TMI Blog1976 (12) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... e 'A', are the sums of Rs. 1,626, Rs. 1,808 and Rs. 2,008 credited to the accounts of the respective minor sons of the assessee as interest liable to be included in the assessee's total income under section 16(3)(a)(ii) of the 1922 Act for the assessment year 1961-62 and under section 64(ii) of the 1961 Act for 1962-63 and 1963-64 ? " The question in the other reference (I.T.R. No. 215 of 1971) runs thus : " Whether, on the facts and in the circumstances of the case, the sums of Rs. 7,177 and Rs. 7,265 credited in the accounts of the two minors with the firm were liable to be included in the total income of the assessee under section 64(ii) of the Income-tax Act, 1961 ? " The said question relates to the assessment year 1967-68. The facts giving rise to the aforesaid two questions may now be stated : The assessee, Chandanmal Kasturchand, is an individual. He has two major sons, Gulraj and Bhupatrai, and two minor sons, Mahendra Kumar and Devendra Kumar. He was also the karta of a joint family which carried on business in cloth in the name and style of Chandanmal Kasturchand Rathod at Mulji Jetha Market, Bombay. On October 31, 1959, there was a partial partition in the jo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1963-64. The assessee appealed to the Appellate Assistant Commissioner and objected to the inclusion in the assessee's income the aforesaid amounts of interest credited to the accounts of his two minor sons and the Appellate Assistant Commissioner by common order for all the three years under consideration took the view that the money standing to the credit of the minors represented their capital investment in the firm and the interest thereon was properly includible in the income of the assessee under section 16(3)(a)(ii) of the 1922 Act and section 64(ii) of the 1961 Act for the relevant years and in support of his view he relied upon the two decisions, one of the Assam High Court in Chouthmal Kejriwal v. Commissioner of Income-tax [1961] 41 ITR 570 (Assam) and the other of the Allahabad High Court in the case of L. Ram Narain Garg v. Commissioner of Income-tax [1965] 55 ITR 435 (All). The matter was carried by the assessee in further appeal to the Tribunal and it was contended on his behalf that under the partnership deed dated October, 19, 1960, (annexure " A ") there was no clause which required contribution of capital by any of the minors and as such the interest earned on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the minors were also credited in their respective accounts year after year and it does appear that there were practically negligible withdrawals made by the minors from their respective accounts, with the result that in the begining of Samvat year 2022 relevant for the assessment year 1967-68 under reference, a sum of Rs 74,483.36 had remained accumulated in the account of Mahendra Kumar while a sum of Rs. 76,610.16 had remained accumulated in the account of Devendra Kumar on that date. At the end of Samvat year 2022 a sum of Rs. 7,116.59 was credited to the account of Mahendra Kumar as interest on the credit balance in his account while a sum of Rs 7,265.16 similarly credited in the account of Devendra Kumar. The Income-tax Officer included the aforesaid interest amount that had been credited in the two respective accounts of the minors at the end of Samvat year 2022 in the total income of the assessee under section 64(ii) of the 1961 Act. The assessee objected to such inclusion in the appeal which he preferred to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner excluded the interest amount, following the decision of the Tribunal in the assesse's appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court and the two amounts of interest could not be included in the total income of the assessee. The Tribunal, therefore, rejected the appeal of the revenue. The second reference is at the instance of the Commissioner of Income-tax. So far as the question in Reference No. 27 of 1967 is concerned Mr. Joshi appearing for the revenue has contended before us that, having regard to the facts and circumstances of the case, particularly the circumstances in which the joint family business came to be converted into a partnership business and the initial capital of the joint family business came to be divided equally amongst the assessee and his two major sons and two minor sons which amounts were credited to the respective accounts of each one of them in the books of the partnership and having regard to the terms of the deed of partnership dated October 19, 1960, the three sums of Rs. 1,526 (for the assessment year 1961-62), Rs. 1,808 (for the assessment year 1962-63) and Rs. 2,008 (for the assessment year 1963-64) which had been credited to the accounts of the respective minor sons of the assessee as interest will have to be regarded as includible in the assssee's total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectly or indirectly . ...... (ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner." The Corresponding provision is to be found in section 64(ii) and the same is in almost identical terms which runs thus : " 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." On a reading of the aforesaid material provisions in the two enactments it will appear clear that in deciding whether a case falls under either of the aforesaid provisions, it is necessary to find out whether there is a connection between the income and the admission of the minors to