1981 (1) TMI 115 - AT - Income Tax

Summary

Issues:
- Applicability of section 64(1)(iii) to income of minor sons from partnerships
- Inclusion of interest paid to minors in parent's income
- Interpretation of partnership deeds regarding interest payments to minors

Analysis:

1. Applicability of section 64(1)(iii) to income of minor sons from partnerships:
The case involved the inclusion of share income and interest paid to minor sons of the assessee in the parent's income under section 64(1)(iii). The CIT (A) determined that the provision was applicable from the assessment year 1976-77 onwards due to the substitution of section 64 by section 13 of the Taxation Laws (Amendment) Act, 1975. The CIT (A) extensively analyzed the partnership deeds and concluded that the interest paid to the minors was on their capital contribution and accumulation of profits, thus rightly includible in the parent's income. The order highlighted that the interest income was treated as capital account and had always been taxed as business income in the hands of the minors.

2. Inclusion of interest paid to minors in parent's income:
The representative for the assessee argued, citing decisions of the Allahabad High Court, that interest paid to minors should not be included in the parent's income if it was on deposits unrelated to their partnership benefits. However, the CIT (A) determined that the minors' funds in the firms were not deposits but capital contributions and profits accumulation. The Appellate Tribunal agreed with the CIT (A) that the interest payments were rightly included in the parent's income under section 64(1)(iii), as the funds were considered capital accounts and not mere deposits.

3. Interpretation of partnership deeds regarding interest payments to minors:
The partnership deeds were crucial in determining the treatment of interest payments to the minors. The CIT (A) examined the clauses in the partnership deeds, emphasizing that the interest paid to both partners and minors indicated equal treatment, suggesting capital nature. The Tribunal concurred with the CIT (A) that the minors' funds were not deposits but capital contributions, affirming the inclusion of interest income in the parent's income. The interpretation of the partnership deeds played a significant role in establishing the connection between the interest income and the minors' admission to the partnerships.

In conclusion, the Appellate Tribunal upheld the decision of the CIT (A) that the interest income paid to the minor sons of the assessee from various partnerships should be included in the parent's income under section 64(1)(iii). The appeal by the assessee was dismissed, affirming the inclusion of the interest income in the parent's tax liability.