1976 (12) TMI 20 - HC - Income Tax

Accumulated Profits, Inclusions In Total Income, Minor Admitted To Benefits Of Partnership, So Included

Issues Involved:
1. Inclusion of interest credited to minor sons' accounts in the assessee's total income under section 16(3)(a)(ii) of the 1922 Act and section 64(ii) of the 1961 Act.
2. Interpretation of partnership deed clauses and their impact on the inclusion of interest income.
3. Impact of accumulated profits and specific arrangements on the inclusion of interest income.

Detailed Analysis:

Issue 1: Inclusion of Interest Credited to Minor Sons' Accounts

The primary question in both references was whether the interest credited to the accounts of the assessee's minor sons should be included in the assessee's total income under section 16(3)(a)(ii) of the 1922 Act and section 64(ii) of the 1961 Act. The court noted that the sums of Rs. 1,526, Rs. 1,808, and Rs. 2,008 credited to the minor sons' accounts for the assessment years 1961-62, 1962-63, and 1963-64, respectively, were included by the Income-tax Officer in the assessee's total income. This inclusion was contested by the assessee, who argued that the interest earned on the amounts left in the firm could not be said to arise from the admission of the minors to the benefits of the partnership.

Issue 2: Interpretation of Partnership Deed Clauses

The court examined the partnership deed dated October 19, 1960, and the relevant clauses to determine if there was an obligation on the minors to bring in capital. Clause 4 of the deed stated that "Whatever capital is required for the business of the partnership shall be brought in by the parties in such shares and proportions and in such manner in all respects as may be agreed to between them without reference to their shares in the partnership." The court interpreted "the parties" to refer to the major partners (the assessee and his two major sons) and not the minors. Therefore, there was no obligation on the minors to bring in capital.

However, the court also noted that there was no bar to the minors voluntarily bringing in capital through their guardian. Clause 5 of the deed indicated that the minors' capital could suffer diminution in case of losses, suggesting that the minors' capital was indeed invested in the partnership. Clause 6 provided for interest at 6% per annum on the capital standing to the credit of each partner, which included the minors.

Issue 3: Impact of Accumulated Profits and Specific Arrangements

In the second reference, the court considered the accumulated profits credited to the minors' accounts and the interest thereon. The Tribunal had excluded the interest amounts based on the Supreme Court's decision in S. Srinivasan v. Commissioner of Income-tax [1967] 63 ITR 273, which differentiated between interest on deposits/loans and interest on accumulated profits. The Tribunal also relied on clause 3(a) of the partnership deed dated February 17, 1965, which stated that any money belonging to a minor admitted to the benefits of the partnership, if retained in the partnership, should be treated as a deposit with interest paid at 9% per annum.

The court agreed with the Tribunal's view that the specific arrangement under clause 3(a) of the 1965 deed meant that the interest on accumulated profits retained in the partnership should be treated as interest on deposits, thereby not attracting section 64(ii). However, the court clarified that this clause applied only to moneys brought in or retained in the partnership after February 17, 1965, and not to the initial capital contribution made by the minors.

Conclusion:

The court concluded that the interest on the initial capital contribution of Rs. 25,788.89 made by the minors through their guardian was includible in the assessee's total income under section 16(3)(a)(ii) of the 1922 Act and section 64(ii) of the 1961 Act. However, interest on accumulated profits retained in the partnership after February 17, 1965, under the specific arrangement of clause 3(a) of the 1965 deed, was not includible.

Judgment:

1. The question in Reference No. 27 of 1967 was answered in the affirmative and in favor of the revenue.
2. The question in Reference No. 215 of 1971 was answered:
- In the affirmative and in favor of the revenue regarding the interest on the initial capital contribution.
- In the negative and in favor of the assessee regarding the interest on accumulated profits retained in the partnership.

There were no orders as to costs in both references.

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