TMI Blog1962 (8) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... to receive interest on the amounts standing to their credit at the rate of 12 annas per cent. per mensem, i.e., nine per cent. per annum. Such interest was not credited in any of the previous years, and on the accumulation of the profits of these persons, interest was credited for the first time in the year ended 30th September, 1956. These interest amounts were ₹ 7,879, ₹ 6,971 and ₹ 7,702 in respect of the wife and the two minor sons. Relief from the application of section 16(3)(a)( i) and (ii) was sought both in respect of the profits earned during the year of account and the interest payment credited as above. The Income-tax Officer rejected the assessee's contention, which was that the shares held by his wife and the two minor sons had been gifted to them by other persons and, since it was not as a result of a transfer from him that these persons had obtained their interest in the firm, their share income should not be included in the total income of the assessee. This contention was rejected. An appeal was taken to the Appellate Assistant Commissioner before whom it was urged that the provisions of section 16(3)(a)( i) and (ii) was ultra vires the Consti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a decision of the Supreme Court in Balaji v. Income-tax Officer [1962] 43 ITR 393 (SC) is against his contentions. This question is, therefore, answered against the assessee. The second question has given rise to some difficulty for the reason that the decision of the Bombay High Court in Bhogilal Laherchand 's case (supra) appears to be in favour of the assessee. Before dealing with the facts of that decision and the reasoning that appealed to the learned judges who decided that case, we may refer to the relevant clauses of the partnership deed in the present case. The partnership was entered into between the assessee, his wife, Shanbagammal, and one Sivachidambaram Pillai. It provided that the accounts shall be closed on the 30th September of each year and, net profits or loss determined as on that date. After setting out the profit-sharing ratio as it obtained previously, the document provided that the profits for the year ending on the 30th September, 1952, and for subsequent years shall be shared in the ratio of 190/300, 25/300 and 30/300 among the three partners, and that the two minors be entitled to 30/300 and 25/300 of the profits. In the event of there being a lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p Act, the partner or a person admitted to the benefits of the partnership is entitled to receive interest on the balances standing to his credit. The statute itself accordingly provides that one of the rights following the membership or the admission to the benefits of a firm shall include the right to receive the interest. Turning to the clause in the partnership deed, the firm undertakes to pay a member or a person admitted to the benefits of the partnership interest at a rate specified. This right in the strictest sense flows from the contractual relationship created between the parties by the partnership document. It would therefore appear that the receipt of this amount cannot be dissociated from the agreement of partnership and can be said to flow directly from the membership of the wife in the one case or the admission of the minors in the other case. In the Bombay decision, to which reference has been made, the facts were these: The assessee therein started a partnership business with his major son. Two of his minor sons were admitted to the benefits of the partnership. The share of the profit of the minors was included in the total income of the assessee. In addition t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marily and substantially by reason of the fact that they deposited moneys in the firm. It is not by reason of the fact that they were partners, nor was it by reason of the fact that they were obliged under the partnership deed to make the deposits, that this interest was earned. Therefore, this income arose to the minors not from their admission to the benefits of the partnership, but the income arose because the minors chose to keep moneys in the partnership firm. They could have earned interest on their deposits without being partners, they could have earned interest on their deposits by keeping the deposits in any other firm, and really apart from the fixing of the rate of interest there is no connection whatsoever between the minors being admitted to the benefits of the partnership and their earning interest on the deposits which they have made or on the moneys that stand to their credit. The position undoubtedly would have been different if there was any obligation upon the minors to make deposits or, on the other hand, if the partnership firm was under an obligation to keep the moneys of the minors, whether they needed them or not. (p. 527) We regret we are unable to ado ..... X X X X Extracts X X X X X X X X Extracts X X X X
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