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TMI Blog1967 (7) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... vember 14, 1958, a business in the name of Central Watch Co. was being conducted by a Hindu undivided family and the assessee was the karta of that Hindu undivided family. On November 14, 1958, the joint family consisted of the assessee himself, his wife, Sulochana, his major son, Suresh, and his minor son, Hemendra. On November 14, 1958, there was a partial partition of the business amongst the assessee and other members of the Hindu undivided family. The family itself continued to be joint with reference to the other assets belonging to the family. A sum of Rs. 2,15,902 stood to the credit of the assessee in his capacity as the karta of the undivided Hindu family so far as the books of the business were concerned. Out of this amount, an amount of Rs. 2 lakhs was divided between the assessee, his wife, Sulochana, and his two sons. Out of this amount of Rs. 2 lakhs, an amount of Rs. 57,500 was allotted to Sulochana and the balance was divided between the assessee and his two sons, each of these three individuals getting Rs. 47,500. On November 15, 1958, the assessee and his major son, Suresh, started a partnership firm to carry on the same business in the same name and style. The m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the account of the minor as interest should also be included in the total income of the assessee for the purpose of assessment. The liability to assessment of this income arises under section 64, clause (ii), of the Act and that section is in these terms : " 64. In computing the total income of any individual, there shall be included all such income as arises directly or indirectly---. . . . . . (ii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm in which such individual is a partner ;. . . . ." It may be mentioned that section 64(ii) of the Act is in identical terms with section 16(3)(a)(ii) of the Income-tax Act, 1922 ; and, therefore, the decisions interpreting section 16(3)(a)(ii) of 1922 Act have a direct bearing on the interpretation of section 64(ii) of the Act. It was urged before us in the instant case on behalf of the assessee that the Tribunal has found in favour of the assessee and has found as a matter of fact that the amount of Rs. 47,500 belonging to the minor was brought in the partnership as a deposit on behalf of the minor ; and it was, therefore, urged that this finding of fact by the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded in the income of the assessee. In view of this decision of the Supreme Court, therefore, in any event, it must be held that the entire amount of Rs. 5,002 cannot be excluded from the total income of the assessee in the light of section 64(ii) of the Act. In Bhogilal Laherchand v. Commissioner of Income-tax the Bombay High Court interpreted section 16(3)(a)(ii) of the 1922 Act. In that particular case the assessee had started a partnership business along with his major son and admitted to the benefits of this partnership his two minor sons. In the assessment year 1950-51, the share of the profit of each of the minors was sought to be included in the income of the assessee under the provisions of section 16(3)(a)(ii). Each of the minors also received interest on the deposits which stood to their credit in the firm ; and the question that arose before the Bombay High Court in that case was whether the interest which the minors had received could be included in the income of the assessee. Chagla C.J. observed in that case that all that section 16(3)(a)(ii) required was that a minor must be admitted to the benefits of the firm of which the assessee is a partner and income must aris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the partnership. Under one of the clauses of the deed of partnership, any member or person admitted to the benefits of the partnership was entitled to receive interest at 9% p. a. on any sum advanced as loan by him to the firm for meeting the expenses of the management. For the first time in the relevant accounting year interest amounts were credited to the wife and to the two minor sons in the books of account of the firm on the accumulation of their shares of profit ; and the Madras High Court held that the interest credited to the wife and the two minor sons arose directly from the membership of his wife in the firm and the admission of the minor sons to the benefits of the partnership and that, therefore, the interest credited to them had to be included in the total income of the assessee under section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922. At pages 168 and 169 of the report, Bhogilal's case has been considered by the Madras High Court ; and the learned judges observed at page 169 of the report as follows : " We regret we are unable to adopt the reasoning of the learned judges of the Bombay High Court. For one thing, it appears to us that if the partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Madras High Court, the assessee had gone in appeal to the Supreme Court and the decision of the Supreme Court has been reported at [1967] 63 I.T.R. 273. In the judgment of the Supreme Court it has not been in terms held, as was held by the Madras High Court, that the decision of the Bombay High Court in Bhogilal's case laid down any wrong principle. On the contrary, at page 277 of the report after referring to the decision of the Bombay High Court in Bhogilal's case the Supreme Court mentions that that particular case was inapplicable to the facts of the case before the Supreme Court because in the case before the Supreme Court the interest arising to the wife and the minor sons of the assessee was not the result of any deposits made by them in the firm. Therefore, it is clear that, in the opinion of the Supreme Court, the decision in Bhogilal's case was good law and it is on that footing that we will proceed in this case. We may mention at this stage that in the course of the arguments before us, it was contended that when moneys are found credited in the account of a partner or of a person admitted to the benefits of the partnership, such amount can fall only in one of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this kind have to be approached keeping the language of the section in mind and apart from the two categories, viz., deposit or advance on the one hand and capital on the other. According to the judgment of the Supreme Court, the facts and circumstances of Srinivasan's case indicated that the wife and the minor sons had earned profits because of their membership in the firm or because of their admission to the benefits of the firm, and having earned these profits in that capacity, they allowed the use of their profits to the firm without any specific arrangement as would naturally have been entered into if these funds had belonged to a stranger. They let the firm use funds of theirs, because they had interest in the profits of the firm. The facts of the case before the Supreme Court also showed that the use of the moneys was also allowed to the firm without asking for any interest for a number of years and it was only at a later stage that the partners of the firm decided to pay interest on these amounts, and because of the decision to pay interest, the nature of the funds did not change and the funds were not converted into deposits or loans. They still remained accumulations be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits of the firm and the shares of the assessee and his major son, Suresh, are also 1/3 each. Since Hemendra was a minor admitted to the benefits of the partnership, it was provided in clause 7 of the partnership deed that the losses of the partnership business including loss of capital shall be borne equally by the assessee and his major son, Suresh, and minor Hemendra, who was admitted only to the benefit of the partnership, was not bound to suffer any losses. Clause 6 of the partnership deed also provides that interest at 6% p. a. should be paid on the amount, if any, standing to the credit of the partners. In the recitals of the partnership deed, the fact that previously the business of Central Watch Co. was being carried on by the assessee as the karta and manager of the Hindu undivided family has been mentioned and the fact of partial partition has also been recited. A significant feature of this case is that though Sulochana, the wife of the assessee, was entitled under Hindu law to a 1/4th share in the amount of Rs. 2 lakhs which was the property divided on partial partition, the share allotted to her was Rs. 57,500 and not Rs. 50,000 that being the 1/4th share of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to the minor continued to be invested with the firm. The very fact of a lesser share coming to the minor at the time of the partition as also the lesser amounts coming to the shares of the assessee and his major son, goes to indicate that this amount of Rs. 47,500 of the minor was brought into the partnership because the minor was admitted to the benefits of the partnership. It is clear that if the minor's share on partition, viz., Rs. 47,500, were not to be invested in the partnership firm, he would not have been admitted to the benefits of the partnership ; the act of bringing in the amount of Rs. 47,500 and his being admitted to the benefits of the partnership were inter-dependent upon each other and were thus connected. There was thus a clear causal connection between bringing in of the amount of Rs. 47,500 of the minor into the partnership and the minor being admitted to the benefits of the partnership. In view of that causal connection, it is clear that even that portion of Rs. 5,002 which is attributable to the amount of Rs. 47,500 and the accumulated interest paid for the previous years on that amount of Rs. 47,500 is, to use the language of the section, income which ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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