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TMI Blog1979 (1) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... its of partnership. Each of the three minor sons was credited with a capital of Rs. 1,100. The capital amount was not to carry any interest. Under cl. 3 of the partnership deed, it was provided that : " If at any time additional funds be considered by the parties hereto as necessary or expedient for efficiently carrying on or extending the business, the same shall be contributed by the parties hereto or raised from outsiders and in either case the monies so advanced to the business of partnership shall be treated as loan on which interest shall be paid at market rate or rates agreed upon by the parties and the same shall be treated as business expenses. Any amount other than the above-said capital standing to the credit of partners including share of profit that may be adjusted shall be treated as loan deposits which shall bear interest as may be mutually agreed having regard to the rate prevailing in the market. " For the assessment year 1966-67, interest paid to the minors on the loan deposits was included by the income-tax authorities in the hands of the assessee as arising to the minors on account of their admission to the benefits of partnership by invoking s. 64 of the I. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ild of such individual from the admission of the minor to the benefits of partnership in a firm in which such individual is a partner." Section 67 is the provision setting out the method of computation of a partner's share income in the firm. It provides that any interest, among other items, paid to any partner in respect of the previous year shall be deducted from the total income of the firm, and the balance ascertained and apportioned among the partners. The interest will be added to the share income of the partner in the firm. For this purpose, a minor admitted to the benefits of a partnership and a partner who is a major are treated identically. The contention for the revenue was that whatever is computed in the hands of the minor as share income from the firm will have to be included in the assessment of the father, i.e., the assessee in the present case. Learned counsel for the assessee submitted that the addition in respect of the income accruing to a minor child from the admission of the minor to the benefits of the partnership would only include the share income and the interest on capital. According to the learned counsel, cl. 3 of the partnership deed in particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the hands of the parent as income arising from the admission of the minor to the benefits of the partnership. The question arises only with reference to any other amount on which interest is paid. Looking at the provision bereft of authority it appears to us that the section contemplates the assessment, in the hands of the parent, of all income arising to the minor by way of interest, so long as the interest is traceable to the admission of the minor to the benefits of the partnership, either under the terms of the partnership dead or under a subsequent agreement. Even in the absence of any agreement, interest paid on capital would be traceable to the membership in the firm. So long as the amount of interest is traceable to the admission of the minor to the benefits of partnership, s.64(1)(ii) of the Act would be attracted. The cases that have been decided have in our opinion brought out only this aspect. The earliest decision of this court was rendered in S. Srinsivasan v. CIT [1963] 50 ITR 160 (Mad). In that case, the partnership deed provided thus : " If the firm requires any sum for meeting the expenses of its management and if any of the partners has and is willing to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to convert it into loan or deposit, we consider that the decision of the Supreme Court would directly apply to this case. It was pointed out by the Supreme Court that the profits accumulated to the credit of the wife and minor child in that case because they did not draw their share of profits after distribution of profits took place. They merely allowed those profits to remain with the firm. It was further added that there was no suggestion in that case that either the wife or the minor sons or any one on their behalf purported to enter into an arrangement with the firm to keep these accumulated profits as deposits. The relevant passage is found at page 276. The principle of the Supreme Court decision is that in cases where there was a subsequent arrangement between the partners or the persons who are competent to enter into any arrangement on behalf of the minors and the firm, so as to pay interest by conversion of the amount into a deposit or loan, then the position would be different. This is because it is open to the partners to invest their further funds in the firm making it clear that they are doing so in the same manner as if they are strangers. If with reference to stra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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