1969 (12) TMI 16 - HC - Income Tax

Assessee s two minor sons had been admitted to the benefits of the partnership. The minors had deposited some sums which were treated by the firm as loans - whether the Tribunal was right in law in holding that the interest paid on the additional amounts contributed by the minors is properly includible in the income of the assessee under section 16(3)(a)(ii) - Held no

Summary

Issues Involved:
1. Inclusion of interest paid on additional amounts contributed by minors in the income of the assessee under section 16(3)(a)(ii) of the Income-tax Act, 1922.

Detailed Analysis:

Issue 1: Inclusion of Interest Paid on Additional Amounts Contributed by Minors
The primary issue referred to the High Court was whether the interest paid on additional amounts contributed by the minors should be included in the income of the assessee under section 16(3)(a)(ii) of the Income-tax Act, 1922.

Facts of the Case:
The assessee was a partner in a registered firm where his two minor sons were admitted to the benefits of the partnership. According to clause 5 of the partnership deed, the capital required was Rs. 25,000 each, and any excess amount contributed would bear interest at 12% per annum. The minors contributed the required capital and additional sums treated as loans. For the assessment year 1961-62, the minors earned interest on both capital and additional loans.

Income-tax Officer's Decision:
The Income-tax Officer included the total interest paid on both capital and additional loans to the minors in the assessee's income under section 16(3)(a)(ii) of the Income-tax Act, 1922.

Appellate Assistant Commissioner's Decision:
The Appellate Assistant Commissioner accepted the assessee's contention that the interest on the additional loans (Rs. 4,241) should not be included in the assessee's income, as there was no obligation for the minors to deposit amounts exceeding the capital. This decision was based on precedents from the Bombay High Court and Assam High Court.

Income-tax Appellate Tribunal's Decision:
The Tribunal reversed the Appellate Assistant Commissioner's decision, holding that the interest on additional amounts deposited by the minors was a benefit arising from their admission to the partnership. It relied on the decision in S. Srinivasan v. Commissioner of Income-tax and noted that the Supreme Court had disapproved the Bombay High Court's decision in Bhogilal Laherchand v. Commissioner of Income-tax.

Assessee's Argument:
The assessee argued that the Tribunal erred in not distinguishing between interest on capital and interest on additional deposits. The interest paid on additional deposits was not under the terms of the partnership deed but was an independent transaction. The assessee cited the Supreme Court's decision in S. Srinivasan v. Commissioner of Income-tax, which distinguished between interest on accumulated profits and interest on loans or deposits.

High Court's Analysis:
The High Court agreed with the assessee, noting a clear distinction between capital investment and other investments. The terms of the partnership required only Rs. 25,000 as capital, and the additional amounts deposited by the minors were treated as loans. The High Court emphasized that the revenue had not established a connection between the additional deposits and the minors' interest in the partnership. Following the Supreme Court's decision in S. Srinivasan v. Commissioner of Income-tax, the High Court held that interest on loans or deposits made independently of the minors' interest in the partnership should not be included in the assessee's income under section 16(3)(a)(ii).

Conclusion:
The High Court concluded that the Tribunal erred in treating the additional amounts as capital without any basis. The amounts deposited by the minors were loans, and the interest paid on these loans could not be included in the assessee's income. The reference was answered in favor of the assessee, and the assessee was entitled to costs.

Final Judgment:
Reference answered in favor of the assessee. The assessee was entitled to costs, with counsel's fee set at Rs. 250.