1996 (5) TMI 57 - HC - Income Tax

Summary

Issues:
Clubbing of interest income earned by minor son in mother's total income under section 64(1)(iii) of the Income-tax Act, 1961.

Analysis:
The judgment pertains to a reference made under section 256(1) of the Income-tax Act, 1961 regarding the inclusion of interest income earned by a minor son in his mother's total income. The minor was admitted to the benefits of partnership in a firm and had interest income credited to his account. The dispute arose when the Income-tax Officer included a portion of this interest income in the mother's total income under section 64(1)(iii) of the Act. The mother contended that the interest income did not directly or indirectly arise from the minor's admission to the partnership but was earned on his deposits with the firm. However, the court held that the interest earned by the minor did arise indirectly from his admission to the partnership, as per the partnership deed clauses, and thus could be included in the mother's income under section 64(1)(iii) of the Act.

The court examined the partnership deed clauses, specifically clause 7, which stated that deposits made by minors shall form a debt due by the firm and carry interest. The court rejected the argument that the interest income was earned on deposits, emphasizing that the minor's share of profits, which he allowed to accumulate with the firm, was not a deposit made by him. The court found a direct or indirect connection between the interest income and the minor's admission to the partnership, thus justifying its inclusion in the mother's income. The court cited precedents, including a Supreme Court decision and a Division Bench judgment, to support its interpretation.

The court distinguished a Bombay High Court judgment where a partnership deed explicitly treated accumulated profits as deposits, leading to a different outcome. In the absence of such a clause in the present case, the court ruled that the interest accrued on the accumulated profits of the minor with the firm fell under the provisions of section 64(1)(iii) of the Act. Ultimately, the court answered the question in favor of the Revenue and against the assessee, upholding the inclusion of the interest income in the mother's total income.