Whether when husband gives interest-free cash loan to wife to buy residential house, such amounts are to be clubbed with net wealth of husband as it falls within purview of 'asset' as defined in Act - NO: ITAT

THE issues before the Bench are - Whether when husband gives interest-free cash loan to wife to buy a residential house, such amounts are to be clubbed with net wealth of husband as it falls within purview of 'asset' as defined in Act and Whether giving interest free loan to wife for buying assets can be considered as a strategy to remain below the maximum tax bracket, although the assessee is already paying the tax at a maximum rate. NO is the answer of the Tribunal.

Facts of the case

The assessee, a famous Bollywood Actor, declared net wealth of Rs.2,75,28,460/- in his wealth tax return. The AO accepted the wealth declared by the assessee by passing an order u/s 16(3) of the Wealth Tax Act. The wife of the assessee, Ms. Gauri Khan, purchased a residential house at Delhi for Rs.1,65,95,000/- and jewellery worth Rs.70,22,658/- out of the loan of Rs.2,28,88,530/- given by the assessee. The AO was of the view that wealth of the assessee escaped assessment, therefore, the loan amount was to be clubbed in the hands of the assessee for computation of his net wealth. He further observed that the jewellery would have been purchased by the assessee which he deliberately avoided, thus, there was indirect "transfer of asset" to the wife, by the assessee, within the meaning of provision of section 4(1)(a)(i) of the Wealth Tax Act, the transferred amount is to be included in the net wealth of the assessee. On appeal, the CIT (Appeals) affirmed the view of the AO.

Having heard the parties, the Tribunal held that,

Transfer of assets

++ if section 4(1)(a)(i) of the Wealth Tax Act,1957 is analyzed it speaks about "transfer of asset" by an individual i.e. by the spouse, directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart. The wife of the assessee has taken cash loan of Rs.2,28,88,530/-, from the assessee, for acquiring residential house at Delhi (Rs.1,65,95,000/-) and jewellery of Rs.62,93,530/-. We are expected to analyze what exactly "asset" means. Section 2(ea) of the Wealth tax Act, 1957, inserted by the Finance Act, 1992, w.e.f. 1.4.1993, and later on substituted by the Finance (No.2) Act 1998, w.e.f. 1.4.1999, defines "asset". The legislature in its wisdom has specifically included building or land appurtenant thereto within the definition of "asset" and has specifically excluded a house meant exclusively for residential or commercial purposes which forms part of stock-in-trade, motor car, jewellery, bullion, furniture, utensils or any other article made wholly or partially of gold, silver, platinum or any other precious metal etc. So even as per the provisions of the Wealth tax Act, extending cash loan, to the wife, by the assessee does not come within the aforesaid definition, therefore, it can be said that there is no "transfer of asset" as has been alleged by the Department;

++ in sub-clause (a) and (b) to sub-section (11 ) to sec.2, of the Income tax Act, "tangible asset" and "intangible assets" have been defined which does not include cash. The case of the Revenue is that interest free loan was given to his wife by the assessee to enable her to acquire the aforesaid asset, and thus, in view of section 4(1)(a)(i) such assets have been transferred by the assessee. We are not agreeing with the Assessing Officer because there is no "transfer of asset" by the assessee rather, an asset has been purchased in the form of a residential house after taking an interest free cash loan from the assessee. Thus, in our view, there is no transfer of asset by the assessee, as has been canvassed by the ld. DR and also held by the ld. Assessing Officer, as well as by the Commissioner of Income tax (Appeals). The assessee was not the owner of the asset which was transferred to the wife, as argued by the DR, rather out of the interest free loan, the wife of the assessee purchased/acquired "new asset" in her own name from the third parties, thus, in our view, there is no justification for adding the amount as no ‘asset’ has been transferred;

Tax avoidance strategy

++ we find that the net taxable income has been shown by the assessee to the tune of Rs.36,63,98,754/- and on which TDS to the tune of Rs.1,95,71,429/- was also deducted and finally tax was paid to the tune of Rs.10,25,00,000/-. It is not the case that the assessee formulated this devise to remain below the maximum tax bracket rather the assessee is already paying the tax at a maximum rate. It is also not the case that with an intention to remain below the wealth tax limit the assessee gave interest free loan to the wife rather as discussed earlier the assessee did not transfer any asset and merely gave interest free loan;

Meaning of the term "transfer:

++ the word "transfer" in section 64 of the Income tax Act, 1961, must be treated as having been used in the strict sense and not in the sense of "including every means by which the property may be passed from one to another". Even if, there is an indirect transfer, there must still be "transfer of asset". The word "indirectly" does not destroy the significance of the word "transfer". Our view is fortified by the decision of the Apex Court in CIT vs. Keshav Lal Lallubhai Patel and CIT vs. N.K. Stremann. The ratio laid down in R Dalmiya vs. CIT wherein the High Court held that it is not right to say that the wife cannot make savings from household expenses paid to her. This cannot be deemed to be asset transferred to the wife. In the present appeal uncontrovertedly interest free cash loan was given by the assessee to his wife, therefore, it cannot be said to be ‘transfer of asset’. Section 64 of the Act, refers to, transfer made to legally wedded wife. It is worth quoting, as argued by the Counsel for the assessee, that at the later stage part of the loan was re-paid by the wife to the assessee, therefore, repayment of part of the loan further strengthens the case of the assessee because it was a loan simplicitor and cannot be said to be a device to "transfer of asset" as has been alleged by the Revenue with the intention of tax avoidance. It is also noted that the assessee gave the loan to his wife and the same was duly declared, therefore, it is not a case of tax avoidance. There is a distinction between the term "transfer" and "loan" which can be appreciated by comparing the "act of transfer" with the act of "lending". In the former case some legal interest is created in the transferee over the subject matter of transfer, whereas in the case of lending, except a possessory interest, which may be momentary also, no other interest is created. For application of section 64(1)(iv) of the Income tax Act, it is imperative that an individual must have transferred the income yielding "asset" to his spouse. It is only then that in computing the total income of the individual the income arising from such asset can be included. Where an assessee has merely created a charge upon his half share in two properties in respect of his obligation to pay his wife an annual sum, section 64 (1)(iv) would not be attracted. As discussed earlier there is no "transfer of asset" as such rather, an interest free loan was given to the wife, therefore, from this angle also there is no case of the Revenue. The ratio laid down in CIT vs. Mrs. Hasina Begum (wife) and Ors. supports our view. In the present case, the wife of the assessee is having independent source of income, filing her return and even subsequently repaid part of the loan and this fact even has been mentioned in para 4.3 of the impugned order that the amount of Rs.4,50,400/- was repaid till assessment year 2008-09, therefore, there was no "transfer of asset" or "colourable device", as has been alleged by the Revenue because the assessee was not the owner of "any asset" which was transferred to the wife, as mentioned earlier, rather a new property was acquired/purchased from a third party out of the interest free cash loan taken by the wife from her husband.