TMI Blog1971 (5) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... nsisting of himself, his major son, Ram Charan, and a minor son, Ram Gopal. On 21st April, 1956, there was a partition in the family whereby certain assets shown in the books of the family were divided. The members agreed to divide the immovable properties belonging to the family through arbitration. The assets divided concerned the family business in cloth and banking. On the following day, i.e., on 22nd April, 1956, L. Ganeshilal, his wife, 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s income accruing to them directly or indirectly because of their membership or being admitted to the benefits of the firm. In the circumstances, the interest income could not be added in the income of the assessee. The two appeals were consequently allowed and the Income-tax Officer was directed to modify the assessment accordingly. As for the assessment year 1957-58 the decision of the Tribunal was against the assessee, he moved an application 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that even interest paid on accumulated profits standing to the credit of the wife or a minor child admitted to the benefits of the firm is includible in the income of the husband or father under section 16(3)(a)(i) and (ii) as held by the Madras High Court in the case of S. Srinivasan v. Commissioner of Income-tax. According to the learned counsel, in the present case, the interest income earned by the wife and the minor son stood on the same footing 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 Laherch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It took into consideration the provisions of clause (5) of the partnership deed which provided for payment of interest, not exceeding 6 per cent. per annum, as may be agreed by the partners from time to time, on the amounts for the time being standing to the credit of the partners or the minor and that the interest was to be paid whether the partnership made profits or not, and held that inasmuch as the interest was to be paid on the amount outstanding 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the wife and the minor sons because they did not draw their share of profits when distribution of profits took place, and allowed those profits to remain with the firm ; but there is no suggestion at all that, at that stage, either the wife or the minor sons, or any one on their behalf, purported to enter into an arrangement with the firm to keep these accumulated profits as deposits. Similarly, there was no such contract which could convert those accumulations 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 1959-60 shows that it proceeded on the footing as if the amounts standing to the credit of the partners and the minor did not represent capital contributed by them. Inasmuch as the persons in whose names the credits stood were entitled to withdraw any amount from that account without obtaining the consent of other persons, the credits represented the loan advanced by them to the firm and that in such a case it is not possible to say that interest paid on 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contributors to be used for the business of the firm so that they may earn profit. The way in which the credits outstanding in the names of the various partners and the minor came into existence clearly shows that these credits have been entered in the names of various persons because of their being partners or persons admitted to the benefits of the firm. Learned counsel for the assessee strongly relied upon the circumstance that the partners and the minor were 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 v ..... X X X X Extracts X X X X X X X X Extracts X X X X
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