(a) Wealth tax---

---- Interest on borrowed capital ---HUF---Amounts given to minor daughters as provision for marriage---Amounts kept as deposits in HUF business-- Interest on such deposits was deductible from business income of HUF-- Indian Income Tax Act, 1961, S. 36.

(b) Gift tax---

---- HUF---Amounts given to minor daughters as provision for marriage-- Amounts placed in interest-bearing deposit in family business---Not taxable as gifts---Indian Gift Tax Act, 1958, S. 2(xii).

(c) Wealth tax---

----Net wealth ---HUF---Amounts given to minor daughters as provision for marriage---Placed in interest-bearing deposits in family business---Not includible in net wealth of HUF---Indian Wealth Tax Act, 1957.

On April 1, 1973, the karta of the assessee-Hindu undivided family made a written declaration of partial partition before the notary. There it was declared that the minor daughters of the karta who were six in number were entitled to protection and maintenance, that there was no other male member (excepting the karta) and that, therefore, the partial partition was made as a provision for their marriage. Under that declaration, the partial partition was effected by setting apart a sum of Rs.3,60,000 from the capital account of the Hindu undivided family. In the books maintained by the said family, the credit balance in the capital account as on April 1, 1973, was Rs.7,43,361. On that date, the cash balance was only Rs.7,361. The Hindu undivided family capital account was debited on that date with Rs.3,60,000 and the same was credited to the partial partition account in the books of the family, that is, each minor was credited with a sum of Rs.60,000 in their respective deposit accounts. It was also declared that the separate moneys obtained by the minors would be kept. as deposits, in the joint family business with interest accruing at reasonable rates. The account books of the Hindu undivided family also showed that the interest was being regularly credited in the said deposit accounts of the minors. On the questions (a) whether interest credited in the accounts was deductible from the assessee's income; (b) whether transfer of the sums to the deposit accounts was a taxable gift; and (c) whether the sums could be included in the net wealth of the Hindu undivided family:

Held, (i) that since the Tribunal had found as a fact that the sums of Rs.60,000 to each of the minor daughters were given in discharge of the legal obligation of the assessee-family, to each of them, the Tribunal was justified in holding that the transfer of Rs.60,000 by the assessee to each of the six minor daughters of the assessee, was a family arrangement or was in discharge of the legal obligation of the assessee-family towards the said daughter and, therefore, the transfer would not amount to a gift within the meaning of section. 2(xii) of the Gift Tax Act, 1958;

(ii) that the sum of Rs.60,000 to each daughter was kept only as deposit in the joint family business with interest accruing thereon. The interest was deductible under section 36(1)(iii) of the Income Tax Act, 1961;

(iii) that the sums standing to the credit of all the minor daughters including accretions thereto could not be treated as the net wealth of the assessee-Hindu undivided family those sums having already come to be owned by the said daughters pursuant to the transfers with consideration made by the karta of the family in favour of the daughters.

Aryamurthi M.N. v. Subbaraya Setty M.L. AIR 1972 SC 1279; CGT v. Radhakrishna Gade Rao (M.) (1983) 143 ITR 260 (Mad.); CIT v. Gupta (R.S.) Dr. (1987) 165 ITR 36 (SC); K.M. S. Lakshmanier & Sons v., CIT and CEPT (1953) 23 ITR 202 (SC) ref.

S.V. Subramaniam for the Commissioner.

R. Janakiraman for the Assessee.

JUDGMENT

ABDUL HADI, J. ---The batch of tax cases, all preferred by the Revenue and against the same assessee, which is a Hindu undivided family, mainly turn on a short point and that is why they were all heard together.

Before adverting to the said short point, we may mention that one of them relates to gift-tax assessment, some of them relate to Income-tax assessment and some others relate to wealth tax assessment. Thus, all of them could be tabulated as follows, showing also the relevant assessment years, in relation to which the tax cases have arisen.

