1967 (7) TMI 31 - HC - Income Tax

Whether the interest income earned by the minor son of the assessee on the amount standing to his credit in the firm of M/s. CWC was includible in the assessment of the assessee u/s 64(ii) - Held yes

Issues Involved:
1. Inclusion of interest income earned by a minor in the assessment of the assessee under section 64(ii) of the Income-tax Act, 1961.

Detailed Analysis:

1. Inclusion of Interest Income Earned by a Minor:
The primary issue is whether the interest income of Rs. 5,002 earned by the minor son of the assessee on the amount standing to his credit in the firm of Messrs. Central Watch Company should be included in the assessment of the assessee under section 64(ii) of the Income-tax Act, 1961.

Background and Facts:
- The assessee was a partner in the firm, Messrs. Central Watch Co., which was initially conducted by a Hindu undivided family (HUF) with the assessee as the karta.
- On November 14, 1958, a partial partition of the business occurred, and the firm was reconstituted with the assessee and his major son as partners, and the minor son admitted to the benefits of the partnership.
- The capital, previously belonging to the HUF, was divided among the family members and continued to be invested in the firm.
- The minor son, Hemendra, had Rs. 47,500 credited to his account from the partition, and interest at 6% per annum was credited to his account based on the partnership deed.

Legal Provisions and Interpretations:
- Section 64(ii) of the Income-tax Act, 1961 (identical to section 16(3)(a)(ii) of the 1922 Act) mandates the inclusion of income arising to a minor from the admission to the benefits of a partnership in the total income of the parent.
- The Tribunal found that the amount standing to the credit of Hemendra represented his advance to the firm, a mixed question of law and fact, allowing the High Court to re-examine the conclusion.

Key Judgments and Precedents:
- S. Srinivasan v. Commissioner of Income-tax: The Supreme Court held that interest arising from accumulated profits in the account of a minor admitted to the benefits of the partnership must be included in the parent's income.
- Bhogilal Laherchand v. Commissioner of Income-tax: The Bombay High Court ruled that interest earned by minors from deposits in the firm, unrelated to their admission to the partnership, should not be included in the parent's income.
- Chouthmal Kejriwal v. Commissioner of Income-tax & Akula Venkatasubbaiah v. Commissioner of Income-tax: Both cases held that interest on capital contributed by minors admitted to the benefits of partnership should be included in the parent's income.
- S. Srinivasan v. Commissioner of Income-tax (Madras High Court): This case dissented from Bhogilal's case, holding that interest on accumulated profits of minors admitted to the benefits of the partnership should be included in the parent's income.

Application to the Present Case:
- The interest of Rs. 5,002 credited to Hemendra's account partly arose from accumulated profits and partly from the Rs. 47,500 credited at the time of partition.
- The causal connection between the minor's admission to the benefits of the partnership and the interest income was established, as the amount of Rs. 47,500 was brought into the partnership as part of the same transaction of partition and formation of the partnership.
- Applying the principles from the Supreme Court's decision in Srinivasan's case and the Bombay High Court's decision in Bhogilal's case, the interest income must be included in the assessee's total income.

Conclusion:
The High Court concluded that the entire amount of Rs. 5,002 credited as interest to Hemendra's account should be included in the total income of the assessee under section 64(ii) of the Income-tax Act, 1961. The question was answered in the affirmative, and the assessee was directed to pay the costs of the Commissioner.

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