1971 (3) TMI 5 - HC - Income Tax

HUF converted into partnership firm - Whether, on the facts and circumstances of the case, the amount of interest standing to the credit of each minor son of the assessee in the said firm was rightly included in the income of the assessee under section 64 of the Income-tax Act, 1961 - Hele, no

Summary

Issues:
Whether the interest standing to the credit of minor sons of the assessee in a firm should be included in the income of the assessee under section 64 of the Income-tax Act, 1961?

Analysis:

The case involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the inclusion of interest credited to the accounts of minor sons of the assessee in the income of the assessee under section 64 of the Act. The assessee, a partner in a firm, had three minor sons admitted to its benefits, and the Income-tax Officer included the minors' share of profit, including interest, in the assessee's income. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld this inclusion, leading to the reference to the High Court.

The partnership deed clarified that the minors were not liable to invest any capital, and any money credited in their names was deemed to be their deposits in the firm. The Tribunal concluded that the minors had an obligation to keep the money deposited in the firm, leading to the inference that the interest earned by the minors should be included in the assessee's income under section 64 of the Act. The Tribunal distinguished this case from previous judgments and relied on the intention with which the amount was introduced in the business.

The High Court analyzed the partnership deed's clauses and the circumstances surrounding the minors' accounts. It noted that the partnership deed clearly indicated that the credits in the minors' names were not their capital contribution but their deposits. The Court emphasized that the minors were not required to contribute any capital, and the circumstances did not indicate otherwise. Therefore, it was held that the interest credited to the minors' accounts should not be added to the assessee's income under section 64 of the Income-tax Act, 1961.

In conclusion, the High Court answered the question in the negative, ruling against the department. The Commissioner of Income-tax was directed to pay costs to the assessee, and the decision was made in favor of the assessee regarding the inclusion of interest in the assessee's income under section 64 of the Act.