1982 (10) TMI 55 - AT - Income Tax

Summary

Issues Involved:
1. Inclusion of interest income received by minors from a partnership firm in the income of their father.
2. Nature of the minors' contributions to the firm - whether they were capital or deposits.
3. Applicability of Section 64(1)(iii) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Inclusion of Interest Income Received by Minors from a Partnership Firm in the Income of Their Father:

The revenue contended that the AAC erred in law and facts by holding that the interest income received by minors from the firm should not be added to the income of the assessee. The revenue relied on precedents like L. Ram Narain Garg v. CIT, Bajrang Lal v. CIT, CIT v. Rukmanand Kedia, and S. Srinivasan v. CIT to support their stance. The AAC, however, found that the interest income received by the minors was not due to their admission to the benefits of the partnership but from their respective credits in the firm. The AAC concluded that the revenue failed to establish the nexus between the interest income and the minors' admission to the benefits of the partnership, thus justifying the deletion of Rs. 5,840 from the assessee's income.

2. Nature of the Minors' Contributions to the Firm - Capital or Deposits:

The partnership deed indicated that the minors, Rajesh Kumar and Rakesh Kumar, were admitted to the benefits of the partnership and were entitled to 12% interest on their respective credits. The ITO argued that the interest received by the minors should be included in the father's income regardless of the source of the credits. The AAC, however, determined that the interest was from the minors' deposits and not from their admission to the partnership benefits. The learned Judicial Member supported this view, emphasizing the lack of evidence connecting the interest income to the minors' partnership benefits.

Conversely, the learned Accountant Member opined that the minors' contributions were capital, not deposits, as the accounts were maintained identically for all partners, including minors. He argued that the absence of a clause requiring capital contribution did not change the nature of the contributions, which were treated as capital in the firm's accounts. He concluded that the interest paid on these contributions should be included in the father's income under Section 64(1)(iii).

3. Applicability of Section 64(1)(iii) of the Income-tax Act, 1961:

The Third Member analyzed the case under Section 64(1)(iii), which includes income arising directly or indirectly to a minor from their admission to the benefits of a partnership in computing the parent's total income. The Third Member agreed with the Accountant Member, finding that the minors' contributions were capital, not deposits. He referenced the Supreme Court's decision in S. Srinivasan and the Allahabad High Court's decision in Rukmanand Kedia, which supported the inclusion of interest on capital contributions in the parent's income. The Third Member concluded that the interest of Rs. 5,840 should be included in the father's income under Section 64(1)(iii).

Conclusion:

The appeal was ultimately resolved in favor of the revenue, with the interest income received by the minors being included in the father's income. The Third Member's opinion led to the reversal of the AAC's order and the restoration of the ITO's order, emphasizing the nature of the minors' contributions as capital and the applicability of Section 64(1)(iii).