I did not gift the money — I lent it, interest free, and it is shown as a loan in my books. Does that keep the income out of the clubbing net?
Not where the supposed borrower cannot contract. A loan is in essence a contract, requiring two parties and an enforceable promise to repay; a minor's contract is void, and a person cannot lend to himself merely because he acts in two capacities. The Delhi High Court therefore held that the money handed over was a transfer of assets, and the interest earned on it was income arising from assets transferred, includible in the transferor's hands.
Decided by the High Court (S. Ranganathan J (author, as printed in the report header)) on 1981-10-19, reported as ILR 1982 Delhi 183; income-tax reference at the instance of the Commissioner; assessment year 1970-71. It bears on section 64(1)(v), section 64, section 60, section 61, section 63 of the Income Tax Act 1961, in Assessment & Scrutiny, How Tax Law Is Read and Evidence & Burden of Proof matters.
The 'it was a loan, not a gift' defence is the commonest answer to a clubbing notice, and this is the decision that dismantles it in the one situation where the defence cannot work — where the recipient is a minor, or where the same individual stands on both sides of the arrangement, so that there is no contract to call a loan. It does not dismantle the defence generally, and the Karnataka High Court has since held the opposite of the general proposition, ruling in CIT v. M. Vinoda Rao [1993] 200 ITR 50 that a loan is not a transfer and that s.64 is 'not at all attracted'. The Court pointedly declined to decide the Revenue's wider submissions that every loan could be brought within ss.60 and 61 through the enlarged definitions in s.63 — it called those arguments far reaching and left them open — so the decision does not hold that a genuine loan to a competent adult is a transfer. What it does hold is that the label 'loan' has to answer to the law of contract before it can do any work, and that book entries recording an advance do not by themselves supply an enforceable agreement.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For assessment year 1970-71 the Income-tax Officer found that Rs 3,542 had been earned as interest on a deposit of Rs 40,000 made with the Industrial Credit Company Ltd in the name of the assessee's minor son, Gaurav Dalmia. The father's books showed an account of the minor recording advances made from time to time — cheques of Rs 37,000, Rs 13,000, Rs 15,000 and Rs 1,000 totalling Rs 66,000, against which Rs 16,000 was shown as returned, leaving Rs 40,000 outstanding at 31 March 1970. The cheques were immediately deposited in a bank account in the minor's name and cheques were then drawn on that account in favour of the deposit company. Of the interest received, Rs 3,452 was accepted as attributable to funds derived from the father. The Income-tax Officer included the interest in the father's income, holding the deposits to have been made out of the father's money; the assessee contended that the deposits had been made by the minor out of monies lent to him interest free by his father, that as guardian he had full power to act for the minor's benefit, and that he had arranged matters so as to fall outside ss.60 to 64. The Income-tax Officer described the loan theory as a make believe, a sham and colourable transaction. The Tribunal took a view favourable to the assessee, and the Commissioner obtained a reference.
The question referred was answered in the negative and in favour of the Revenue, with costs and counsel's fee of Rs 250 (para 19). The transaction could not in law be described as a transaction of loan: a contract by a minor is void, so there could be no enforceable agreement between father and minor son, and there could equally be no loan by the father in his individual capacity to himself acting as the minor's guardian (para 15). Once the loan characterisation was rejected, the assessee had no basis on which to resist inclusion — there was a clear transfer of monies by the assessee to the minor son, the monies were intended to be and were immediately deposited to earn interest, and the interest was therefore earned from assets transferred by the father (para 18).
The Court expressly declined to decide the Revenue's broader submissions that every case of loan could be brought within ss.60 and 61 by taking advantage of the enlarged definitions of 'transfer' in s.63(b) and of revocability in s.63(a), describing those as arguments with far reaching consequences and disposing of the case on a short ground (para 14). It assumed in the assessee's favour, without deciding, that a loan is not a transfer as held in R.K. Murthi v. CIT [1961] 42 ITR 379 (Mad), and asked instead whether there was a loan at all. Taking the ingredients of a loan from Corpus Juris Secundum and from the Supreme Court's definitions in K.M.S. Lakshmanier and Sons and Badridas Daga, it held that a loan requires an enforceable agreement between a lender and a borrower (para 15). A minor's contract being void, and a man being unable at common law to contract with himself even where he acts in different capacities — for which it cited Salmond's Jurisprudence and the analogy of a partnership between a person individually and as trustee — no loan could exist here (para 15). The Court accepted that the father might on equitable grounds recover the money from the minor's assets after majority, but held that a contract was not among the grounds available (para 17).
The essence of a loan is a contract.
