1978 (10) TMI 75 - AT - Income Tax

Summary

Issues Involved:
Inclusion of interest on accumulated share of profits of minor children in the assessments of their parents under Section 64(1)(iii) of the Income Tax Act, 1961.

Detailed Analysis:

Common Issue and Consolidation:
The judgment addresses four appeals involving a common issue, consolidated for convenience. The minors in question were admitted to the benefits of certain firms during the assessment year 1976-77. The primary issue is whether interest on the accumulated share of profits of these minors should be included in the assessments of their parents under Section 64(1)(iii) of the Income Tax Act, 1961.

Income Inclusion under Section 64(1)(iii):
The Income Tax Officer (ITO) included the interest on both the accumulated shares of profits and other current account balances of the minors in the assessments of their parents. The Appellate Assistant Commissioner (AAC) deleted the inclusion of interest on current account balances, following the Supreme Court ruling in S. Srinivasan vs. CIT Madras, but confirmed the inclusion of interest on the accumulated share of profits.

Assessees' Argument:
The counsel for the assessees argued that the interest on the accumulated share of profits, retained and used for business by the firms, should not be included in the assessments of the parents. The argument was based on clauses in the partnership deeds of the firms, which purportedly required the firms to retain the accumulated profits and pay interest on them. The counsel relied on the Bombay High Court ruling in CIT, Bombay City-II vs. Chandanmal Easwarchand, asserting that Section 64(1)(iii) would not apply.

Revenue's Argument:
The Revenue countered by relying on the AAC's orders and the Supreme Court ruling in 63 ITR 273. The departmental representative argued that the clauses in the partnership deeds did not support the assessees' contention and that the facts in the Bombay case were distinguishable.

Tribunal's Analysis:
The Tribunal considered the rival submissions and focused on whether the interest on the accumulated share of profits of the minors is includible in the assessments of the parents. The Tribunal noted that the Supreme Court in S. Srinivasan vs. CIT Madras held that interest earned on amounts retained by the firm as accumulated profits of minors is includible in the assessment of the parents. The Tribunal distinguished the Bombay High Court ruling, which was based on specific clauses in the partnership deeds treating accumulated profits as deposits.

Examination of Partnership Deeds:
The Tribunal examined the clauses in the partnership deeds referred to by the assessees' counsel. The relevant clauses stated that capital shall not carry any interest, additional sums required by the business may be advanced by partners and credited to their current accounts, and interest on current accounts would be mutually agreed upon. The Tribunal found no agreement or understanding among the partners to treat the accumulated share of profits as deposits on which interest was payable.

Conclusion:
The Tribunal concluded that the accumulated share of profits was not converted into deposits or loans but remained as accumulations belonging to the minor children. The interest was paid by the firms because the funds belonged to the minors admitted to the benefits of the partnership, not due to any specific arrangement or contract. The Tribunal upheld the AAC's order, confirming the inclusion of interest on the accumulated share of profits in the assessments of the parents, and dismissed the appeals.

Final Judgment:
The appeals were dismissed, and the inclusion of interest on the accumulated share of profits of the minors in the assessments of their parents under Section 64(1)(iii) of the Income Tax Act, 1961, was upheld.