1962 (8) TMI 109 - HC - Income Tax

Summary

Issues Involved:
1. Constitutional validity of section 16(3)(a)(i) and (ii) of the Income-tax Act.
2. Inclusion of interest earned by the assessee's wife and minor children on past profit accumulations in the assessee's total income under section 16(3)(a)(i) and (ii).

Issue-wise Detailed Analysis:

1. Constitutional Validity of Section 16(3)(a)(i) and (ii):
The assessee challenged the constitutional validity of section 16(3)(a)(i) and (ii) of the Income-tax Act, arguing that these provisions offend clauses (f) and (g) of article 19(1) of the Constitution of India. The Tribunal relied on the decision in Amina Umma v. Commissioner of Income-tax [1954] 26 ITR 137 to reject this contention. The learned counsel for the assessee conceded that the Supreme Court's decision in Balaji v. Income-tax Officer [1962] 43 ITR 393 (SC) was against his contention. Therefore, the court answered this question against the assessee, upholding the constitutional validity of the provisions.

2. Inclusion of Interest Earned by the Assessee's Wife and Minor Children:
The second issue revolves around whether the interest earned by the assessee's wife and minor children on past profit accumulations should be included in the assessee's total income under section 16(3)(a)(i) and (ii). The relevant facts are that the assessee, his wife, and one other partner constituted a partnership firm, with the assessee's two minor sons admitted to the benefits of the partnership. The firm credited interest on the profits standing to the credit of the wife and minor sons for the first time in the year ending 30th September 1956.

The Tribunal, relying on the decision in Bhogilal Laherchand v. Commissioner of Income-tax [1954] 25 ITR 523, concluded that interest attributable to sums gifted to the minors by other persons could not be considered income arising from their admission to the partnership. However, the interest on the balances of profits credited to the wife and minor sons fell under section 16(3)(a)(i) and (ii). The assessee argued that the interest should not be included in his total income, while the department contended otherwise.

The court examined the partnership deed, which allowed members or persons admitted to the benefits of the partnership to receive interest on amounts standing to their credit. The court noted that the interest was credited based on the accumulated profits of the wife and minors, and there was no separate agreement for advancing amounts as loans to the firm.

The court disagreed with the Bombay High Court's reasoning in Bhogilal Laherchand's case, which suggested that interest earned on deposits by minors did not arise from their admission to the partnership. The court emphasized that the right to receive interest flowed directly from the membership or admission to the benefits of the partnership, as per the partnership deed and section 13(d) of the Partnership Act.

The court also referred to the Assam High Court's decision in Chouthmal Kejriwal v. Commissioner of Income-tax [1961] 41 ITR 570, which supported the view that interest on capital supplied by a minor admitted to the benefits of the partnership arose directly from that relationship.

Ultimately, the court concluded that the interest earned by the wife and minor children on past profit accumulations should be included in the assessee's total income under section 16(3)(a)(i) and (ii). The question was answered against the assessee, and the assessee was ordered to pay the costs of the department.