TMI Blog1992 (2) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... These minors were not only paid the share of profits but they also received interest from the firm on the accumulated profits and it is this interest which was assessed in the hands of the assessee by the Incometax Officer by invoking the provisions of section 64(1)(iii). The assessee filed an appeal before the Appellate Assistant Commissioner but he came to the conclusion that the interest received by the minors was assessable in the hands of the assessee. A second appeal was filed to the Income-tax Tribunal who examined the clauses of the partnership deed. The Tribunal held that, in respect of Vikas Textile Agency, the partnership deed was executed on July 1, 1974, and on March 12, 1975, the following resolution was passed by the partners: "All partners feel that the capital contributed by the partners may not be sufficient and, therefore, decide that deposits should be accepted from minors and loans may be raised from other outsiders. Such deposits and loans shall carry interest at 12% per annum." In respect of the other partnership firm, viz., Associated Sales Company, a similar resolution was passed on July 15, 1975, by the partners of that firm which was in the follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est which arises thereon would be the interest belonging to the minors-exclusively and the provisions of section 64(1)(iii) would not be applicable. On behalf of the Department, Shri Rajendra has vehemently contended that, in the instant case, the Tribunal has rightly applied the ratio of the decision of the Supreme Court in Srinivasan's case [1967] 63 ITR 273 and that the facts in the present case are in pari materia with that decision. According to learned counsel, it is by reason of the minors being admitted to the benefits of the partnership that the interest was paid and, therefore, the provisions of section 64(1)(iii) were attracted. In order to appreciate the contention, it is necessary to set out the provisions of section 64(1)(iii) as it stood at the relevant time : "64.(1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly-... (iii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm." A bare reading of the said section shows that any income which arises directly or indirectly to a minor child of an individual from the admission of the mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the wife and the minor sons should be held to be in the nature of deposits made by them with the firm, or in the nature of loans advanced by them to the firm, and interest earned on such deposits or loans can have no relationship with the membership of the firm of the wife or the admission to the benefits of the partnership of the minor sons. It appears to us that these accumulated profits remaining in the hands of the firm cannot, on any principle, be equated with deposits made or loans advanced. The profits accumulated to the credit 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 anyone 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de hors the partnership agreement, whereby a loan is advanced by a minor to the partnership firm to which firm he has been admitted to the benefits of the partnership, then that interest may not become liable to tax in the hands of the father. It will be appropriate, at this stage, to refer to some of the decisions of the High Courts and to see how they have applied and followed the decision of the Supreme Court in Srinivasan's case [1967] 63 ITR 273. In Smt. Nripendrakumari Bhandari v. CIT [1976] 105 ITR 158 (Mad), the minors had been admitted to the benefits of the partnership and interest was paid to them in terms of clause 4 of the partnership deed which provided that whatever excess remained over the capital should be treated as a loan to the firm and that interest is payable on such accumulations which are treated as loans. The Division Bench of the Madras High Court came to the conclusion that the ratio of the decision of the Supreme Court in Srinivasan's case [1967] 63 ITR 273 was clearly applicable. After referring to the decision of the Madras High Court in P. A. P. Chidambara Nadar v. CIT [1970] 77 ITR 84 and Kaladhar Prasad Chaturvedi v. CIT [1971] 82 ITR 713 (All), t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e partnership that the interest was paid and, therefore, the same was rightly included in the assessment of the father's income. A somewhat contrary note was struck by the Bombay High Court in the case of Chandanmal Kasturchand [1978] 112 ITR 296. In that case, interest was paid on two amounts, viz., on the capital which had been contributed on behalf of the minors and secondly on the accumulated profits which had been credited to the minors' accounts. The Bombay High Court applied the principles laid down in Srinivasan's case [1967] 63 ITR 273 (SC) and came to the conclusion that the interest which was paid on the capital which had been contributed was clearly assessable in the hands of their father. With regard to the interest paid on the accumulated profits, the court took notice of the fact that the partnership deed itself provided that any money belonging to the minor admitted to the benefits of the partnership if brought into the partnership or retained in the partnership shall be treated as a deposit and interest shall be paid thereon. It was held by the Bombay High Court that this would amount to a contract to convert the accumulated profits into loans and would fall in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship but, thereafter, by positive act, the guardian of the minors directed that a part of the capital should be withdrawn and be treated as a loan. In those circumstances, the Bombay High Court came to the conclusion that the nature of the amounts immediately underwent a change and thereafter, the said amount, which was originally capital, stood transformed to that of a loan and that interest which was received on the loan belonged exclusively to the minor and could not be clubbed in the hands of the father. In arriving at this decision, the Bombay High Court followed its earlier decision in Chandanmal Kasturchand's case [1978] 112 ITR 296 (Bom). As we shall presently see, there was no such overt act in the present case whereby the accumulated profits were impressed with the character of a loan or deposit. The Calcutta High Court has also had occasion to consider the provisions of section 64(1)(iii) in the case of CIT v. Ramesh Chandra Sogani [1990] 183 ITR 312 ; [1990] 52 Taxman 244, where a similar question came up for consideration. The headnote of the report clearly brings out the facts and the ratio of the decision and the same is as follows (headnote of 52 Taxman) : "Fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself. The interest payable to the minor by the firm on such accumulations was, therefore, liable to be included in the income of the assessee." We may, however, note that the attention of the Hon'ble judges of the Calcutta High Court was apparently not drawn to the two decisions of the Bombay High Court in Chandanmal Kasturchand's case [1978] 112 ITR 296 and S. V. Nashte's case [1979] 119 ITR 130. The last decision on this point is also of the Calcutta High Court in the case of CIT v. Santosh Kumar Kanoria [1992] 193 ITR 655. In this case, the High Court considered the judgment of the Bombay High Court in Chandanmal Kasturchand's case [1978] 112 ITR 296 and applied the ratio of the decision of the Supreme Court in Srinivasan's case [1967] 63 ITR 273 and came to the conclusion that even where there was provision in the partnership deed for payment of interest, the interest so paid would be includible in the total income of the assessee under section 64(1)(iii). In Santosh Kumar Kanoria's case [1992] 193 ITR 655 (Cal) the High Court also referred to the decision of the Madras High Court in the case of Addl. CIT v. Misrimul Sowcar [1979] 119 ITR 123, the headnote of which brings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In other words, no overt act was done to impart the character of a deposit or loan on the accumulated profits which were there in the books of account of the firm. The Tribunal, in the present case, has found as a fact that there was no exercise of volition by the minors or anyone on their behalf to Convert the accumulated profits to a loan or deposit. The resolution of March 12, 1975, in the case of Vikas Textile Agency was prior to the accumulated profits arising. The accounting year in the present case is the year ending June 30, 1976. After June 30, 1976, there was no suggestion either by the father, viz., the assessee or the minor children or anyone else on their behalf that the accumulated profits should be converted into loan. On March 12, 1975, a decision was taken by the partners that, in future, deposits should be accepted from minors and loans be raised from outsiders. There was no decision, thereafter, of the minors or anyone on their behalf, including the assessee, that the accumulated profits existing as on June 30, 1975, and June 30, 1976, should be regarded as deposit or loan to the firm. As regards the Associated Sales Company, the resolution of July 15, 1975, doe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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