2014 (8) TMI 202 - HC - Income Tax

Clubbing of income u/s 64(1)(iii) Interest paid to minors from partnership firm - Whether the amounts standing to the credit of respective account of the respective minors on which the interest have been paid was required to be treated as capital or as loan advanced to the firm and/or the deposit Held that - The AO rightly was of the view that the provision of Section 64(1)(iii) of the Act cover the payments of interest made to minors on their deposits with the firms as it amounted to income which arose indirectly to the minors - there was no other material and/or basis for the Tribunal to come to the conclusion that the account in the respective partnership firms were the loan and/or advance - Considering the relevant clauses in the partnership deeds the amount credited in the account of the respective minors on which interest has been paid, is to be treated as capital investment - section 64(1)(iii) of the Act as it stood at the relevant time would be attracted and the AO rightly clubbed the interest earned by the minors on the amount lying that the partnership form while computing the total income of the assessee Decided in favour of Revenue.

Issues Involved:
1. Whether the amounts of interest paid to the accounts of the minors from the partnership firms were liable to be clubbed under the provisions of Section 64(1)(iii) of the Income Tax Act, 1961 with the income of the assessee?

Issue-wise Detailed Analysis:

1. Clubbing of Interest Income under Section 64(1)(iii):

Facts and Background:
The Assessing Officer (AO) clubbed the interest income credited to the accounts of two minors, Kaushik Kumar and Sandeep Kumar, in the books of three partnership firms under Section 64(1)(iii) of the Income Tax Act, 1961, for the assessment years 1976-77 to 1978-79. The minors were admitted to the benefits of the partnership firms, and the AO included the interest income in the assessee's income, considering it as arising indirectly to the minors. The first appellate authority upheld the AO's order.

Tribunal's Findings:
On appeal, the Tribunal concluded that the amounts credited to the minors' accounts were loans or deposits from independent sources and not capital contributions. The Tribunal held that the interest on these amounts was not subject to Section 64(1)(iii) since the minors were not obligated to contribute capital. The Tribunal allowed the appeals for the assessment years 1976-77, 1977-78, and 1978-79.

Revenue's Argument:
The Revenue contended that the Tribunal misinterpreted the partnership deeds and clauses, which indicated that the minors were required to contribute capital. The Revenue argued that the amounts should be treated as capital contributions, and the interest income should be clubbed under Section 64(1)(iii).

Assessee's Argument:
The assessee argued that there was no specific obligation for the minors to contribute capital, and the amounts were treated as loans or deposits. The Tribunal's interpretation was correct, and the interest income should not be clubbed under Section 64(1)(iii).

High Court's Analysis:
The High Court examined the relevant clauses in the partnership deeds of the three firms:

- M/s. Shanabhai Jethabhai Patel & Co.: Clause (3) indicated that capital was to be brought by each partner according to their share, with no specific obligation for minors to contribute capital.

- K.S. Patel & Co.: Clause (3) allowed minors to invest capital voluntarily, with no specific obligation.

- Patel Traders: Clause (4) required partners to bring capital by mutual understanding, with no specific stipulation for minors.

The High Court found that the Tribunal misinterpreted the partnership deeds. The clauses allowed minors to contribute capital voluntarily, and the amounts credited to the minors' accounts should be treated as capital investments. Therefore, the interest income should be clubbed under Section 64(1)(iii).

Conclusion:
The High Court held that the interest income paid to the minors' accounts should be clubbed under Section 64(1)(iii) of the Income Tax Act, 1961, with the income of the assessee. The Tribunal's findings were set aside, and the assessment orders were restored.

Judgment:
The question referred to the High Court was answered in favor of the Revenue and against the assessee. The interest income paid to the minors' accounts from the partnership firms was liable to be clubbed under Section 64(1)(iii) with the income of the assessee.

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