the benefits of the partnership ; the connection need not be direct ; it may be indirect and the question in the instant case is whether the three sums which were credited to each of the accounts of the two minor sons as interest for the three years in question have any connection direct or indirect with their admission to the benefits of the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set out at the commencement of the judgment. It is not possible to accept this submission of Mr. Dastur for the reason that by framing the question in the manner it has done, all that the Tribunal wanted to emphasise was that the terms of the partnership deed (annexure " A ") were an important aspect by reference to which the question may have to be decided but that does not mean that the question framed will have to be answered only by having regard to the terms of the deed of partnership ignoring the facts and circumstances of the case. The terms and conditions of the deed of partnership have themselves to be considered in the light of the facts and surrounding circumstances obtaining in the case and as we shall indicate later on, the facts and surrounding circumstances are not in dispute at all and, therefore, the question will have to be answered by having regard not merely to the terms and conditions of the deed of partnership but also to the facts and surrounding circumstances of the case. We may mention that the question raised in the second reference has been framed in such a manner that the question is expected to be answered by having regard to the facts and in the circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s divided amongst the members of the said joint Hindu family and that such division has been recorded in the books of the said business. The aforesaid recital clearly brings out the fact that in the partial partition that was effected on October 31, 1959, amongst the coparceners of the joint Hindu family, the assets of the aforesaid joint family business were dividend amongst the members of the said joint family and it was also not disputed before us but in fact Mr. Dastur produced before us the relevant entries appearing in the books of account of the joint family business to show that as a result of the said division of assets of the said joint family business the capital was also divided and a sum of Rs. 25,788.89 forming part of the initial capital of the joint family business came to be credited in the name of each one of the coparceners including the two minor sons. It is, therefore, clear that this amount which was credited in the respective accounts of the two minor sons was straightaway brought into their account from the capital account which initially stood in the karta's name in the books of the joint family business. Mr. Dastur further stated before us that though the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the loose manner in which these expressions have been used it would not be possible to give the same meaning to the particular expression at all places wherever it has been used by the parties in the document and every time the context will have to be seen for properly construing these expressions. With this preliminary observation we proceed to consider the relevant portions of the deed of partnership which is annexure " A " to the settlement of the case. From the recitals it is clear that the document has been executed by three parties, viz., Chandanmal as party of the first part, Gulraj as party of the second part and Bhupatrai as party of the third part and it is also clear from the recitals that these three parties to the document being all majors, have admitted the two minors, Mahendra Kumar and Devendra Kumar, to the benefits of the partnership. The first two recitals which are important run thus : " And whereas a partial partition of certain assets of the said joint family took place on the 31st day of October, 1959, and on such partition the said assets were equally divided between the party of the first Part, his wife, Jivabai, his sons the party of the second par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e benefits of the partnership to the extent of 20 nP in a rupee. ------------------------------------ Total 1.00 ------------------------------------ and they shall in like proportion bear all losses including loss of capital, if any. Provided however and it is hereby expressly agreed between the parties hereto who are all majors that the said minors, Mahendra Kumar Chandanmal and Devendra Kumar Chandanmal, shall be entitled to the benefits of the partnership only and shall not be personally liable for any obligations of the said firm." The aforesaid clause in our view is very important inasmuch as it not merely indicates the shares of the five persons named therein in the profits of the partnership business, viz., the three major persons as well as the two minor sons but also contemplates that these named persons shall in like proportion bear all losses including capital loss, if any. In the first place, the expression " the partners " occurring in the opening words of clause 5 has been clearly used, for if under the clause the shares in the net profits of the belonging to the partners were to be indicated then the names of only three major persons, namely, Chandanm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been made clear that though the capital, if any, brought in on behalf of the minors may suffer reduction or diminution, it was expressly agreed between the parties who were all majors that the said minors