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TMI Blog2014 (8) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... while computing the total income of the assessee – Decided in favour of Revenue. - Income Tax Reference No. 44 of 1998 - - - Dated:- 17-6-2014 - M. R. Shah And K. J. Thaker,JJ. For the Petitioner : Mr. K. M. Parikh For the Respondent : Mr. R. K. Patel JUDGMENT (Per : Honourable Mr. Justice M. R. Shah) 1. Present Income Tax Reference at the instance of the Revenue has been made by the learned Income Tax Appellate Tribunal, Ahmedabad (hereinafter referred to as Tribunal ) under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as Act ) to consider the following common question of law. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the amounts of interest paid to the accounts of the minors from the partnership firms of (1) M/s. K.S. Patel Co. (2) M/s. Patel Traders and (3) M/s. Shanabhai Jethabhai Patel Co. were not liable to be clubbed under the provisions of Section 64(1)(iii) of the I.T. Act, 1961 with the income of the assessee? 2. Facts leading to the present Reference in nutshell are as under: 2.1 That the Assessing Officer clubbed the income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . That the learned Tribunal also allowed the appeals of the assessee on the issue for the AY 1977-78 and 1978-79 in ITA No.1197 and 1198/81. 2.3 That the reference applications made by the revenue came to be rejected by the learned Tribunal vide its order in Revision Application No.115/Ahd/82 [arising out of ITA No.2282/Ahd/1980 for AY 1976-77] and Revision Application 651/1982 652/1982 [arising out of ITA No.1197/1981 and 1198/1981 for AY 1977-78 and 1978-79]. The reference applications made by the revenue to this Court under Section 256(2) of the Act also came to be rejected vide the order passed in ITA No.151/1983 and ITA Nos.63/1983 and 64/1983. It appears that being aggrieved by the orders passed by this Court, rejecting the aforesaid reference applications, the revenue approached the Hon ble Supreme Court and the Hon ble Supreme Court vide its judgment and order dated 20.09.1994 passed in Civil Appeal Nos.4569 4570 of 1990 with Civil Appeal No.4988/1990 observed that the question raised by the revenue is a question of law involving interpretation of the provisions of section 64(1)(iii) of the Act on which there is no binding decision of that Court and therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said partnership firm he can do so and for that they will be paid interest. So far as the partnership deed in the case of third firm viz. M/s. Patel Traders is concerned, the relevant clause would be clause (4), which reads as under: (4) The required capital for this partnership is to be brought by each partner according to their share in the firm. Moreover, if the business firm require more capital at any time, the firm can borrow capital either on interest or on loan basis and the firm shall pay interest thereon. 3.1 While passing the assessment orders and on interpretation of the relevant clauses in the partnership deeds and even considering the conduct on the part of the assessee more particularly considering the Profit Loss account of the respective partnership firms/assessee, the AO observed that even the assessee themselves treated the account as capital account and not the loan or deposit account and therefore it is held that the amount of interest earned and credited / paid to the minors is to be clubbed into the accounts of the assessees considering the section 64(1)(iii) of the Act. That the respective appeals by the assessee before the learned CIT(A) c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. which was brought into existence with effect from Kartak Sud 1 S.Y. 2014 i.e. with effect from 24.10.57 A.Y. 195960. This firm was reconstituted from A.Y. 197576 i.e. from 27.10.73 when Kaushik kumar Sandeep kumar were admitted to the benefits of partnership. In this partnership there are three partners Shanabhai (25% share), Maganbhai (25% share) and Kishorebhai (20% share). Minor Sandeep kumar and Kaushik kumar have been admitted to benefits of partnership each having 15% share in profit only. Clause (3) of the partnership deed specifies that the partners have to being capital in proportion of their profit sharing ratio. It further specifies that whether to being larger or smaller amount of capital would depend upon the concern of the other partners. It also lays down that firm would bring the same at interest by borrowings and that the capital contributed by partners would bear 9% rate of interest. This deed of partnership also does not specify any condition for contribution of capital by minors for their being admitted to the benefits of partnership. Minor Kaushik kumar had deposited with the said firm from S.Y. 2021 on which interest has been paid and the balance is to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut the capital contribution according to which all the partners had to bring capital by mutual understanding an in case extra capital was required the same could be brought by the firm at interest or by loan. There is no stipulation in the deed of partnership for contribution by minor Sandeep for being admitted to the benefits of partnership. A sum of ₹ 25,000 was credited to this account in S.Y. 2028 by withdrawal from the account of Shanabhai from M/s. S.R. Patel Co. and interest and profit has been credited to this account year after year. As pointed out earlier in absence of specific provision in the deed of partnership requiring the minor to contribute capital as a condition is being admitted to the benefits of partnership the interest credited to the benefits of partnership the interest credit to this account, in our opinion would not be his by provisions of section 64(1)(iii) of the Act. By making above observations on interpretation and/or considering the relevant clauses of the partnership deeds with respect to the respective firms reproduced hereinabove, the learned Tribunal has held that the interest credited to the account of the aforesaid two minors would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecific provision or obligation on the part of the minor to contribute any capital, the learned Tribunal has observed and held that therefore it could be inferred that the amounts standing to the credit of minor Kaushik kumar on which the interest has been paid right from S.Y. 2021 should be treated as loan account and as a consequence the interest paid on the said amount is not hit by the provisions of sec.64(1)(iii) of the Act. It is submitted that if the learned Tribunal would have properly interpreted and/or considered clause (3) of the partnership deed, which provided that it was open for the minor to contribute the amount in that case, the learned Tribunal would not have come to such an inference and the conclusion. 4.2 It is further submitted by Shri Parikh, learned advocate appearing on behalf of the revenue that even with respect to the partnership firm M/s. Shanabhai Jethabhai Patel Co. is concerned, the learned Tribunal has misinterpreted and/or misread the relevant clause i.e. clause (3) in the partnership deed. It is submitted that the learned Tribunal has materially erred in observing that the deed of partnership does not specifically provides for any condition fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat therefore when the findings recorded by the learned Tribunal to treat the amount on wrong premise and when the learned AO specifically observed and held that even the assessee also treated the same as capital account, the learned Tribunal has materially erred in allowing the appeals and in holding that the aforesaid amount of interest is not hit by provision of section 64(1)(iii) of the Act. It is further submitted by Shri Parikh, learned advocate appearing on behalf of the revenue that as per section 64(1)(iii) [as it stood at the relevant time] in computing the total income of any individual, all such income as arises directly or indirectly to a minor child of such individual from the admission of the minor to the benefits of the partner in a firm was required to be included in the computing the total income of the individual. It is submitted that therefore in the present case when the amount of interest received by the minors was a capital account in the partnership firm, section 64(1)(iii) would be directed and the said income of interest was required to be included in computing the total income of the individual assessee. It is submitted that therefore the impugned common ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tel Co. were not liable to be clubbed under the provisions of section 64(1)(iii) of the Act with the income of the assessee? Therefore, while considering the aforesaid questions it is required to be considered 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. The relevant clauses in the respective partnership deeds are already reproduced hereinabove. 6.1 In the case of Kaushik kumar and Sandeep kumar Patel Co., the relevant clause would be clause (3). Clause (3) of the partnership deed provided that the required capital for the partnership firm is to be brought by party of the Third Part and party of the Fourth Part and party of the First Part and party of the Second Part are working partners and will not bring any capital for the partnership firm. However, it further provided that if the minor wants to invest any capital in the said firm, he can do so and for that they will be paid the interest. Therefore, it is not that the minors were not required to invest the capital. It was voluntary. That the learned Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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