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TMI Blog1984 (11) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... -------------------------------------------------- 1 2 3 ------------------------------------------------------------------------------------------------------------------------------------------------- 1. Chetan Industries Sangita Surajram 3,089 Daxa Surajram 3,001 Rakesh Surajram 4,903 Nimesh Surajram 3,264 2. Hiralal Industries Jayant Surajram 1,812 3. Himson Textile Jayant Surajram 246 Engineering Nimesh Surajram 490 ------------------------------------------------------------------------------------------------------------------------------------------------- 3. The ITO took the view that the payments of interest to the minors from the above firms were hit by provisions of section 64(1)(iii) and, as such, the said income from interest was includible in the hands of the assessee, mother of the minors. 4. The matter was carried in appeal before the Commissioner (Appeals), who confirmed the order of the ITO after rejecting the claim of the learned representative of the assessee that the amounts on which the interest was paid should be treated as deposits made by the minors in the said firms. The Commissioner (Appeals) was of the view that the interest cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest on accumulated profits has to be treated as income arising indirectly as a result of admission of the minors to the benefits of the partnership. The legal position in this regard was well settled by the decision of the Supreme Court in the case of S. Srinivasan as also the other decisions as set out in para 4 of the order of my learned brother. 8. The short point, therefore, which arises for consideration, is whether in the light of the said clause 5 of the deed of partnership in the said two firms, the accumulated balance profits could be equated with the moneys lent by the minors. There can be no dispute that accumulated profits, without more, cannot be equated with deposit made or loan advanced by the minors and in the absence of any other clause or arrangement or understanding, interest payable on accumulated profits is liable to be included in the hands of the parent by virtue of section 64(1)(iii) by treating the same as an indirect transfer. 9. So far as the legal position in this regard is concerned, the matter is no longer res integra. The position, however, as pointed out earlier, is whether the said clause 5 would make any difference. The analysis of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid down by them in the case of CIT v. Shah Mohandas Sadhuram [1965] 57 ITR 415 namely, that ' A partnership deed must be construed reasonably '. Further, in the case of Kylasa Sarabhaiah v. CIT [1965] 56 ITR 219 (SC), apart from stating the above view that the partnership deed has to be reasonably construed, it is further stated that, however, the substance of the agreement could not be permitted to be overshadowed merely by the use of collecting description of some of the persons who agreed to be partners. Thus, in effect, the principle, which is laid down in the said decisions, is clear that the agreement or arrangement between the partners inter se has to be construed reasonably and must, therefore, receive a broad interpretation. Thus, the purport of clause 5 has to be understood in the manner in which the partners have reached the arrangement inter se. Therefore, on a reasonable construction of the said clause 5, I am of the opinion, that the minors were placed at par with third party or that they were to be treated as lenders or loan creditors. The accumulated profits, on which the interest is paid, are not exigible to inclusion under section 64(1)(iii). In other words, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccountant Member, the minors on a reasonable construction of the partnership deed stood at par with third parties as far, as the deposits were concerned and were to be treated as lenders or loan creditors. The interest credited to their account, therefore, was not to be included in the assessee's total income. 3. The learned counsel for the assessee has taken me through the clauses of the partnership deed and especially clause 5 thereof, under which, according to him, the minor partners were not to bring any capital. On the contrary, they could advance loan to the firms and the firms could pay interest in their capacity as lenders of money. The minor's money was not necessary for the conduct of the business. The minor was only a lender of loans to the firms. He has to be treated like any other creditor. According to the learned counsel, even the decision of the Supreme Court in the case of S. Srinivasan did not justify the inclusion of this interest in the assessee's total income. The learned counsel has also referred to the copy of accounts of the partners from the very beginning to stress his point that the capital was neither necessary for the firm nor treated as such. 4. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clause 5 of the deed specifically provides that minors need not bring in any capital. The deed was drawn up at a time when there were amounts standing deposited in the firm in the name of the minors. Viewing the position on the whole, therefore, the original amounts standing to the credit of the minor should clearly be treated as deposits and not capital on which the business is to pay interest. The fact that these amounts stand credited to the capital account, does not make any difference. The sums of Rs. 490 and Rs. 246 from Himson Textile Engineering Industries are not includible under section 64(1) in the income of the assessee. 7. As regards minor Jayantkumar's account in the firm of Hiralal Industries, this person has been a partner in the firm at least from the assessment year 1967-68. There was an opening cash balance of Rs. 14,938 as on 1-4-1967. Interest and profit were credited to this account from year to year. The accounts from 1967-68 to-date indicate that the minor has been withdrawing substantial amounts from the account, leaving relatively small balances therein. Thus, the withdrawals during 1967-68 were Rs. 12,291, 1968-69---Rs. 20,904, 1969-70---Rs. 8,570 and 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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