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TMI Blog1973 (10) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Officer included in the assessment of the assessee the share income received by her two minor sons admitted to the benefits of the partnership invoking the provisions of section 64(ii) of the Income-tax Act, 1961. The sums so included in her assessment were as under: Share of profits Interest Total Rs. Rs. Rs. Sunil Kumar 7,480 4,205 11,685 Ashok Kumar 7,480 3,744 11,224 The assessee appealed to the Appellate Assistant Commissioner contending that since the partnership had come into existence in 1959 prior to the commencement of the Income-tax Act, 1961, and the minors had been admitted to the benefits of the partnership even when the firm was constituted, section 64(ii) of the Act of 1961 had no application in her case and that the interpretation placed by the Supreme Court in Commissioner of Income-tax v. Sodra Devi on the corresponding provision in section 16(3)(a)(ii) of the Indian Income-tax Act, 1922, to the effect that the expression "individual" does not include the female of the species should continue to apply to a firm which had come into existence prior to the commencement of the Act of 1961. Alternatively, it was contended by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 4,205 and Rs. 3,744 being interest received by the minors, Sunil Kumar and Ashok Kumar, respectively, from the firm of M/s. Premier Credit Corporation, are not includible in the total income of the assessee under section 64(ii) of the Income-tax Act, 1961 ?" With reference to the first question set out above, the assessee's case is that a proper interpretation of section 64 of the Act would indicate that it would apply only to cases wherein the minors have been admitted to the benefits of the partnership after the coming into force of the Income-tax Act of 1961. The assessee presumably wants to take advantage of the decision of the Supreme Court in Commissioner of Income-tax v. Sodra Devi . In that case section 16(3)(a)(ii) of the Income-tax Act of 1922 came up for consideration and the Supreme Court held that the intention of the legislature in enacting section 16(3) was only to include the income derived by a wife or a minor child in the computation of the total income of the husband or the father, as the case may be, for the purpose of assessment, that the words "any individual" occurring in section 16(3) are restricted in their connotation to mean only the male of the sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the spouse in a firm or from the admission of the minor to the benefits of the partnership in which such individual is a partner. Therefore, whenever income arises directly or indirectly from the admission of the minor to the benefits of the partnership, section 64 comes into operation irrespective of the fact whether the admission of the minor to the benefits of the partnership was before or after the commencement of the 1961 Act. In such an event section 64 operates only prospectively and not retrospectively as contended by the assessee. Normally, accrual of income takes place year by year and we have to see only at what time the income accrues. Once it is found that the income has accrued after the commencement of the new Act then section 64 by its own force operates. So far as the scope of section 64 is concerned, it is not restricted in its scope and it applies to either of the spouses unlike section 16(3) which applied only to a husband or father. In Smt. Priti Lata Samanta v. Commissioner of Income-tax, the Allahabad High Court, while construing section 64(ii), held that the income derived by a minor child because of his admission to the benefits of the partnership firm i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were included in the income of the father under section 16(3)(a)(ii). The partnership deed did not cast any obligation upon the minors to maintain any deposits in the firm or upon the firm to keep any deposits made by the minors. The partnership deed provided that interest at a particular rate should be paid by the firm if there are any deposits or monies standing to the credit of the minors. The Bombay High Court took the view that the interest earned by the minors on the amounts standing to their credit in the firm could not be included in the total income of the assessee under section 16(3)(a)(ii) of the 1922 Act. The court also expressed that the legislature has made a distinction between the share of profits of a minor for the purpose of assessing him to tax with regard to such profits, and the benefits which the minor receives from his admission to a partnership, which benefits are to be taxed not in his assessment but in the assessment of his father. Chagla C. J., speaking for the Bench, said: "It is clear that the minors earned interest primarily and substantially by reason of the fact that they deposited moneys in the firm. It is not by reason of the fact that they were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the benefits of the partnership, that if it was optional for a minor to make a deposit, it cannot be said that the deposit was necessarily made as a result of his being admitted to the partnership and that, therefore, any interest accruing on such a deposit cannot be said to arise directly or indirectly from the admission of the minor to the benefits of the partnership. In S. Srinivasan v. Commissioner of Income-tax, the assessee was a partner in a firm in which his two minor sons were admitted to the benefits of the partnership. Under a clause in the partnership deed any member or person admitted