The following necessary facts have also to be stated before actually adverting to the abovesaid short point: The accounting year in relation to each assessment year is the year ended on April 12. On April 1, 1973, the karta of the assessee-Hindu undivided family made a written declaration of partial partition before the notary. There, it was declared that the minor daughters of the karta, who are six in number, then aged 17, 15, 12, 11, 8 and 6 were entitled to protection and maintenance, the right to be given in marriage, etc., that there is no other male member (excepting the karta) and that, in therefore, the partial partition was made as a provision for their marriage. Under that declaration, the partial partition was effected by setting apart a sum of Rs.3,60,000 from the capital account of the Hindu undivided family. In the books maintained by the said family, the credit balance in the capital account as on April 1, 1973, was Rs.7,43,361. On that date, the cash balance was only Rs.7,361. The Hindu undivided family capital account was debited on that date with Rs.3,60,000 and the same was credited to the partial partition account in the books of the family, that is, each minor was credited with a sum of Rs.60,000 in their respective deposit accounts. It was also declared that the separate moneyes obtained by the minors would be kept as deposits, in the joint family business with interest accruing at reasonable rates. The account books of the Hindu undivided family also showed that the interest was being regularly credited in the said deposit accounts of the minors. In the case of the eldest daughter, there was a withdrawal of Rs.-19,000 on April 1, 1974, relevant to the assessment year 1975-76 as stridhanam for her marriage. In the case of the second daughter there was a withdrawal of Rs.20,000 on April 5, 1975, for purchase of jewellery on May 31, 1976, and a withdrawal of Rs.3,793 for payment of balance price of jewellery and yet another withdrawal on June 9, 1976, of Rs.31,000 as stridhanam payment for her marriage. In the assessment for the year 1973-74, the assessee claimed for recognition of partial partition to the extent of Rs.3,60,000. That was refused by the income-tax authorities. Further, finally in the Tribunal also, in the appeal relating. to recognition of the partial partition, it was held that since there was only a single co-parcener (karta), it was not permissible to have a partition.

Now, coming to the abovesaid short point, we should say that all the questions referred to us revolve round the said short point or question whether there is a gift by the assessee-Hindu undivided family, chargeable to gift-tax, when the karta of the said family has credited a sum of Rs.60,000 to each of his minor daughters (who atone are the members of the said family along with the said karta, who is the only sole suriving co-parcener), having taken out the said sums, totalling Rs.3,60,000, in all, from out of the capital account of the Hindu undivided family which has immovable business of pawn broking and money-lending and investment in firms to a separate account. The question, which has been actually referred to us in Tax Case No. 1557 of 1986 is as follows:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the transfer of Rs.60,000 by the assessee, to each of his six minor daughters was a family arrangement and, therefore, the transfer would not amount to a gift, within the meaning of section 2(xii) of the Gift-tax Act?

In the earliest of the orders of the Tribunal, in these tax cases, which is, dated April 16, 1981, out of which Tax Cases Nos. 1468 to 1471 of 1982 have arisen, the Tribunal after holding that there is no gift chargeable to gift-tax, alternatively held thus: "if not a gift, it is a family settlement or arrangement, by which Rs.3,60,000 has been transferred from the Hindu undivided family to the minors."

In the other order of the Tribunal, dated December 28, 1984, which has given rise to Tax Case No. 1557 of 1986, the Tribunal placed reliance on CGT v. M. Radhakrishna Gade Rao (1983) 143 ITR 260 (Mad), where it was held that the settlement of property on the unmarried daughter could be said to be in discharge of the legal obligation of the Hindu undivided family and it cannot be considered to be a gift under section 2(xii) of the Gift-tax Act.

Learned counsel for the respondent-assessee also submits that the abovesaid Tax Case No. 1557 of 1986 is squarely covered by the abovesaid decision of this Court in CGT v. Radhakrishna Gade Rao (1983) 143 ITR 260 in favour of the assessee and that, therefore, the said question has to be answered in the affirmative.