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Handle my notice → Ask a CA on WhatsAppNot where the supposed borrower cannot contract. A loan is in essence a contract, requiring two parties and an enforceable promise to repay; a minor's contract is void, and a person cannot lend to himself merely because he acts in two capacities. The Delhi High Court therefore held that the money handed over was a transfer of assets, and the interest earned on it was income arising from assets transferred, includible in the transferor's hands. This was decided by the High Court (S. Ranganathan J (author, as printed in the report header)) and bears on section 64(1)(v), section 64, section 60, section 61, section 63 of the Income Tax Act 1961. It is reported as ILR 1982 Delhi 183; income-tax reference at the instance of the Commissioner; assessment year 1970-71. The 'it was a loan, not a gift' defence is the commonest answer to a clubbing notice, and this is the decision that dismantles it in the one situation where the defence cannot work — where the recipient is a minor, or where the same individual stands on both sides of the arrangement, so that there is no contract to call a loan. It does not dismantle the defence generally, and the Karnataka High Court has since held the opposite of the general proposition, ruling in CIT v. M. Vinoda Rao [1993] 200 ITR 50 that a loan is not a transfer and that s.64 is 'not at all attracted'. The Court pointedly declined to decide the Revenue's wider submissions that every loan could be brought within ss.60 and 61 through the enlarged definitions in s.63 — it called those arguments far reaching and left them open — so the decision does not hold that a genuine loan to a competent adult is a transfer. What it does hold is that the label 'loan' has to answer to the law of contract before it can do any work, and that book entries recording an advance do not by themselves supply an enforceable agreement. If it applies to you, the first step is this: Before running the loan defence, ask whether there is an enforceable contract: a lender, a borrower with capacity, and a promise to repay. If the recipient is a minor, there is not.
For assessment year 1970-71 the Income-tax Officer found that Rs 3,542 had been earned as interest on a deposit of Rs 40,000 made with the Industrial Credit Company Ltd in the name of the assessee's minor son, Gaurav Dalmia. The father's books showed an account of the minor recording advances made from time to time — cheques of Rs 37,000, Rs 13,000, Rs 15,000 and Rs 1,000 totalling Rs 66,000, against which Rs 16,000 was shown as returned, leaving Rs 40,000 outstanding at 31 March 1970. The cheques were immediately deposited in a bank account in the minor's name and cheques were then drawn on that account in favour of the deposit company. Of the interest received, Rs 3,452 was accepted as attributable to funds derived from the father. The Income-tax Officer included the interest in the father's income, holding the deposits to have been made out of the father's money; the assessee contended that the deposits had been made by the minor out of monies lent to him interest free by his father, that as guardian he had full power to act for the minor's benefit, and that he had arranged matters so as to fall outside ss.60 to 64. The Income-tax Officer described the loan theory as a make believe, a sham and colourable transaction. The Tribunal took a view favourable to the assessee, and the Commissioner obtained a reference. The matter was decided on 1981-10-19 by the High Court (S. Ranganathan J (author, as printed in the report header)). On those facts the High Court held as follows. The question referred was answered in the negative and in favour of the Revenue, with costs and counsel's fee of Rs 250 (para 19). The transaction could not in law be described as a transaction of loan: a contract by a minor is void, so there could be no enforceable agreement between father and minor son, and there could equally be no loan by the father in his individual capacity to himself acting as the minor's guardian (para 15). Once the loan characterisation was rejected, the assessee had no basis on which to resist inclusion — there was a clear transfer of monies by the assessee to the minor son, the monies were intended to be and were immediately deposited to earn interest, and the interest was therefore earned from assets transferred by the father (para 18).
The Court expressly declined to decide the Revenue's broader submissions that every case of loan could be brought within ss.60 and 61 by taking advantage of the enlarged definitions of 'transfer' in s.63(b) and of revocability in s.63(a), describing those as arguments with far reaching consequences and disposing of the case on a short ground (para 14). It assumed in the assessee's favour, without deciding, that a loan is not a transfer as held in R.K. Murthi v. CIT [1961] 42 ITR 379 (Mad), and asked instead whether there was a loan at all. Taking the ingredients of a loan from Corpus Juris Secundum and from the Supreme Court's definitions in K.M.S. Lakshmanier and Sons and Badridas Daga, it held that a loan requires an enforceable agreement between a lender and a borrower (para 15). A minor's contract being void, and a man being unable at common law to contract with himself even where he acts in different capacities — for which it cited Salmond's Jurisprudence and the analogy of a partnership between a person individually and as trustee — no loan could exist here (para 15). The Court accepted that the father might on equitable grounds recover the money from the minor's assets after majority, but held that a contract was not among the grounds available (para 17). In the words reproduced by the source cited on this page: "The essence of a loan is a contract." The decision followed or applied R.K. Murthi v. CIT [1961] 42 ITR 379 (Mad) — assumed in the assessee's favour without decision; Mohan Lal Shyam Lal [1942] 10 ITR 219 (All) — relied on by analogy; CIT v. M. Vinoda Rao [1993] 200 ITR 50 (Kar) — contrary, decided later; a loan held not to be a transfer and s.64 not attracted.
