1984 (11) TMI 82 - AT - Income Tax

Summary

Issues Involved:

1. Inclusion of interest paid to minors from three partnership firms under section 64(1)(iii).
2. Interpretation of partnership deeds and clause 5 regarding minors' contributions and interest payments.
3. Applicability of the Supreme Court decision in S. Srinivasan's case.
4. Determination of whether accumulated profits can be treated as deposits or loans advanced by minors.

Issue-wise Detailed Analysis:

1. Inclusion of Interest Paid to Minors from Three Partnership Firms Under Section 64(1)(iii):

The Income Tax Officer (ITO) included the interest paid to minors from three firms in the hands of the assessee under section 64(1)(iii). The Commissioner (Appeals) upheld this decision, rejecting the claim that the amounts on which interest was paid should be treated as deposits made by the minors. The Commissioner (Appeals) reasoned that the interest credited to minors arose indirectly from their admission to the benefits of the partnership, as the amounts standing to their credit were from accumulated profits.

2. Interpretation of Partnership Deeds and Clause 5 Regarding Minors' Contributions and Interest Payments:

The assessee argued that clause 5 of the partnership deeds of Hiralal Industries and Himson Textile Engineering specified that minors were not required to bring in capital but could lend money to the partnership firm as third parties, with interest paid to them in their capacity as lenders. The Accountant Member agreed with this interpretation, stating that the interest paid on accumulated profits should be treated as loans advanced by minors, not arising indirectly from their admission to the partnership. However, the Judicial Member disagreed, maintaining that the interest was includible under section 64(1)(iii).

3. Applicability of the Supreme Court Decision in S. Srinivasan's Case:

The learned departmental representative contended that the Supreme Court decision in S. Srinivasan's case established that interest on accumulated profits should be treated as income arising indirectly from the minors' admission to the partnership. The Accountant Member distinguished this case, noting that the partnership deeds in question specifically allowed minors to lend money to the firms, treating the interest as arising from loans rather than accumulated profits.

4. Determination of Whether Accumulated Profits Can Be Treated as Deposits or Loans Advanced by Minors:

The Accountant Member emphasized that the accumulated profits should be treated as deposits or loans advanced by minors, based on the specific provisions of clause 5 in the partnership deeds. The Judicial Member, however, argued that without an explicit arrangement or understanding, accumulated profits could not be equated with deposits or loans. The Third Member ultimately agreed with the Accountant Member, concluding that the interest paid to minors by Hiralal Industries and Himson Textile Engineering should not be included under section 64(1)(iii).

Conclusion:

The judgment concluded that the interest paid to minors by Hiralal Industries and Himson Textile Engineering is not includible in the hands of the assessee under section 64(1)(iii). The Third Member's decision resolved the difference of opinion between the original members, emphasizing the specific provisions of the partnership deeds and the reasonable construction of clause 5. The appeal was partly allowed, with the interest from Chetan Industries remaining includible under section 64(1)(iii).