As against this submission, learned senior counsel for the Revenue could not say anything contra since the factual finding of the Tribunal is that the abovesaid sum of Rs.60,000 given to each of the six minor daughters was only to discharge the legal obligation of the assessee-Hindu undivided family towards the said daughters. No doubt, the abovesaid question referred to us only speaks about "family arrangement" and not the aspect of the abovesaid sums having been given in discharge of the legal obligation of the assessee family. No doubt, the Supreme Court in M.N. Aryamurthi v. M.L. Subbaraya Setty, AIR. 1972 SC 1279 explained the term "family arrangement" by saying that to constitute a family arrangement, inter alia, the agreement should be with the object either of compromising doubtful or disputed rights or for preserving. the family property, or the peace and security of the family by avoiding litigation, or for saving its honour. So, it cannot be said that there is no scope for holding "family arrangement" on the above facts found. Even assuming that the present case does not squarely fit in the abovesaid meaning given to the term "family arrangement", it is clear to us, since the factual finding of the Tribunal is also that the abovesaid sum of Rs.60,000 to each of the minor daughters were given in discharge of the legal obligation of the assessee-family, to each of them, !he abovesaid question referred to us could be more appropriately refrained as follows and answered in the affirmative and in favour of the assessee:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the transfer of Rs.60,000 by the assessee to each of the six minor daughters of the assessee, was family arrangement or -was in discharge of the legal obligation of the assessee family towards the said daughters and, therefore, the transfer would not amount to a gift within the meaning of section 2(xii) of the Gift-tax Act?"

Accordingly, we answer the abovesaid question, as reframed, in the affirmative and in favour of the assessee.

Here, we must also mention that so far as the abovesaid gift-tax question is concerned, even learned senior counsel for the Revenue, while arguing the tax cases relating to income-tax, has himself, represented that the question referred to us in Tax Case No. 1557 of 1986 relating to gift-tax, has to be answered in favour of the assessee. No doubt, for saying so, the said counsel had a different reasoning, viz., that the abovesaid "giving" of Rs.60,000 to each of the minor daughters would not be a valid gift, chargeable to tax since at the time when-the said sums were given, admittedly, there was no cash balance to the extent of Rs.3,60,000 available with the assessee-family and what was available as cash balance was only Rs.7,361. For this reasoning, he sought to rely on the Supreme Court decision in CIT v. Dr. R.S. Gupta (1987) 165 ITR 36.

In the said decision, the Supreme Court has held that in order to constitute a valid gift, there must be existing property. Further, it observed that where the donor makes a gift of a n amount by transfer entries from the credit account which he has with a firm, , Hindu undivided family or company, and that amount is available with that firm, family or company as cash on hand on the date of the gift, then a valid gift by book entries is possible; but that, where the said firm, family or company does not carry on banking business and does not have any overdraft facilities and the amount is not available with it, mere book entries in the accounts will not effectuate a valid gift, even though there is acceptance of that gift.

But we do not think that this decision will have any application to the present case in view of the abovesaid factual finding of the, Tribunal below that the abovesaid sum of Rs.60,000 to each of the minor daughters was given to discharge the legal obligation of the assessee-family towards the said daughters. In other words, in view of the abovesaid finding, the transfer of the said sums to the minor daughters could be considered only as with consideration, and, therefore, unlike the facts in the abovesaid Supreme Court case. The respondent in the Supreme Court case maintained an account with a private company and on January 1, 1957, when the account showed a sum of Rs.1,50,740 to his credit, the respondent addressed a letter to the company stating that he had decided to make gifts to four donees, his two sons and two grandsons, aggregating to Rs.1,50,000 and directed the company to debit his account to that extent and credit the amounts of the gifts to the respective donees. The said instructions of the respondent therein were carried out and each son accepted the gifts in his favour and in favour of his son, in a letter to the respondent. But, on that day, viz., January 1, 1957, the said company had a cash balance of Rs.4,000 only. Nor did the said company have any overdraft facilities with any bank. There, it was also found by the Tribunal that the said company was not carrying on banking business. On the above facts, the Supreme Court held that there were no valid gifts since the only sum which could be taken by the donees was Rs.4,000 and the company was not a banking company and had no overdraft facility with any bank and, therefore, there were no existing goods to be parted with. The net result was, the Supreme Court held that the sum of Rs.1,50,000 had to be included in the respondent's net wealth. Thus, in the abovesaid Supreme Court case, the proposed transaction was a gift or a transfer without consideration. Only in that context, in the light of the requirements relating to the law of gifts, the Supreme Court observed that there was no valid gift. But, in the present case, on the basis 'Of the factual finding of the Tribunal, as stated above, the abovesaid transfer of Rs.60,000 to each of the minor daughters was for consideration, that is, for discharge of the above referred to legal obligation of the assessee-family in favour of the minor daughters. In the circumstances, the said Supreme Court decision will have no application to the present case. Learned senior counsel for the Revenue also could not cite any similar decision in relation to a transfer with consideration.

