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TMI Blog1983 (12) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... especially when there was no obligation on the minors to fetch capital under the terms of the concerned partnership deeds. The facts are few and they can be stated as under. 3. The assessee is an individual and she is the mother of two minors---Master K. Satish Kumar and Baby K. Usharani. Inter alia, they were admitted to the benefits of partnership in a firm called Kunchakarra Bhaktavatsala Rao and Gella Parthasaradhi, Khammam, which was constituted under the deed of partnership dated 25-3-1976. Though the terms of the partnership deed were reduced to writing on 25-3-1976, the firm itself was functioning from 20-12-1974. It carried on business in cloth and textiles. Clauses 5 and 6 of the said partnership deed are as follows: "5. The capital for the partnership business shall be contributed by all the partners according to their convenience and capacity of the partners. 6. The interest at 18 per cent per annum may be charged and the same shall be debited to the profit and loss account and credited to the partners' accounts in proportion of their investments." Under clause 7 of the partnership deed, Master Satish Babu was entitled to 17 per cent and Baby Usharani to 15 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and K. Bhaktavatsala Rao, Khammam, in which Master Satish and Baby Usharani used to have their accounts. At the end of the assessment year 1975-76, it can be seen from the copy of the accounts of the minors furnished at page 1 of the paper book that Satish was having a credit balance of Rs. 40,150.14 and Usharani was having a credit balance of Rs. 30,726.16. The very same amounts of credit were brought into the first firm as per the copy of the personal accounts of these two minors furnished at page 2 of the paper book. For the assessment year 1976-77 for which the accounting year is 15 months and 10 days, Master Satish was credited with an amount of Rs. 9,189 and Baby Usharani was credited with an amount of Rs. 6,951.90 towards interest on their capital. Profit derived by the firm and ascribed to the share of the minors was separately credited in their personal accounts. Thus, though a single consolidated account was maintained, in the case of these two minors in the books of the firm, the credits towards interest as well as profit were being separately shown. In the assessment year 1977-78, copy of the personal account of the two minors in the first firm as well as copy of accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors' share income including interest received from the firm should be deemed to be benefits arising out of their admission to the benefits of partnership and so the assessee's claim for exclusion of interest is not acceptable. On that score, the ITO included the interest derived by Master Satish and Baby Usharani in the first firm and also the share and interest income derived by Master Satish in Mamata. Aggrieved by the decision of the ITO for the assessment years 1977-78 and 1978-79, the assessee went up in appeal before the AAC, A-Range, Hyderabad. The AAC held that the word 'partner' was used in a broader sense which includes minors. The decision of the Bombay High Court relied on behalf of the assessee, viz., CIT v. S.V. Nashte [1979] 119 ITR 130, was felt not applicable as it was rendered prior to the amendment of section 64. He further held that in the present case interest accrued to the minors because of their admission to the benefits of partnership. He also held that profits as well as interest were derived by the minors on their capital contribution. He also held that clause 5 of the partnership deed dated 25-3-1976 obliged the partners to contribute capital and by virt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the Division Bench holding that the word 'partner' used in the terms of the partnership deeds under reference does not include minor partners and so we hold that the minor partners were not obliged to bring in any capital before being admitted to the benefits of partnership under both the partnership deeds which are under review. 11. The assessee relied upon the Bombay High Court's decision in the case of S.V. Nashte, for the proposition that interest received on loans advanced by the minors out of their own funds to a partnership firm to the benefits of which they are admitted cannot be said to be income arising directly or indirectly from the admission of the minors to the benefits of partnership. In the said decision, the Bombay High Court held as follows: "... Giving the words their natural and normal meaning, interest received on loans advanced by a minor out of his own funds to a partnership firm to the benefits of which he is admitted cannot be said to be income arising directly or indirectly from the admission of the minor to the benefits of the partnership. In Bhogilal Laherchand v. CIT [1954] 25 ITR 523 (Bom.), this Court has taken the view that the interest ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that on a reading of the relevant documents where the minor is not obliged to deposit or the firm is not obliged to receive and keep the deposit on condition of its paying interest thereon, we consider any interest paid on deposits made by the minor cannot be taken to have a direct or indirect connection with his being admitted to the benefits of partnership'. This view was arrived at by the Tribunal after considering the decision of the Madras High Court in Addl. CIT v. Misrimul Sowcar [1979] 119 ITR 123 cited by the revenue. Ultimately, the Bench held that the interest paid to the minor Bhagwandas by the firm Rampal Mohanlal cannot be included in the hands of the assessee under section 64(1)(iii). 15. As against the decisions and orders cited in favour of the assessee, the learned departmental representative, Shri Santhanam, brought to our notice, firstly, the decision of the Supreme Court in S. Srinivasan v. CIT [1967] 63 ITR 273. On the facts of that case, the assessee is a senior partner in the firm. The other two partners are his wife and a stranger. In addition, two minor sons of the assessee were admitted to the benefits of partnership. There was a clause in the deed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m and having earned these profits in that capacity, they allowed the use of their profits to the firm without any specific arrangement as would naturally have been entered into if these funds had belonged to a stranger. (5) They let the firm use funds of theirs, because they had interest in the profits of the firm. (6) In the first instance, they did not charge interest but it was only at a later stage that the three partners of the firm decided to give interest on these amounts. (7) When the decision was taken to give interest, the nature of the funds did not change." Based on all the above findings of fact the Honourable Supreme Court ultimately decided that it is clear that interest indirectly arose or accrued to the wife and the minor sons because of their capacity mentioned in section 16(3)(a)(i) and (ii). 16. However, in this case, the amount invested was not accumulated profits at all. But, the same was brought in as cash. Prior to 20-12-1974, neither Master Satish nor Baby Usharani was admitted to the benefits of partnership of K. Bhaktavatsala Rao and G. Parthasaradhi. For the first time, the above firm itself came into existence only on 20-12-1974. As in S. Srin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest derived by the minors in this case is includible in the hands of their parent under section 64(1)(iii). The argument is, in our opinion, misconceived. What is held by the Andhra Pradesh High Court was, when the interest was paid on the capital contribution made by the minor admitted to the benefits of partnership, then it is includible in the hands of his parent. We have no quarrel even with this proposition also. We have already found that what is contributed by the minors is not capital but it is an advancement of loan. Therefore, the above proposition laid down by the Andhra Pradesh High Court does not come into operation at all. 19. The learned departmental representative also sought to rely upon the decision of this Tribunal, Calcutta Bench, in IT Appeal No. 326 (Hyd.) of 1979 dated 15-3-1980, copy or which is filed before us. We have carefully read the order and we are of the opinion that this order does not advance the case of the revenue at all. Firstly, in the said order, the provisions of section 64(1)(iii), which are relevant for our purpose, were not at all considered. Secondly, it is not found by the Tribunal that interest income also arises directly or indir ..... X X X X Extracts X X X X X X X X Extracts X X X X
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