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TMI Blog1982 (10) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... n L. Ram Narain Garg v. CIT [1965] 55 ITR 435 (All.), Bajrang Lal v. CIT [1970] 77 ITR 309 (All.), CIT v. Rukmanand Kedia [1968] 69 ITR 557 (All.) and S. Srinivasan v. CIT [1967] 63 ITR 273 (SC). 3. On the other hand, Shri Jain, the learned counsel for the assessee, contended that the impugned order is justified and merited no interference. 4. We have heard the rival contentions and submissions, and gone through the record before us. 5. The partnership deed, which is at page 1 of the paper book, shows that Rajesh Kumar and Rakesh Kumar (minors), sons of Gopichand, are admitted to the benefits of the partnership. Shri Gopichand is also the partner in the firm. The shares of the partners in the profit and loss are as under : Share of profit Share of loss 1. Sanat Kumar 10 per cent 20 per cent 2. Vinod Kumari 25 per cent 50 per cent 3. Mamta Devi 25 per cent 30 per cent 4. Rajesh Kumar 20 per cent --- 5. Rakesh Kumar 20 per cent --- 6. It is also clear from para 5 of the partnership deed that the partners are entitled to 12 per cent interest on the amount of their respective credits in the firm. 7. According to the aforesaid clause, S/Shri Rajesh Kumar and Rakesh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hri Gopichand. The partnership commenced on 6-11-1973 with the following persons as partners : 1. Shri Sanat Kumar 10 per cent 2. Smt. Mamta Devi 25 per cent 3. Shri Rakesh (Minor) 20 per cent 4. Shri Rajesh (Minor) 20 per cent 1.2 On the first day of the commencement of this business, the aforementioned persons introduced the following sums in the firm : Rs. 1. Shri Sanat Kumar 1,000 2. Smt. Mamta Devi 2,100 3. Smt. Vinod Kumari 2,100 4. Shri Rakesh 2,100 5. Shri Rajesh 2,100 1.3 These sums were credited to their respective accounts in identical fashion. During the course of the year further sums were contributed by the aforesaid persons, so that at the end of the year the balances outstanding in the accounts were as follows : Rs. 1. Sanat Kumar 1,000 2. Mamta Devi 10,000 3. Vinod 10,000 4. Rakesh 15,000 5. Rajesh 10,000 1.4 Interest on the above balances was paid by the firm to all the above persons at 12 per cent. Clause 5 of the partnership deed contained the provision for payment of interest. It reads as follows : "That the partners shall be entitled to the interest on the amounts outstanding to their credit at 12 per cent per annum." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in from all in the same manner, was treated in accounts in the same manner, and profits were credited to all of them in the same manner. Crediting of profit is, in my opinion, strong indicator of the nature of the contribution, profit is normally credited to a capital account, and never to a deposit account, unless there are special circumstances to explain the crediting of the profit to the account in question. I am, therefore, of the view that what the minors had contributed was their capital, and so interest paid on it is to be clubbed with their father's income under section 64(1)(iii) of the Income-tax Act, 1961 ('the Act'). 3. The facts of the case appear to me to be on all fours with those of Rukmanand Kedia relied upon by the revenue. I, therefore, allow the departmental appeal and reverse the order of the learned AAC. The order of the ITO is restored. THIRD MEMBER ORDER Per Shri Prakash Narain, Accountant Member -- This appeal has been referred to me by the President of the Tribunal under section 255(4) of the Income-tax Act, as there was a difference of opinion between the Accountant and Judicial Members, who had earlier heard it. 2. The issue relates to the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xt year : 19,092 By cash from Magniram Gopichand Rs. 2,100 on 6-11-1973 Rs. 10,000 on 14-1-1974 Rs. 2,000 on 22-1-1974 Rs. 900 on 10-1-1974 15,000 " Interest from Magniram Gopichand 361 " Interest from firm 426 " Share of profit 3,305 ------------------------- 19,092 19,092 ------------------------ Rakesh Kumar's account (Assessment year 1975-76) To balance to next year 24,657 By old balance 19,092 " Interest 2,291 " Share of profit 3,274 ------------------------- 24,657 24,657 ------------------------- Rakesh Kumar's account P. 2 (Assessment year 1976-77) To income-tax 426 By old balance 24,657 Balance to next year 27,773 " Interest 2,959 " Share of profit 583 ------------------------------ 28,199 28,199 ------------------------------ In the books of Chandoria Traders, Sirsaganj : Rajesh Kumar's account (Assessment year 1974-75) Rs. To balance to next year : 13,829 By Cash from Magniram Gopichand Rs. 2,100 on 6-11-1973 Rs. 5,000 on 14-1-1974 Rs. 1,000 on 29-1-1974 Rs. 1,900 on 30-1-1974 10,000 " Interest from Magniram Gopichand 229 " Interest from firm 295 " Share o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d finding was that the sum brought in by the minor to the account of the firm was not in the nature of capital. From this, the High Court inferred that the money brought in by the minor was in the nature of a deposit or a loan. The High Court observed that it was for the department to establish a connection between the partnership of the minor and the receipt of interest on the money brought in by the minor and that in the instant case, no such connection had been established by the department. The Court, therefore, held that the interest was not includible in the hands of the minor's mother under clause (ii) of section 64. 