Now, coming to the common question of law referred to us in the abovereferred Tax Cases Nos. 1468 to 1471 of 1982, it is as follows:

"Whether, the assessee is entitled under section 36(1)(iii) of the Income Tax Act, for deduction of interest of Rs.1,080 for the assessment year 1973-74, Rs.27,081 for the assessment year 1974 75, Rs.27,988 for the assessment year 1975-76 and Rs.29,683 for the assessment year 1976-77 as deduction in the computation of the total income?"

Likewise, in Tax Case No.314 of 1983, the question referred to us is as follows:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that a sum of Rs.21,156 being the interest paid by the assessee, on the accounts of his minor daughters should be allowed as a deduction under section 36(1)(iii) of the Income Tax Act, for the assessment year 1977-78?"

In the same way, the question referred to us in Tax Case No.671 of 1985 is as follows:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the funds given by the assessee-Hindu undivided family to the daughters of the karta who is the sole co-parcener of the family were in the nature of family arrangement and that the interest credited by the assessee on the said funds was allowable as deduction?"

Thus, since, the abovesaid sum of Rs.60,000 credited to each of the six daughters, is only utilised by the assessee-family in its business and interest thereon also is credited to the daughters' accounts in the books of the assessee-family, the question is whether such interest could be deducted in computing the business income of the assessee-family, under section 36(1)(iii) of the Income Tax Act, 1961. The deduction allowed under section 36(1)(iii) of the Income Tax Act is towards "the amount. of the interest paid in respect of capital borrowed for the purposes of the business..." (emphasis supplied). What learned senior counsel for the Revenue contends is that there is no real borrowed in the present case. In this connection, he also drew our attention to K.M. S. Lakshmanier & Sons v. CIT and CEPT (1953) 23 ITR 202 in support of his contention. But, there is no merit in this contention at all. The Supreme Court decision turned on different facts and it .does not at all support the said contention. As earlier noted vide paragraph 3, the abovesaid sum of Rs.60,000 to each daughter is kept only as deposits in the joint family business with interest accruing thereon. So, in the present case, there is no difficulty in holding that section 36(1)(iii) deduction should be granted. Accordingly, the above questions in Tax Cases Nos. 1468 to 1471 of 1982, Tax Case No.314 of 1983 and Tax Case No.671 of 1985 are answered in the affirmative and in favour of the assessee.

Now, coming to the Wealth Tax cases, the common question referred to us in Tax Cases Nos. 873 to 875 of 1985 is as follows:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal has rightly held that the amounts of Rs.3,61,080, Rs.3,88,161 and Rs.4,04,330 are not includible in the Wealth of the assessee for the assessment years 1973-74, 1974-75 and 1976-77, respectively?"

Likewise, the common question referred to us in Tax Cases Nos. 1802 and 1803 of 1986, is as follows:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal has rightly held that the amounts of Rs.3,53,694 and Rs.3,74,916 are not includible in the wealth of the assessee for the assessment years 1977-78 and 1978-79, respectively?"

Similarly the question referred to us in Tax Case No. 1885 of 1984 is as follows:

"Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the sum of Rs.3,97,148 cannot be included in the net wealth of the assessee for the assessment year 1975-76?"

The question referred to us in Tax Case No.849 of 1987 is as follows:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount allotted by the assessee-family to the six minor daughters of the karta who was the sole coparcener of the family together with accrued interest, totalling Rs.4,02,288 had been validly transferred to the minors and not includible in the net wealth of the assessee?"

The abovereferred to sums in all the abovesaid questions pertaining to different assessment years, are sums which are standing to the credit of all minor daughters, all put together, including any accretion thereto. Obviously, they cannot be treated as the net wealth of the assessee-family, those sums having already come to be owned by the said daughters pursuant to the above transfers with consideration made by the karta of the family in favour of the said daughters, as found by the Tribunal in the gift-tax case. Therefore, these questions are also answered in the affirmative and in favour of the assessee. No costs.

M.B.A./1344/FC Order accordingly.