1968 (3) TMI 7 - HC - Income Tax

Interest earned by the minor son of the assessee on the amounts standing to his credit in the firm - whether includible in total income of the assessee u/s 16(3)(a)(ii)

Issues Involved:
1. Inclusion of interest earned by a minor in the total income of the assessee under section 16(3)(a)(ii) of the Indian Income-tax Act, 1922.

Detailed Analysis:

1. Background and Facts:
The case involves the assessment years 1956-57, 1957-58, 1958-59, and 1959-60. The assessee, Badrilal, along with his three major sons and a minor son, Suresh Chandra, constituted a Hindu undivided family (HUF) engaged in forest contracts. A partial partition occurred on 11th September 1955, dividing the business capital among the family members. Subsequently, a partnership was formed on 12th September 1955, comprising Badrilal and his three major sons, with Suresh Chandra admitted to the benefits of the partnership. The Income-tax Officer included the interest earned by Suresh Chandra on his capital amount in the total income of Badrilal under section 16(3)(a)(ii) of the Act.

2. Income-Tax Officer's Inclusion:
The Income-tax Officer included the share income from the partnership and the interest earned by Suresh Chandra in Badrilal's total income, citing section 16(3)(a)(ii) of the Act. This inclusion was upheld by the Appellate Assistant Commissioner, who argued that the minor had supplied capital to the firm, justifying the inclusion of interest income.

3. Tribunal's Decision:
The Tribunal overturned the decisions of the Income-tax Officer and the Appellate Assistant Commissioner, stating that there was no obligation for any partner or the minor to contribute or maintain capital in the firm. Therefore, the interest paid to the minor could not be considered as income arising from his admission to the benefits of the partnership. The Tribunal relied on the Bombay High Court's decision in Bhogilal Laherchand v. Commissioner Income-tax.

4. Legal Provision:
Section 16(3)(a)(ii) of the Indian Income-tax Act, 1922, mandates the inclusion of income arising directly or indirectly from the admission of a minor to the benefits of a partnership in the total income of the individual (assessee).

5. High Court's Analysis:
The High Court disagreed with the Tribunal's reasoning. It emphasized that if a minor contributes capital to a partnership firm and earns interest on that capital, the interest income should be included in the total income of the individual (assessee) under section 16(3)(a)(ii). The Court noted that the minor's capital contribution was a direct result of his admission to the benefits of the partnership, regardless of any obligation to maintain capital. The Court distinguished between capital contributions and advances, citing section 13 of the Partnership Act, 1932.

6. Supporting Precedents:
The High Court cited several precedents supporting its view:
- L. Ram Narain Garg v. Commissioner of Income-tax: The Allahabad High Court held that interest on capital investment by a minor admitted to the benefits of a partnership is includible in the father's income under section 16(3)(a)(ii).
- Chouthmal Kejriwal v. Commissioner of Income-tax: The Assam High Court held that interest on capital supplied by a minor admitted to the benefits of a partnership is an indirect result of his admission and should be included in the father's income.
- Akula Venkatasubbaiah v. Commissioner of Income-tax and Commissioner of Income-tax v. Bilas Raj Tekriwal: Both cases supported the inclusion of interest on capital contributed by minors in the total income of the father.
- S. Srinivasan v. Commissioner of Income-tax: The Supreme Court affirmed that interest on accumulated profits earned by minors admitted to the benefits of a partnership is assessable in the hands of the father.

7. Conclusion:
The High Court concluded that the interest earned by Suresh Chandra on the capital amount standing to his credit in the firm for the relevant assessment years should be included in the total income of the assessee, Badrilal, under section 16(3)(a)(ii) of the Act. The Court answered the question in the affirmative and awarded costs to the Commissioner of Income-tax, fixing the counsel's fee at Rs. 200.

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