It was decided by the High Court on 1981-10-19 and is reported as ILR 1982 Delhi 183; income-tax reference at the instance of the Commissioner; assessment year 1970-71. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 64(1)(v), section 64, section 60, section 61, section 63, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The question referred was answered in the negative and in favour of the Revenue, with costs and counsel's fee of Rs 250 (para 19). The transaction could not in law be described as a transaction of loan: a contract by a minor is void, so there could be no enforceable agreement between father and minor son, and there could equally be no loan by the father in his individual capacity to himself acting as the minor's guardian (para 15). Once the loan characterisation was rejected, the assessee had no basis on which to resist inclusion — there was a clear transfer of monies by the assessee to the minor son, the monies were intended to be and were immediately deposited to earn interest, and the interest was therefore earned from assets transferred by the father (para 18). It arises in Assessment & Scrutiny, How Tax Law Is Read and Evidence & Burden of Proof matters, on section 64(1)(v), section 64, section 60, section 61, section 63 of the Income Tax Act 1961, and was decided by S. Ranganathan J (author, as printed in the report header). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not rely on the individual acting as guardian, trustee or karta to supply the second party; the Court held that double capacity does not connote double personality. Where the recipient is a competent adult spouse, document the loan as a real one — a written agreement, a repayment obligation, actual repayments, and interest at a rate that stands scrutiny — and then run CIT v. M. Vinoda Rao [1993] 200 ITR 50 (Kar), which holds that a loan is not a transfer and that s.64 is not attracted at all. This decision leaves that argument untouched: R.K. Murthi v. CIT [1961] 42 ITR 379 (Mad) was assumed in the assessee's favour, not overruled. Watch the transaction chain: the Court fixed on the fact that the money transferred was intended to be, and immediately was, deposited to earn interest, which supplied the nexus between the transfer and the income.
Searched for later treatment; none was found. That is not the same as a source affirming it. The apparent conflict with Karnataka can now be stated accurately, and it is not a conflict. The Karnataka High Court in CIT v M. Vinoda Rao [1993] 200 ITR 50 (20 November 1992) held at para 17 that 'a loan is not a transfer' and at para 27 that 'As we are of the view that "loan" is not a "transfer", section 64 is not at all attracted to the transactions', answered the questions referred, including those on ss.64(1)(vii) and 64(2), 'in the affirmative and against the Revenue' (para 36) and rejected the McDowell device argument. But that Court did not dissent from this judgment: it says in terms that the facts of the Delhi decision are distinguishable, because here there was no lawful loan at all, a minor being incapable of contracting. That is the same ground the Delhi Court decided on, and it is why the two stand together. This Court expressly assumed R.K. Murthi v. CIT [1961] 42 ITR 379 (Mad) in the assessee's favour without deciding it. Indian Kanoon's citator carries eight documents citing this judgment; nothing overruling or doubting it was found. The Kerala High Court in CIT v K.T. Mathew (23 October 1996) adopted at its para 15 a proposition taken from this judgment, that a man may act in several different capacities, but on a trust question and not on the s.64 point, so it is not authority that the s.64 holding has been applied. Note also that the clause of s.64 applied has since been renumbered and that minors' income is now governed by s.64(1A), so the decision should be cited for the proposition that an advance to a person who cannot contract is a transfer of assets, not for the clause number it applied. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The report describes the provision applied as s.64(1)(v) for assessment year 1970-71; the clause numbering of s.64 was recast by the Taxation Laws (Amendment) Act 1975 and again by the Finance Act 1992, and the section number as printed in the report has been reproduced here rather than translated. Since 1 April 1993 the income of a minor child is in any event covered by s.64(1A), so the practical value of this decision now lies in transfers to a spouse or son's wife under s.64(1)(iv) and (vi) and in the general question whether an advance is a 'transfer'. Paragraphs 1 to 7 and 14 to 19 were transcribed; paragraphs 8 to 13, which set out the Tribunal's findings and the fuller arguments, were not reached. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The question referred was answered in the negative and in favour of the Revenue, with costs and counsel's fee of Rs 250 (para 19). The transaction could not in law be described as a transaction of loan: a contract by a minor is void, so there could be no enforceable agreement between father and minor son, and there could equally be no loan by the father in his individual capacity to himself acting as the minor's guardian (para 15). Once the loan characterisation was rejected, the assessee had no basis on which to resist inclusion — there was a clear transfer of monies by the assessee to the minor son, the monies were intended to be and were immediately deposited to earn interest, and the interest was therefore earned from assets transferred by the father (para 18).
TaxSphere, “CIT v Mridu Hari Dalmia”, https://taxnotice.vittsphere.com/caselaw/case/mridu-hari-dalmia-interest-free-loan-is-a-transfer/ (validity last checked 2026-09-16)
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The gift deed says nothing about taking anything back, so surely the transfer is irrevocable and ss.61 to 63 cannot apply?
I assigned the dividends on my shares to my wife for her life but kept the shares. Is that dividend still my income?
The department accepted your position for years and has now reversed it. Can it?
My father's foreign trust can only be unwound if the settlor and the trustee act together. Does that still make it a revocable transfer taxable in his hands?
