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TMI Blog1984 (11) TMI 84X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee has produced copies of the partnership deeds. He has contended that there is no clause in the partnership deeds which required the partners to bring in any capital. He has further contended that under the terms of partnership deed the interest paid to the minors is to be regarded as interest paid to lenders. In support of this contention he has relied upon the following clause in the partnership deed of Chetan Industries: Clause 5: "On the funds invested in this partnership firm of ours, by us the partners as well as by the said nine minors, an interest at a rate fixed by us at the relevant time will be paid. The partners are free to take loan from either a sharoff or a bank in a case of necessity for the development of this business." So far as other firms M/s Hiralal Industries and M/s Himson Textile Engineering are concerned, he has relied on the following clause: "But in consideration of benefit of partnership to minors, no capital is required to be brought in. However, any minor can lend money to the partnership firm like any other third party and firm can pay interest thereon. It is, however, clarified that such interest paid to the minor will be paid to him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid and, therefore, the accumulated profits should be regarded as deposits. 7. In Chandanmal Kasturchand, the Bombay High Court, relying upon the aforesaid Supreme Court decision, held that the interest on the accumulated profits of the minors could not be added to the assessee's income because in that case there was a clear provision in the partnership deed as follows: "It is expressly agreed that if any money belonging to a minor admitted to the benefits of the partnership are brought into partnership or retained in the partnership, the same shall be treated as a deposit and interest shall be paid on it." 8. In I. T. A. No. 2181/Ahd/79 relied upon by the assessee, the Tribunal observed: "But if the minor makes a deposit on its own volition without any obligation then the interest earned by him on the deposits would no be liable for inclusion under the said section." This decision does not help the assessee because as stated above the question is whether the amounts allowed by the minors to remain with the firm were deposits or not. 9. We have therefore to consider the clauses of the partnership deeds which have been pointed out by the assessee's counsel in ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest on those accumulated profits whereas in this case there was an agreement right from the beginning in the partnership deed itself that the interest can be paid on money lent by the minor. Therefore, according to him, since the interest had been paid, the amount on which interest had been paid should be regarded as deposits. We are unable to agree with this. The difficulty remains the same. By the relevant clause the firm is only enabled to pay the interest. It is not bound to do so. Secondly, by any clause, the firm is not disabled from paying the interest on accumulated profits. Therefore, it does not necessarily follow that the interest that has been paid is paid only on money lent. In view of the clear decision in Srinivasan's case, some positive evidence is necessary to prove that the accumulated profits were to be treated as deposits or money lent on behalf of the minors. In the absence of that we must hold that the interest was not paid on any money lent by the minors but was simply the interest on accumulated share of the minors in the profits. A copy of the recent decision of the Gujarat High Court in Income-tax Application No. 15 of 1983 in the case of CIT vs. Smt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inors of the amounts standing to their credit arose to the minors indirectly from their admission to the benefits of the partnership, inasmuch as the amounts so standing to their credit were out of accumulated profits. 5. Being aggrieved the assessee came in appeal before us. The reliance was placed on cl. 5 of the deed of the partnership in case of the said the firms which has been set out in the orders of my ld. brother. So far as the interest payment made to the minor by the firm M/s. Chetan Industries is concerned, I agree with the view taken by the ld. brother that the amount of interest paid to the minors is hit by s. 64(1)(ii) of the IT Act. 6. So far as the other two partnership firms viz., M/s Hiralal Industries and M/s Himson Textile Engineering are concerned, with respect. I am unable to endorse the view taken by my ld. brother. For the sake of convenience, I shall reproduce the said cl. 5 which is common to both the firms. It reads thus: "But in consideration of benefit of partnership to minors, no capital is required to be brought in. However, any minor can lend money to the partnership firm like any other third party and firm can pay interest thereon. It is, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d two firms as set out earlier would go to show that the minors were not required to contribute any capital and that minors were not precluded from lending any money to the partnership firm like a third party. The cl. 5 specifically lays down that interest paid to minors in case they lent money, will be paid to such minors in their capacity as lenders only. The character of the minor and the deposits which are made by him would that of a loan creditor. There would be no difficulty in excluding the amount of interest, if that the amount was brought by the minors as a loan inasmuch as the interest paid on such loan would be outset the pale of s. 64(1)(iii) of the Act. However, the character of accumulated profits on which the interest is paid has to be considered in the light of the specific provision made in the said cl. 5. In Srinivasan's case, it is stated that the accumulated profits remaining in the hands of the firm cannot, on any principle, be equated with the deposits made or loans advanced but it is also stated further thus : "There is not suggestion at all that, at that stage, either the wife or the minor sons, or anyone on their behalf, purported to enter into an arrang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accumulated profits in the light of the exceptions to the general principle laid down in S. Srinivasan's case has to be treated as part of the amount advanced by the minors. This is further evident from the fact that in the case of M/s Chetan Industries, in absence of similar clause, it is held that the interest on accumulated profits is clearly hit by s. 64(1)(iii) of the Act. In the result, I would hold that the interest paid to the minors by the firm M/s Hiralal Industries and M/s Himson Textile Engineering is not includible in the hands of the assessee. In the result, the appeal is partly allowed. Reference Under s. 255(4) of the IT Act, 1961 K.T. THAKORE, A. M.: Difference of opinion has arisen amongst the members, who constituted the Bench. The following point of difference is referred to the Hon'ble President of the Tribunal under s. 255(4): "Whether on the facts and in the circumstances of the case, the provisions of s. 64(1)(iii) were applicable in regard to the interest paid to the minors by (a) Hiralal Industries and (b) Himson Textiles Industries?" 7th Nov., 1984 Order V. BALASUBRAMANIAN, VICE-PRESIDENT (AS A THIRD MEMBER): The two ld. Membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms nor treated as such. 4. For the department, it is pointed out that earlier these minors were not partners in the firms. There were amounts standing to their credit on the day when they were admitted to the partnership. Immediately after such admission these amounts became their capital. The stipulation therefore, in cl. 5 of the partnership deed that capital is not to be brought by the minor partners does not have any effect as far as this amount is concerned. On the contrary, neither cl. 5 of the deed nor any other agreement between the partners specifies that the amount lying to the credit of the minors' accounts should be treated as a deposit. Reference is made in this connection to the decision in the case of Addl. CIT vs. Misrimul Sowcar (1979) 13 CTR (Mad) 308 (1979) 119 ITR 123 (Mad). There is no contract to retain the amount as capital in the firm or as deposit entitled to only interest. 5. On a consideration of the facts, I hold that in respect of both these firms the interest paid to the minors is not to be included under s. 64(1) in the total income of the assessee. I agree, therefore, with the order of the ld. Accountant Member. 6. The account of minor Nimes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20,904, 1969-70 Rs. 8,570 and 1970-71 Rs. 21,335. The withdrawal in the year 1974-75 also is substantial. During the year of account an interest of Rs. 1,812 had been credited to this partner's account. Perusing the accounts as a whole from the year 1967-68 I find that the opening balance standing as on 1st April 1967 has been fairly kept up for all these years and the partner has withdrawn most of the interest and profit credited to his account. The interest of Rs. 1,812 now in question would at best relate to the opening balance. it is true that we do not have the copy of accounts prior to the asst. yr. 1967-68 before us but from the facts as stated above it would be clear that the interest in question cannot related to the profit or other amounts created out of the partnership and credited to the minor's account. In this firm also there is a specific stipulation in cl. 5 of the deed that the minor is not required to bring in any capital. The ld. counsel for the department has interpreted cl. 5 in such a way as to mean that it gives a free hand to the minor to deposit money and does nothing more. I do not think this interpretation is correct. There is a clear statement that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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