1971 (3) TMI 40 - HC - Income Tax

Whether interest earned by a minor on a sum deposited by him with a firm to the benefits of which he has been admitted and in which his father is a partner, is liable to be included in the income of his father by virtue of section 64(ii) of the Income-tax Act, 1961 question is answered in the affirmative, that is, in favour of the department and against the assessee

Summary

Issues Involved:
1. Whether interest earned by a minor on a sum deposited with a firm, to the benefits of which he has been admitted and in which his father is a partner, is liable to be included in the income of his father under section 64(ii) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Inclusion of Minor's Interest Income in Father's Income

Facts and Background:
The case involves a Hindu undivided family (HUF) where a partial partition occurred, and the minors' shares were determined and credited in a partnership firm. The minors, sons of Gian Chand, were admitted to the benefits of the partnership. The interest accrued on these credited amounts was disputed for tax liability under section 64(ii) of the Income-tax Act, 1961.

Contentions:
- The assessee conceded that the interest on the original credited amount was taxable under section 64(ii).
- However, the assessee contended that the interest on the accretions (subsequent profits and interest) should not be taxed under section 64(ii).

Tribunal's Findings:
- The Tribunal initially failed to determine whether the credited amounts were deposits or investments related to the minors' benefits in the partnership.
- Upon further examination, it was clarified that the credited amounts were accretions and not voluntary deposits or loans.

Supreme Court Reference:
The Supreme Court's decision in S. Srinivasan v. Commissioner of Income-tax was pivotal. It held that accumulated profits, even if left with the firm, do not transform into deposits or loans. They remain as profits derived from the partnership benefits.

Final Judgment:
- The High Court concluded that the interest on accretions falls within section 64(ii) of the Income-tax Act, 1961.
- The minors' initial capital contributions and subsequent accretions were not voluntary deposits or loans but profits arising from their admission to the partnership benefits.
- Therefore, the interest on these amounts should be included in the father's income.

Additional Contentions:
- The assessee's argument that minors were under no obligation to contribute capital was rejected.
- The Tribunal's reference to the account books was deemed appropriate as it was not additional evidence but a review of existing evidence.

Conclusion:
The High Court answered the referred question in the affirmative, supporting the department's stance and against the assessee. The interest earned on the minors' credited amounts, including accretions, is liable to be included in the father's income under section 64(ii) of the Income-tax Act, 1961. No costs were ordered.