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TMI Blog1960 (2) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... ,536 is credited which comprises of ₹ 7,055 as the share of his profit and ₹ 2,481 as interest. For the assessment year 1955-56 in the account of Prasanna Kumar a sum of ₹ 9,010 is credited comprising of ₹ 5,794 as the share of his profit and ₹ 3,216 as interest and in the account of Om Prakash ₹ 8,996 has been credited comprising of ₹ 5,794 as the share of his profit and ₹ 3,202 as interest. 3. Under a partnership deed dated 23rd March, 1953, entered into between the father, Chouthmal, and his two major sons, the two minor sons were admitted to the benefits of partnership. For the assessment years 1954-55 and 1955-56 the Income Tax Officer included the interest credited to the minor sons as a part of the allocation in the order passed by him under section 23(6) of the Income Tax Act and assessed the total credits in the accounts of the two minors in the hands of their father, the assessee. Appeals were filed before the Appellate Assistant Commissioner against the assessments made by the Income Tax Officer and the order of the Income Tax Officer including the interest received by the minors in the total income of the father under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determined is whether it can be said in the circumstances of the present case that the interest which the minor earned on his capital was directly or indirectly the result of his admission to the benefits of the partnership. If the minor partner gets interest on the capital, the interest is undoubtedly the result of his supplying the capital for the partnership and the supply of capital by him cannot be due to anything else except that he was admitted to the benefits of the partnership. But for his admission to the benefits of the partnership the question of his supplying capital would not arise at all. Cases of deposits by a minor partner may stand on a different footing. In the case of deposits the minor who has been admitted to the benefits of the partnership may not be under any obligation to made such deposits and in the absence of any such obligation on his part to make the deposit, it could not be said that the deposits which earned an interest was due to the fact that the minor was admitted to the benefits of the partnership. If it is optional for a minor who has been admitted to the benefits of the partnership to made a deposit, it cannot be said that the deposit was nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Income Tax Officer included the share in the profits of the firm of the two minors amounting to ₹ 2,10,154 and the interest amounting to ₹ 86,420 in the total income of the assessee. The inclusion of interest by the Income Tax Officer earned by the minors in the income of the father was challenged. Clause 3 if the deed of partnership which was relevant in that case was as follows: Interest at the rate of six per cent. per annum shall be paid to each partner on the moneys for the time being standing to his credit out of the gross profits of the business and such interest shall be cumulative so that any deficiency in any one year shall be made up out of the gross profits of any succeeding year or years. 8. It was held by the Bombay High Court that the interest could not be included in the income of the father. It was observed as follows: If therefore this be the true position under the partnership deed, can it be said that the interest which the minors earned was an income which directly or indirectly arose from their admission to the benefits of the partnership ? It is clear that the minors earned interest primarily and substantially by reason of the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be that section 16 will only be operative with regard to the actual share of the profits of the minors and not to any other benefit accruing to them or arising out of their admission to the partnership. In that view of the matter the word "indirectly" used in the section becomes redundant. In the present case the two relevant provisions of the partnership deed may be referred to. Clause 3 provides that "the capital of the partnership is the sum of the business capital of the family firm on the day of its taking over after distribution of the said capital amongst the partners in their profits sharing ratios." In the opening part of the deed the minors are also shown as the second party to the deed. The shares of the minors are shown to be one-fifth each. The shares of the minors in the joint family assets on the date of the partnership were taken over as their contribution towards the capital of the new partnership business. It is therefore clear by perusal of clause 3 that the capital was supplied in this case by the minors and, to my mind, the minors supplied capital only because they were admitted to the benefits of the partnership. 11. Clause 4 of the deed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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