The necessity of a concluded contract for a loan transaction and the interpretation of the Trust Deed in distinguishing between deposit and loan transactions.

( 1 ) THE Income Tax Appellate Tribunal, Ahmedabad Bench SA, in the matter of Income Tax Appeal Nos. 1520 and 1521/ahd/90 relating to Assessment Years 1985-86 and 1986-87, has referred the following question under Section 256 (1) of the Indian Income Tax Act, 1961 (the Act for short) for the opinion of this Court:whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the interest paid to the beneficiaries was the income of the applicant-Trust and the applicant-Trust was not entitled to a deduction of the same

( 2 ) THE short facts giving rise to the present matter are that during the assessment proceedings for the Assessment Year 1985-86, the Assessing Officer observed that the Assessee-Trust had credited an amount of Rs. 44,030/- on account of interest to the account of the beneficiaries and claimed deduction thereof. He called for the explanation and after rejecting the same, added the said amount of Rs. 44,030/- to the income of the Trust and accordingly, taxed the Trust. The Trust, all through, had been submitting that the Trust was a specific Trust with six minor beneficiaries, having definite share and that only two Trustees were given absolute power to possess the amount standing to the credit of the said six beneficiaries with further power to spend accumulations for maintenance, support, education, advancement, etc. till dissolution of the Trust. It had been all through submitted by the Assessee that the Trust was settled in the interest of the beneficiaries and the Trust was to enter into the business and the income so earned by the Trust was to be distributed equally between the beneficiaries. 1. It is also the case of the Trust that the net income has to be divided equally and is to be paid in cash to the beneficiaries or in the alternative, a credit could be made in the accounts of the beneficiaries and such credit would amount to payment. The submission of the Trust all through had been that as the money accredited in the accounts of the beneficiaries was not withdrawn by the beneficiaries, the same remained with the Trust, it was treated as a loan and the Trust was paying interest to the beneficiaries and in such a case, the Trust was entitled to claim deduction to such an extent. The Assessing Officer, the Commissioner of Income Tax (Appeals) and the Tribunal all had been in lines in observing that the interest paid to the beneficiaries could not legally be claimed as deduction because there was no loan transaction between the parties. The Tribunal also held that there was no privity of contract amongst the beneficiaries and the Trust so far as the transaction of borrowing is concerned as the beneficiaries were not having any control over their income till it was absolutely transferred to them. The Tribunal also held that the Trust cannot be allowed to allocate interest to the beneficiaries when they have not actually paid any amount to the beneficiaries except making a book entry which was not going to vest any right in the beneficiaries for utilisation of the amount so far as so passed under those book entries.

( 3 ) SHRI Talati, learned Counsel for the Assessee, placing his strong reliance upon the judgement of the Division Bench of this Court in the matter of Commissioner of Income-Tax v. Tanvi Sajni Family Trust submitted that if the money was treated to be loan and interest was paid on the same, then, no wrong could be found in the action of the Trust and the Trust was entitled to claim deduction of the amount of interest paid.

( 4 ) IT was also submitted that from the terms of the Trust Deed, it would clearly appear that the Trust was entitled to raise loans, use and utilise the said amount for earning more and was also entitled to pay interest on the loan amount. His submission is that if the money is accredited in the account of the beneficiaries and was not actually withdrawn by them, then, the same could be treated to be the loan from the side