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TMI Blog1971 (5) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... , Kasturi Devi, and their major son, Ram Charan entered into partnership and started a firm by the name, Messrs. Lalji Mal Tika Ram. They also admitted the minor son of L. Ganeshilal, Ram Gopal, to the benefits of the firm. The new partnership took over the banking and the cloth business that was being carried on by the joint family. At the time of partition, the family business assets aggregating to Rs. 5,76,390 were equally divided amongst the members of the family, each of them getting Rs. 1,44,097-8-3. In addition, cash amounting to Rs. 33,837-10-0 was also divided amongst the members, each getting Rs. 8,459-2-6. On the commencement of the partnership, Lala Ganeshilal introduced a sum of Rs. 1,42,514-9-0, Smt. kasturi Devi introduced a sum of Rs. 1,44,214-9-0, Ram Charan introduced a sum of Rs. 1,70,683-11-0 and the minor, Ram Gopal, introduced a sum of Rs. 1,44,214-9-0 from out of the assets received by them at the time of partition of the family business. Each of them further introduced a sum of Rs. 8,000 from out of the cash received by them. It was agreed that the three partners and the minor admitted to the benefits of the firm would get interest, not exceeding 6% per annu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion before the Appellate Tribunal, under section 66(1) of the Indian Income-tax Act, 1922, for making a reference to this court. The Tribunal has accordingly submitted a statement of the case in respect of the following question : " Whether, on the facts and circumstances of the case, the sums of Rs. 4,838 and Rs. 4,958 being interest earned respectively by Kasturi Devi, wife of the assessee, and Ramgopal, minor son of the assessee, on the respective amounts standing to their credit in the firm, Messrs. Lalji Mal Tika Ram in which the assessee is a partner are liable to be included in his total income under section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922 ?" For the assessment years 1958-59 and 1959-60 the decision of the Tribunal was against the revenue. The Commissioner of Income-tax, therefore, moved the Tribunal for referring the question of law involved in the case for the opinion of this court. The Tribunal has accordingly referred the following question to this court for opinion : " Whether, on the facts and in the circumstances of the case, the interest income earned by Kasturi Devi and Ram Gopal were liable to be included in the assessment of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the interest which is paid to the partners on accumulated profits. Learned counsel for the assessee, on the other hand, contended that the real nature of the credits standing in the names of the wife and the minor son represented loans advanced by them to the firm and as such interest earned on these credits could not be said to be the income arising directly or indirectly because of their being partners or being admitted to the benefits of the firm. In support of the contention that the interest received by the wife or a minor, on sums advanced to a firm as loan, cannot be said to be income arising because of their being partners or being admitted to the benefits of the firm, learned counsel relied on the case of Bhogilal Laherchand v. Commissioner of Income- tax and also the observation made by the Madras High Court in the case P.A.P. Chidambara Nadar v. Commissioner of income-tax. In the present case, for the assessment year 1957-58 the Tribunal came to the conclusion that the amounts standing to the credits of the wife and minor son represented their capital contribution and, therefore, interest earned on it was income which arose to them directly or indirectly because of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the name of the partner or the person admitted to the benefits of the firm irrespective of whether profit is earned, it showed that the amount introduced did not partake of the nature of capital. According to it, normally no part of capital contributed by partners or persons admitted to the benefits of a firm can be withdrawn without the consent of all the partners, and since in this case a partner or the minor was free to withdraw the amount standing to his credit without obtaining the consent of other partners it also indicated that the amount did not partake of the nature of capital. In the end it held that the amount so introduced was really in the nature of advance or loan. The Tribunal further pointed out that capital can be contributed only under a specific agreement. Since a minor cannot enter into an agreement, the amounts standing in the name at least of a minor could not possibly be considered to be capital contributed by him. The Supreme Court had an occasion to consider the meaning and scope of the words " income of minor or wife " arising directly or indirectly from their membership of or being admitted to the benefits of a firm for the purpose of section 16(3)(a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumulations into loans advanced to the firm by these persons. The facts and circumstances indicate that the wife and the minor sons had earned these profits because of their membership of 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 also 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 minor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those credits represent income arising to the partner or the persons admitted to the benefits of the firm, because of their membership or being admitted to the benefits of the firm. We have to examine the case in the light of the observations made by their Lordships of the Supreme Court in the case of S. Srinivasan v. Commissioner of Income-tax. Coming now to the undisputed facts in the present case we find that the amount which was allotted to various members of the joint family on partition of the family business on 21st April, 1956, represented the value of their share in the assets of the joint family business and cash totalling Rs. 33,836-10-0. The business of the joint-family was taken over by the newly constituted firm as such. Thereafter, the accounts of various partners and the minor were opened in the books of the firm in which the amount representing the value of their respective assets which had been taken over from the family business was mentioned as standing to their credit. Clause (5) of the partnership deed provided as follows : " Such rate of interest not exceeding 6% per annum as the partners may from time to time think proper, will be allowed to each partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere free to deal with the amount standing in their names in any manner that they liked. They could withdraw any part of that amount at any time they liked and invest it with any other firm. He argued that, in the circumstances, whether they continued to keep it invested with the firm, Lalji Mal, or deposited it with another firm after withdrawing it from that firm (sic). According to him this circumstance clearly shows that the nature of the credit was that of a loan on the principle of the decision in the case of Bhogilal Laherchand's case, wherein it has been said that a case where a firm maintains accounts of its partners representing their accumulated profits and pays interest on the amounts standing to the credit of various persons the position is the same. Each partner can withdraw any part of the accumulated profits at any time that he likes without the consent of the other partners. As pointed out earlier, the Supreme Court in the case of S. Srinivasan v. Commissioner of Income-tax has held that the accumulated profits do not get converted into a loan or an advance in the absence of a specific agreement between the parties to that effect. Mere fact that the partner or the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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