1989 (5) TMI 23 - HC - Income Tax

Firm Inclusions In Total Income Interest Minor Admitted To Benefits Of Partnership Total Income

Summary

Issues:
Treatment of interest paid by the firm to a minor admitted to the benefits of partnership under section 64(1)(iii) of the Income-tax Act, 1961.

Analysis:
The case involves a reference under section 256(1) of the Income-tax Act, 1961, for the assessment year 1976-77. The question of law referred to the court was whether the interest payable to a minor son by a firm, of which he was a partner, should be included in the income of the assessee-father under section 64(1)(iii) of the Act. The minor's share in the firm and the interest payable to him were the key financial aspects in question.

The Income-tax Officer initially included both the minor's share from the firm and the interest in the assessee's total income under section 64(1)(iii). However, the Appellate Assistant Commissioner excluded the interest income from the assessed total income, considering it to have accrued on loans advanced by the minor out of his own funds. The Department appealed this decision, arguing that the interest payable to the minor was part of his accumulated share of profit from the firm and should be included in the parent's income under section 64(1)(iii).

The core contention was whether the interest payable to the minor should be treated as income of the parent under section 64(1)(iii). The Tribunal, after considering submissions from both parties, held that interest on independent loans made by the minor to the firm or on the credit balance in his account should not be included in the parent's income under section 64(1)(iii). The Tribunal upheld the Appellate Assistant Commissioner's decision in this regard.

The court analyzed the partnership deed's clause regarding the treatment of amounts standing to the credit of partners as capital and further contributions as loans to the firm. It referenced a similar case before the Madras High Court to support its interpretation. The court emphasized that interest on amounts traceable to the admission of a minor to the benefits of partnership should be included in the parent's income under section 64(1)(iii).

Citing precedents, including a Supreme Court decision, the court concluded that interest on accumulated profits of a minor admitted to the benefits of partnership should be treated as income of the parent. The court rejected the argument that the partnership deed's provision converting accumulated profits into loans altered the nature of the income. It highlighted the importance of a specific agreement for such conversion and held that interest on such accumulations should be included in the parent's income.

Ultimately, the court answered the reference question in the negative and in favor of the Revenue, stating that interest on accumulated profits traceable to the minor's admission to the benefits of partnership should be included in the parent's income.