3. Sugnaben N. Shah, wife 3,37,601 3,97,717
4. Sujata N. Shah, daughter 2,20,195 2,43,195"
The AO further noticed that the assessee did not show any interest on these amounts due from relatives and HUF. The above said amounts were invested by the respective persons from which they earned income. The above mentioned persons have filed their respective returns of income and disclosed the income earned. The AO invoked Section 60 of the IT Act and added Rs. 1,60,000 by applying 15 per cent per annum income earned by family members on the above amounts. The CIT(A) deleted the said addition with the following observations:
"I have perused the facts and circumstances of the case as discussed by the AO and submissions of the learned Authorised Representative. The undisputed fact is that the appellant has paid certain amounts to his HUF and family members without charging any interest and the receivers of such money have deployed these for earning income. From the facts, it may appear that the appellant has not transferred any income to his family members. He has paid money on which he has not charged interest. This is the only situation here. Such money was utilised by the family members for earning certain income. It cannot be said that the appellant has made some arrangement and has transferred some income which would otherwise have been taxable on his own hands. From the facts narrated, it is not proved that there is arrangement made by the appellant to reduce his tax liability and he has passed on his own income to other persons for this purpose. On consideration of the facts and circumstances of the case, submission of the learned Authorised Representative and the ratio of the decision of Gujarat High Court referred to above, the addition made by the AO is not found justified and is deleted herewith."
3. The learned Departmental Representative supported the order of the AO and submitted that the AO has correctly invoked provisions of Section 60 as the assessee has transferred the cash in the form of loans to the relatives. The assessee did not charge any interest whereas those relatives earned the income. The learned Authorised Representative on the other hand supported the order of the CIT(A) and submitted that the AO has wrongly applied Section 60 of the IT Act. Section 60 laid down a declaratory principle. A transfer of income alone without there being a transfer of the source of that income is mere application of the income. The object underlying the provisions of Section 60 is to meet with the device which was being adopted by the assessee by which income of a property was transferred to someone else whereas the interest in the property was retained. In such cases, the income was brought to tax in the hands of the transferor-assessee because of the legal fiction provided in Section 60. He further submitted that the cardinal principle of this section was that a fiction would operate only when the asset which produces the income is still with the transferor, while the income belongs to the transferee as has been held by the Gujarat High Court in the case of CIT v. Manharlal Girdharlal Doshit (1998) 231 ITR 89 (Guj). The learned Authorised Representative further submitted that Section 60 is directed in the following circumstances, there are assets yielding an income, such income is transferred by overriding title, by the owner of the assets, but the owner retains the property in the assets unto himself. If these conditions are fulfilled, all income arising out of the so retained assets shall be chargeable to tax in the hands of the transferor. In the assessee's case the amount was given as loan out of funds lying with the assessee unused. The family members have either invested the amount or reused the same for personal purposes. The learned Authorised Representative in support of his contention filed a photo copy of judgment of Hon'ble Jurisdictional High Court in the case of CIT v. H.H. Maharaja Family Trust in IT Ref. No. 271 of 1984, dt. 6th April, 1997. The relevant observations are reported as under:
"The Court further held that the interest income did not accrue to beneficiaries by virtue of the transaction of the loan, but it accrued to them by virtue of subsequent transactions of their having invested the amounts. It is, therefore, clear that the provisions of Section 60 of said Act could not have been invoked by the Revenue for assessing the income of the beneficiaries in the hands of the assessee-trust. The Tribunal was, therefore, justified in holding that the provisions of Section 60 were not applicable to the facts of the present case."
The learned Authorised Representative submitted that the assessee was having sufficient interest-free fund in the form of capital of Rs. 13,62,429 and the advances given to relatives were not more than that amount. He further submitted that the assessee did not claim any expenditure which can be disallowed on the basis of interest free advances/loans given to relatives. It is the submissions of the learned Authorised Representative that the addition of Rs. 1,60,000 is purely on notional basis and is not covered by the provisions of Section 60. He further submitted that respective parties have shown their interest income in the return and the Department has accepted the same. He urged that the order of the CIT(A) may be confirmed.
4. We have heard the learned representatives of the parties and perused the record. The AO made the addition under Section 60 which reads as under:
"Transfer of income where there is no transfer of assets-All income arising to any person by virtue of a transfer whether revocable or not and whether effected before or after the commencement of this Act shall, where there is no transfer of the assets from which the income arises, be chargeable to income-tax as the income of the transferor and shall be included in his total income."
The object underlying the provisions of Section 60 is to meet with the device which was being adopted by the assessee by which while retaining the interest in the property, its income would be allowed to go to someone else, so that it is not taxed in the hands of the assessee. In such case, even if the arrangement is made by which the income is received by someone else, by fiction it would be regarded as the income of the transferor and assessed as such. This fiction would operate only when the asset which produces the income still remains the property of the transferor, while the income belongs to the transferee. For this purpose we would like to refer the judgment of Hon'ble Gujarat High Court in the case of CIT v. Manharlal Girdharlal Doshit (supra) and in the case of CIT v. H.H. Maharaja Family Trust (supra). After considering the totality of the facts of the case, we find that it is simply a case of interest-free loans and advances given by the assessee to his relatives. We find that Section 60 is not applicable under the facts and circumstances of the case as it is not a case where the income has been transferred without transferring the assets. The assessee was having sufficient own funds in the form of capital and such own funds have come out from the yearly income subject to income-tax. The assessee is entitled to use his capital as per his desire. We have also noticed that it is not a case of disallowance of interest paid by the assessee. Under the circumstances, we do not find any infirmity in the order of the CIT(A). We accordingly confirm the order of the CIT(A).
5. The second ground raised pertains to addition of Rs. 67,000 on account of salary expenses. During the assessment proceedings, it has been noticed by the AO that the assessee has claimed total salary expenses of Rs. 79,006, payable to K.P. Patel at the rate of Rs. 3000 per month, to M.P. Patel at the rate of Rs. 2,000 per month and to office boy at the rate of Rs. 500 per month. The AO observed that the assessee has shown net income of Rs. 39,332 only out of total consultancy receipts of Rs. 3,28,000. For earning this much income, the AO observed that such salary expenses are not required. The AO allowed Rs. 12,000 and disallowed Rs. 67,000. The CIT(A) deleted the said addition with the observation that the AO did not bring any material to prove that the expenses were either not incurred or it was incurred other than for the business purposes. The learned Departmental Representative relied upon the order of the AO whereas the learned Authorised Representative relied upon the order of the CIT(A).
6. It has been noticed that the AO has disallowed the salary expenses on the basis that the assessee has declared net profit only at Rs. 39,332 which is not the correct fact as this net profit is after allowing depreciation of Rs. 80,284 and financing charges of Rs. 22,478. It has also been noticed that the AO has not doubted about the genuineness of the expenses as he himself allowed partly such expenses.
7. After considering the facts of the case, we find that the CIT(A) has correctly deleted the addition as the AO failed to point out that these expenses were not for the purpose of the business. In the light of the above discussion, we confirm the order of the CIT(A).
8. In the result, the appeal is dismissed.