8. On the basis of the above decision, it was contended before the AAC that there was no direct relationship between the admission of the minor to the benefits of partnership and the interest received by him from the firm. The AAC agreed with the submission of the assessee. He found that there was no pre-condition that the partners shall contribute any capital on which they were to be paid any interest. He was of the view that the interest received by the minors was not by virtue of their admission to the benefits of the partnership in the firm, but because th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the accounts in question do not appear to be deposit accounts, they are capital accounts, simpliciter. 2. It is true that there is no clause in the partnership obliging the adult partners or the minors to contribute capital, but nevertheless they have been all contributed and the deed visualizing that the partners would contribute capital provide, vide clause 5, quoted above, that on individual capital contributions they will be paid interest at 12 per cent per month. Nothing, therefore, in my opinion, turns on the facts that there was no clause in the partnership deed requiring capital contribution. Whether or not a contribution is of capital or is a mere deposit will have to be determined with reference to the totality of the facts of the case and the manner of their treatment in the accounts. The absence of the clause re : capital contribution was as much relevant for the adult partners as it was for the minors. Despite its absence, the capital came in because the business needed it. It could not, therefore, be treated as capital in the hands of the adults and as deposit in the hands of the minors. Contribution came from all in the same manner, was treated in accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so be seen that the only difference between section 64(1)(ii) before the amendment and section 64(1)(iii) after the amendment is that the words 'in which such individual is a partner' have been omitted in the amended provision. In other words, up to the assessment year 1975-76, income of a minor child from his admission to the benefits of a partnership in a firm was to be included in the hands of his father or mother only if the latter was also a partner in the same firm. However, that restriction has now been removed. Under the new section income of a minor child can be included in the income of his parent if he is admitted to the benefits of a partnership in any firm. Since there is no material change in the main language of the two provisions, the decisions relating to section 64(1)(ii) before its amendment are equally applicable to section 64(1)(iii) of its amended provisions. 13. I will at first analyse the position whether the various amounts deposited by Shri Rakesh Kumar and Shri Rajesh Kumar in their respective accounts quoted above are in the nature of capital or they are in the nature of mere deposits. As pointed out by the learned Accountant Member in his order, both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs represented their capital contributions in the firm of Chandoria Traders, I will now briefly deal with the legal aspect of the matter. The leading case on the subject is that of the Supreme Court in S. Srinivasan. It was held in this case that the interest credited on the accumulated profits accrued to the wife and the minor sons of the assessee at least indirectly and was, therefore, assessable in the assessee's hands. It was held that when the decision was taken to give interest, the nature of the funds did not change and that they did not get converted into deposits or loans. The Allahabad High Court in Rukmanand Kedia has clearly held that where interest accrues upon capital introduced in a firm by a minor admitted to the benefits of partnership, the interest is income which has arisen from such admission and that it is liable to be included in the income of the father under the provisions of section 16(3)(a)(ii) of the 1922 Act. The present case is fully covered by the principle laid down in this case. The decision of Allahabad High Court in the case of Triveni Devi is not applicable to the facts of the present case. As already stated above, the finding in the cited case wa ..... 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