1982 (9) TMI 150 - AT - Income Tax

Summary

Issues:
Interpretation of Section 64(1)(iii) of the IT Act, 1961 regarding the addition of interest income of minors admitted to partnership benefits to the total income of the assessee.

Detailed Analysis:
The case involved an appeal against the order of the AAC sustaining an addition made under Section 64(1)(iii) of the IT Act, 1961. The assessee, an individual, had minor daughters admitted to the benefits of partnership in two firms, receiving interest on funds advanced to the firms. The ITO added this interest to the total income of the assessee under Section 64(1)(iii), which was confirmed by the AAC. The appeal before the ITAT argued that the interest accrued only on the partner's share of profit and deposit from the minors' own funds, not as part of the benefits of partnership. The partnership deeds of the firms explicitly stated that no interest would be given on the partner's capital contributions. The revenue contended that the interest accrued due to the minors being admitted to partnership benefits, thus falling under Section 64(1)(iii) of the Act.

Upon considering the submissions, the ITAT held in favor of the assessee. Section 64(1)(iii) requires adding income arising to a minor child from admission to partnership benefits to the total income of the assessee. The crucial point was whether the interest income arose directly or indirectly from the admission of minors to partnership benefits. Referring to a decision of the Madras High Court, the ITAT emphasized the need for a connection between the admission of minors to partnership benefits and the realization of income. In this case, the interest was paid because the firm borrowed funds from the minors, not due to any obligation on the minors to keep their profits or funds with the firm. Therefore, the interest accrued from such deposits did not constitute benefits arising from the partnership under Section 64(1)(iii) and should be excluded from the assessee's income. Consequently, the ITAT set aside the lower authorities' orders and directed the ITO to recompute the assessee's income, excluding the interest accruing to the minors from the firm deposits, ultimately allowing the appeal.