1966 (10) TMI 25 - SC - Income Tax

Whether interest credited by the firm to the assessee s wife and minor children attributable to past profit accumulations only is includible in the assessment of the assessee under section 16(3)(a)(i) and (ii)? Held that - The facts show that the use of these moneys was allowed to the firm without asking for any interest and it was only at a later stage that the three partners of the firm decided to give interest on these amounts. When the decision was taken to give interest the nature of the funds did not change. They did not get converted into deposits or loans. They still remained accumulations belonging to a partner or persons admitted to the benefits of the partnership and allowed to be used by the firm. The interest also appears to have been allowed by the firm simply because these funds belonged either to a partner or to the minors who had been admitted to the benefits of the partnership. It is thus clear that the interest at least indirectly arose and accrued to the wife and the minor sons because of their capacity mentioned in section 16(3)(a)(i) and (ii) in the Income-tax Act. Appeal dismissed.

Summary

Issues:
1. Interpretation of provisions of section 16(3)(a)(i) and (ii) of the Income-tax Act.
2. Inclusion of interest earned on accumulated profits in the income of a partner.
3. Whether interest credited by the firm to the partner's wife and minor children is includible in the assessment of the partner under section 16(3)(a)(i) and (ii) of the Income-tax Act.
4. Application of legal principles regarding interest earned by minors in a partnership.

Detailed Analysis:
The judgment involved the appellant, a senior partner in a firm with his wife, a stranger, and two minor sons admitted to the benefits of the partnership. The firm's deed allowed partners to advance sums as loans with interest. The profits were distributed among partners, with the wife and minor sons' shares accumulating without interest until interest was decided to be allowed. The appellant challenged the inclusion of interest in his income under section 16(3)(a)(i) and (ii) of the Income-tax Act, arguing legislative overreach and unjustified inclusion of interest. The lower authorities upheld the inclusion partially. The Tribunal referred questions to the High Court, which ruled against the appellant, leading to the appeal in the Supreme Court.

The first issue addressed was the constitutionality of section 16(3)(a)(i) and (ii). The appellant did not press this point, citing precedent. The Supreme Court affirmed the validity of the provisions based on previous decisions, dismissing the challenge against the legislative powers of Parliament.

Regarding the second issue, the appellant contended that interest on accumulated profits of his wife and minor sons should not be included in his income as it did not directly arise from their partnership membership. The Court disagreed, emphasizing that the accumulated profits were not akin to deposits or loans, as they were funds retained due to their partnership interests. The interest indirectly arose from their partnership status, aligning with section 16(3)(a)(i) and (ii) of the Income-tax Act.

The third issue focused on whether interest credited to the appellant's wife and minor sons should be included in his assessment under section 16(3)(a)(i) and (ii). The Court rejected the appellant's argument, distinguishing cases involving interest on deposits or capital contributions by minors, as the interest in this case stemmed from accumulated profits linked to their partnership interests.

Lastly, the Court referenced various precedents to differentiate cases involving interest on capital investments by minors from the situation at hand, where interest accrued on accumulated profits due to the partnership relationship. The Court upheld the High Court's decision, concluding that the interest earned indirectly related to the partnership, justifying its inclusion in the appellant's income. As a result, the appeal was dismissed, affirming the inclusion of interest in the appellant's income for tax assessment purposes.