to the benefits of partnership was entitled to receive interest at 9 per cent. per annum on an sum advanced as loan by him to the firm for meeting the expenses of its management. The interest amounts payable under the said clause were credited in the relevant accounting year to the wife and to the two minor sons in the account books of the firm on the accumulation of their shares of the profit. A Bench of this court held that the interest so credited to the wife and the two minor sons arose directly from the membership of the wife in the firm and the admission of the minor sons to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout any specific arrangement as would naturally have been entered into if these funds had belonged to a stranger. They let the firm use funds of theirs, because they had interest in the profits of the firm. The facts also show that the use of these moneys was allowed to the firm without asking for any interest, and it was only at a later stage that the three partners of the firm decided to give interest on these amounts. When the decision was taken to give interest, the nature of the funds did not change. They did not get converted into deposits or loans. They still remained accumulations belonging to a partner or persons admitted to the benefits of the partnership and allowed to be used by the firm. The interest also appears to have been allowed by the firm simply because these funds belonged either to a partner or to the minors who had been admitted to the benefits of the partnership. It is thus clear that the interest at least indirectly arose and accrued to the wife and the minor sons because of their capacity mentioned in section 16(3)(a)(i) and (ii) in the Income-tax Act." As is clear from the above passage, the Supreme Court had upheld the inclusion of the interest inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be treated as capital contributed by him or as deposit or advance depends primarily upon the intention with which it was introduced in the business, that the partnership deed unequivocally provided that money credited in the names of the minors shall be deemed to be their deposits in the firm and that, therefore, it was clear that the amount standing to the credit of each individual minor was introduced in the firm as deposit and not as their capital contribution and hence the interest paid to the minors on the deposits standing to their credit is not includible in the income of the father. On a due consideration of the various principles laid down in the above decisions the true legal position appears to us to be this: Wherever there is a connection between the admission of the minor to the benefits of the partnership and the realisation of income by him by way of interest, the same can, be included in the income of the parent, whether the said connection is direct or indirect. The fact that payment of interest has been provided under the terms of the partnership deed does not ipso facto establish such a connection if the payment could be enforced otherwise under the gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to the benefits of the partnership under the terms of the agreement of partnership but without reference to his connection with the partnership. Take for instance a case where a partner or a minor admitted to the benefits of the partnership specifically advances a loan to the firm which is permitted to take loan for the purpose of its business from whomsoever. It cannot be said that the payment of interest in such a case has any specific connection with the membership or the admission to the benefits of the partnership. The question whether interest income arose directly or indirectly from the admission of the minor to the benefits of the partnership has to be decided with reference to various circumstances such as the character of the amount on which the interest has been paid by the firm, the terms of the partnership deed, the intention of the parties and the capacity in which the amount is received by the minor. We are not inclined to agree with the learned counsel for the assessee that it is only the interest paid on capital contributed by the partner that will have to be taken to have a connection with the admission of the minor to the benefits of the partnership, and all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f payment outside the terms of the partnership deed but none the less those payments may have connection with the admission of the minor to the benefits of the partnership. At the same time there may be cases of payments made in pursuance of the terms of the partnership deed but none the less it may not have connection with the admission of the minor to the benefits of the partnership. The learned counsel for the revenue then put forward a somewhat novel contention. According to him, section 2(23) defines "partner" as including a minor admitted to the benefits of the partnership. Therefore, by the application of section 67(1)(b) any interest paid to a minor admitted to the benefits of the partnership should be taken to be his share income from the firm and that, therefore, any interest received by the minor will have to be brought in as the father's income under section 64(ii). But we are of the view that section 67 deals with the computation of the partner's share in the income of the firm and the extended definition of "income" under section 67(1)(b) cannot be applied to the interpretation of section 64. Section 67(1)(b) treats any interest received by a partner as part of his ..... X X X X Extracts X X X X X X X X Extracts X X X X
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