1973 (10) TMI 19 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of section 64(ii) of the Income-tax Act, 1961, to partnerships formed before the commencement of the Act.
2. Inclusion of interest income received by minors from the firm in the total income of the assessee under section 64(ii).

Detailed Analysis:

Issue 1: Applicability of section 64(ii) of the Income-tax Act, 1961, to partnerships formed before the commencement of the Act.

The assessee contended that section 64(ii) of the Income-tax Act, 1961, should not apply to partnerships formed before the Act's commencement. The argument was based on the interpretation of section 16(3)(a)(ii) of the Indian Income-tax Act, 1922, as decided in Commissioner of Income-tax v. Sodra Devi, where the Supreme Court held that the term "individual" does not include females. The assessee argued that since the minors were admitted to the benefits of the partnership before the 1961 Act, the new provisions should not apply retrospectively.

The Tribunal, however, held that section 64(ii) applies irrespective of when the partnership was formed or when the minors were admitted. The court agreed with the Tribunal, stating that section 64 does not differentiate based on the timing of the partnership's formation. The provision is intended to cover income arising from transactions regardless of when they occurred, and it operates prospectively, applying to income accruing after the Act's commencement.

The court noted that section 64(ii) is broader in scope than section 16(3) of the 1922 Act and applies to both spouses, unlike the earlier provision which applied only to a husband or father. The Allahabad High Court's decision in Smt. Priti Lata Samanta v. Commissioner of Income-tax was cited, affirming that section 64(ii) includes the income derived by a minor child from a partnership where the mother is a partner. Therefore, the court answered the first question in the affirmative, ruling against the assessee.

Issue 2: Inclusion of interest income received by minors from the firm in the total income of the assessee under section 64(ii).

The Tribunal had excluded the interest income received by the minors from the assessee's total income, reasoning that the interest on excess capital treated as a loan did not arise from the minors' admission to the benefits of the partnership. The Tribunal relied on the Supreme Court decision in S. Srinivasan v. Commissioner of Income-tax, which distinguished between interest on deposits and interest on accumulated profits.

The court examined several authorities on the interpretation of section 64(ii). In Bhogilal Laherchand v. Commissioner of Income-tax, the Bombay High Court held that interest on deposits made by minors, not obligated by the partnership deed, should not be included in the father's income. Conversely, in Chouthmal Kejriwal v. Commissioner of Income-tax, the Assam High Court included interest on capital supplied by minors in the father's income, reasoning it was an indirect result of their admission to the partnership.

The Supreme Court in S. Srinivasan v. Commissioner of Income-tax upheld the inclusion of interest on accumulated profits in the father's income, emphasizing the connection between the income and the minors' admission to the partnership. The court also referred to P. A. P. Chidambara Nadar v. Commissioner of Income-tax, where interest on independent deposits by minors was excluded from the father's income.

The court concluded that the connection between the minors' admission to the partnership and the interest income must be examined. If the interest is paid under the partnership deed and the firm is not obligated to take deposits from outsiders, the interest income is connected to the minors' admission. In this case, the firm was obligated to retain the minors' funds and pay interest, which was not extended to third parties. Therefore, the interest income was directly related to their admission to the partnership.

The court disagreed with the Tribunal's exclusion of the interest income and answered the second question in the negative, ruling against the assessee. The revenue was awarded costs, with counsel's fee set at Rs. 250.