2002 (2) TMI 10 - HC - Income Tax

Whether Tribunal was right in holding that the loan accounts of the minors in the books of the firm M/s. Ratnalaya will not lose its character and will not partake of the character of capital account by virtue of the fact that the share incomes of the minors were credited to their loan account? It is not disputed that minors were entered into partnership to the benefits of the partnership and they were under no obligation under the partnership deed to contribute any capital and when the amount of profit was credited in their accounts they were the absolute owners of that profit which was credited in their accounts. There is no agreement contrary to the ownership of that amount with the minors. Thus no interference is called for in the order of the Tribunal.

Summary

Issues:
Interpretation of section 64(1)(iii) of the Income-tax Act, 1961 regarding the treatment of loan accounts of minors in a partnership firm.

Analysis:

The case involved a partnership firm named M/s. Ratnalaya, which included two minors admitted to the benefits of the partnership without any obligation to contribute capital. The Income-tax Officer invoked section 64(1)(iii) of the Act, considering the amounts credited in the minors' accounts as includible in the income of the assessee. Both the Commissioner of Income-tax (Appeals) and the Tribunal upheld this view. However, the Tribunal noted that since the minors were not required to contribute capital as per the partnership deed, their income from the firm should not be clubbed with the assessee's income under section 64(1)(iii) of the Act.

The assessee relied on the decision in CIT v. Jwalaprasad Agarwala [1967] 66 ITR 154 (SC) and CIT v. Smt. Savitri Devi Dhandharia [1996] 219 ITR 277 (Gauhati). In the former case, the Supreme Court observed that the minor's deposit in the partnership firm did not necessarily indicate an obligation to deposit capital, emphasizing the need for evidence to support such claims. The latter case highlighted that the amount kept in deposit by the minor in the firm was considered the minor's absolute property, with no evidence of an agreement to convert the deposit to capital.

The Tribunal found that the minors in the present case were the absolute owners of the profits credited to their accounts, as they were not obligated to contribute capital and no agreement existed to alter the ownership of the credited amounts. Consequently, the Tribunal's decision was upheld, and no interference was deemed necessary. The question posed was answered in favor of the assessee and against the Revenue, affirming that the loan accounts of the minors in the partnership firm would not lose their character or be treated as capital accounts based on the credited share incomes of the minors.