1969 (9) TMI 21 - HC - Income Tax

ITO included in the assessment of the assessee the share incomes of the minor sons including the interest which was credited to their respective capital accounts in the firm s account books - held that share income of the minors was rightly included in the income assessed in the hands of the assessee

Summary

Issues:
1. Assessment of share incomes of minor sons in the hands of the assessee under section 16(3)(a)(ii) of the Income-tax Act.
2. Correct status of the assessee as "Hindu undivided family" or "individual."

Analysis:
The judgment pertains to the assessment year 1958-59 where the assessee, an individual, held a share in a partnership firm along with his adult son and three minor sons. The partnership deed specified the profit-sharing ratio and the entitlement of the minor sons to the benefits of the partnership. The Income-tax Officer included the interest income of the minor sons in the assessee's assessment under section 16(3)(a)(ii) of the Income-tax Act.

The Appellate Assistant Commissioner initially excluded the interest income but refused to entertain the plea to change the status of the assessee from individual to Hindu undivided family. Subsequently, the Income-tax Appellate Tribunal allowed the department's appeal and dismissed the assessee's appeal, upholding the inclusion of the interest income in the assessment.

The key question referred to the court was whether the interest earned by the minor sons should be included in the total income of the assessee. The assessee relied on a Bombay High Court decision, arguing that interest earned by minors on capital in a partnership should not be included in the assessee's income. However, the Tribunal found that the minors had indeed contributed capital to the firm and earned interest due to their admission to the benefits of the partnership.

The court considered precedents from the Assam High Court and its own decisions, emphasizing that interest earned by minors on capital invested in a partnership is directly or indirectly derived from their admission to the partnership benefits. Therefore, the Tribunal's conclusion that the minors' share income should be included in the assessee's income was upheld, and the question was answered in the affirmative against the assessee, who was directed to pay costs.

In conclusion, the judgment clarifies the treatment of interest income earned by minor partners in a partnership and affirms the inclusion of such income in the hands of the assessee under the Income-tax Act provisions.