shall be entitled to the benefits of the partnership only and shall not be personally liable for any obligation of the said firm. In other words, since the two minors were being admitted to the benefits of the partnership they shall have no personal liability in respect of any obligations of the firm. But so far as the capital, if any, brought in on behalf of the minors through their guardian was concerned the same may suffer diminution. Mr. Dastur contended that such interpretation of the aforesaid material phrase in clause 5 would be illegal and not in consonance with the legal principle that the minor is merely to be admitted to the benefits of the partnership and should never be liable for any losses that may be suffered by the partnership business. We do not wish to express any opinion one way or the other on this legal submission which has been made by Mr. Dastur but the important aspects that emerge from clauses 4 and 5 read together are that there was no obligation ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar indicated anywhere in the deed preventing the minors from making capital investment in the partnership. On a fair reading of clause 5 it appears to us very clear that parties did not contemplate that minors if they thought fit, may bring capital in the partnership business and if they did, interest at 6% would be paid. Having regard to this position which emerges very clearly on a proper construction of the partnership deed and having regard to the factual circumstances which we have indicated above, the position in our view is quite clear that the two amounts of Rs. 25,788.89 which were initially credited in the respective accounts of the two minor sons in the books of the partnership were as and by way of capital investment made by them through their guardian and that is how they were admitted to the benefits of the partnership and, if that be so, interest earned on these two respective individual amounts which was credited to their accounts in the partnership books will have to be regarded as having a connection with their having been admitted to the benefits of the partnership and as such the interest will be includible in the total income of the assessee under the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition is entirely different. Initially, there was a joint family business which was comprised of six coparceners of which the assessee was the karta. In such joint family business there was a capital account maintained in the books of that business, that there was an oral partition on October 31, 1959, at which certain assets including the assets of the joint family business were divided equally between the coparceners and certain amounts going to the share of each of the five persons, namely, the assessee and his two major sons and two minor sons representing in the aggregate total capital standing in the books of the family firm came to be entered or credited in the individual account of the assessee, his two major sons and two minor sons. It is also clear that though under the deed of partnership no obligation was cast on the minors to bring in any capital there was no bar to the minors voluntarily doing so and that the partnership deed does suggest that the partners did contemplate that the minors through their guardian could I bring in any capital and having regard to the admitted facts which we have mentioned above, the initial credits that were made in the two respective ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent. per mensem. For a number of years up to the previous year relevant to the assessment year 1957-58, the shares of profits of the wife and the minor sons were allowed to accumulate without interest. With effect from that previous year the firm decided to allow 9% interest per annum on these accumulated profits. The question was whether the interest so allowed was assessable in the hands of the appellant under section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922. The court held that the interest accrued to the wife and the minor sons at least indirectly because of their capacity mentioned in section 16(3)(a)(i) and (ii) and was, therefore, assessable in the appellants' hands. The court has also pointed out that the cases where interest is earned on a deposit or loan differ from cases where interest is earned on the accumulated profits arising from the firm itself. It may be stated that on behalf of the appellant, reliance was placed upon the decision of this court in Bhogilal's case [1954] 25 ITR 523 (Bom) and the Supreme Court took the view that the ratio of that decision was not applicable to the case before it. The Supreme Court pointed out that in Bhogilal's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 minors who had been admitted to the benefits of the partnership. It is thus clear that the interest at least indirectly arose and accrued to the wife and the minor sons because of their capacity mentioned in section 16(3)(a)(i) and (ii) in the Income-tax Act. " In the lengthy passage which we have quoted above, the Supreme Court has clearly carved out an exception where an arrangement wiih the firm to keep these accumulated profits as deposits could be made on behalf of the minor sons and that if such an arrangement can be said to have been made the ratio of the decision would not apply. In this behalf the Tribunal as well as Mr. Dastur before us relied upon clause 3(a) of the deed of p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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