1971 (5) TMI 28 - HC - Income Tax

Whether the interest earned by the wife and minor son of the assessee on the credits standing in their names is income which accrued to them directly or indirectly because of their membership or admission to the benefits of the firm Messrs. Laljimal Tika Ram in which the assessee is a partner Whether the interest income earned by Kasturi Devi and Ram Gopal were liable to be included in the assessment of the assessee under section 16(3)(a)(i) and 16(3)(a)(ii) of the Indian Income-tax Act 1922

Issues Involved:
1. Whether the interest earned by the wife and minor son of the assessee on the credits standing in their names is income arising directly or indirectly due to their membership or admission to the benefits of the firm.
2. Whether such interest income should be included in the total income of the assessee under section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922.

Issue-Wise Detailed Analysis:

1. Nature of the Credits Standing in the Names of the Wife and Minor Son:
The primary issue was to determine whether the credits standing in the names of the wife and minor son of the assessee represented their capital contributions to the firm or were merely loans advanced by them. The Tribunal initially held for the assessment year 1957-58 that these amounts were capital contributions, thus making the interest earned on them income arising directly or indirectly from their membership or admission to the benefits of the firm. This was based on the fact that the family business assets were transferred to the firm as a going concern, and the amounts were credited to their accounts on the opening day. The Tribunal relied on the case of Chouthmal Kejriwal v. Commissioner of Income-tax to support this view.

However, for the assessment years 1958-59 and 1959-60, the Tribunal took a different view, stating that the amounts introduced by the wife and minor could not be considered as capital contributions. This was based on the interpretation that capital is a sum fixed by agreement for the purposes of commencing or carrying on partnership business, and no such agreement existed in this case. The Tribunal also noted that the partnership deed allowed for interest to be paid irrespective of profits, indicating that the amounts were more akin to loans or advances rather than capital.

2. Applicability of Section 16(3)(a)(i) and (ii):
The court had to decide if the interest income earned by the wife and minor son should be included in the assessee's total income under section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922. The Supreme Court's decision in S. Srinivasan v. Commissioner of Income-tax was pivotal. The Supreme Court held that interest on accumulated profits standing to the credit of partners and minors admitted to the benefits of the firm is income accruing to them directly or indirectly because of their membership or admission to the benefits of the firm. The court emphasized that without a specific arrangement converting accumulated profits into loans or deposits, such credits remain linked to the individual's capacity as a partner or minor admitted to the benefits of the firm.

Tribunal's Findings and Court's Examination:
For the assessment year 1957-58, the Tribunal concluded that the credits represented capital contributions, and the interest earned was income arising from their membership or admission to the benefits of the firm. For the subsequent years, the Tribunal found that the credits were loans or advances, not capital contributions, and thus the interest earned should not be included in the assessee's income.

The court examined these findings in light of the Supreme Court's observations in S. Srinivasan v. Commissioner of Income-tax. The court noted that the arrangement for interest payment in the partnership deed was not akin to an agreement with a stranger for a loan or deposit. The interest rate was variable and dependent on the partners' discretion, indicating that the credits were not loans but contributions due to the partners' interest in the firm's profits.

Conclusion:
The court held that the amounts standing to the credit of the wife and minor son were contributed in their capacity as partners or persons admitted to the benefits of the firm. Consequently, the interest earned on these credits was income arising directly or indirectly from their membership or admission to the benefits of the firm. Therefore, the interest income was includible in the assessee's total income under section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922.

Final Judgment:
The court answered the questions referred in both references in the affirmative and in favor of the revenue. The interest income earned by the wife and minor son was to be included in the assessee's total income under section 16(3)(a)(i) and (ii). The parties were directed to bear their own costs, and counsel's fee was assessed at Rs. 200 in each of the two references.

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