9911796707
TMI Blog1989 (1) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 1976-77 ?" Jagdish Prasad and his brother, Musaddilal, constituted a partnership firm, Jagdish Prasad and Co. One Bajranglal is the assessee herein. In 1970, his elder son by name, Sanjay Kumar, was admitted to the benefits of the said partnership. On that occasion, Sanjay Kumar brought in a sum of Rs. 10,000 into the partnership. Four years later, the other son of Bajranglal, Master Manoj Kumar, was also admitted to the benefits of the partnership. A similar sum of Rs. 10,000 was brought in by Master Manoj Kumar on the occasion of his admission. When Sanjay Kumar was admitted, deed of partnership was executed and again when Manoj Kumar was admitted another deed of partnership was executed. For the assessment year 1976 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Judicial Member opined that the definition of partner in the Income-tax Act takes in a minor and further that there was no express agreement or arrangement with the firm to keep the accumulated profits of the minors as deposits. He was of the opinion that in the circumstances on record, it is also not possible to spell out an oral contract or agreement to the effect that the said amounts shall be treated as deposits. He was, therefore, of the opinion that the interest income earned by the minors was includible in the assessee's total income. In view of the difference of opinion between the two Members, the matter was referred to a third Member. The third Member, by his order dated April 7, 1982, agreed with the view taken by the Accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest amount and the admission of the minors to the benefits of the partnership, then such interest amount can be included in the father's income but not otherwise. In short, the question arising before us is not a pure question of law but is a mixed question of fact and law. It is, therefore, necessary to briefly refer to the relevant facts. The deed of partnership dated November 21, 1974, executed at the time of admitting Manoj Kumar to the benefits of the partnership contains the following relevant recitals. The elder son of Bajranglal, Master Sanjay Kumar, was admitted to the benefits of the partnership under the partnership deed dated December 17, 1970. The second son of Sri Bajranglal, Master Manoj Kumar, aged five years, was als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other benefit. It would be evident that the minors were admitted to the benefits of the partnership because they contributed Rs. 10,000 each at the time of their admission. It should also be noticed that clause 3 of the partnership deed provided that capital shall be invested by all the partners as and when required and that such capital shall carry interest at 7 1/2% per annum. Now, the minors were being paid interest at the rate of 7 1/2%. It is well known that the market rate of interest was much higher than 7 1/2% even at that time. In other words, the minors were keeping this amount with the firm not by choice but as matter of obligation though such an obligation is not specifically referred to in the deed of partnership. This aspect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling to give such amount, he may advance (such amount) as loan. He may receive interest on such sum at the rate of 12 annas per cent. per mensem." The question was whether the interest allowed on the accumulated profits was assessable in the hands of the senior partner (husband/father) under section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922. It was held that the interest accrued to the wife and the minor sons at least indirectly because of their capacity mentioned in section 16(3)(a) (i) and (ii) and was, therefore, assessable in the appellant's hands. At the same time, the Supreme Court pointed out the distinction between a deposit or loan and accumulated profits. They said that the interest earned on a deposit or loan diff ..... X X X X Extracts X X X X X X X X Extracts X X X X
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