1997 (4) TMI 57 - HC - Income Tax

Summary

Issues:
1. Taxability of interest income earned on amounts transferred from minors' capital accounts to fixed deposit accounts under section 64(1)(iii) of the Income-tax Act, 1961.
2. Inclusion of income earned by assessee's minor children from partnership benefits towards total income under section 64(1)(iii) of the Income-tax Act, 1961.

Analysis:

1. Taxability of Interest Income:
The Revenue questioned the correctness of the Income-tax Appellate Tribunal's decision regarding the taxability of interest income of Rs. 48,000 earned on amounts transferred from minors' capital accounts to fixed deposit accounts. The Tribunal found that the transfer of funds indicated an intention to treat them as separate loans, leading to the conclusion that the interest on these deposits did not directly or indirectly arise from the minors' admission to the partnership benefits. Therefore, the interest income was deemed not taxable in the hands of the assessee under section 64(1)(iii) of the Income-tax Act, 1961.

2. Inclusion of Partnership Income:
On the other hand, the assessee raised a question regarding the inclusion of Rs. 25,280 earned by the minor children from partnership benefits in the total income of the assessee. The Tribunal observed that the amounts credited to the minors' accounts were capital investments in the firm, allowing the interest credited to be included in the assessment of the assessee. Citing the decision in Radhey Shyam Dalmia v. CIT [1992] 195 ITR 667 and S. Srinivasan v. CIT [1967] 63 ITR 273, the court held that income arising to the minor due to the partnership deed, whether in the form of profit share, commission, or interest, would be assessable in the father's hands. However, if there exists a separate contract where a loan is advanced by the minor to the firm, the interest may not be taxable in the father's hands. The Tribunal's conclusion aligning with the Supreme Court's decision deemed the interest on these deposits not directly or indirectly income to the minors from their partnership benefits.

In conclusion, the High Court answered both questions affirmatively. The Revenue's question was resolved in favor of the assessee, indicating that the interest income was not taxable under section 64(1)(iii). Conversely, the question raised by the assessee was resolved in favor of the Revenue, implying that the income earned by the minor children from partnership benefits was includible in the total income of the assessee. No costs were awarded in this matter.