1998 (2) TMI 85 - HC - Income Tax

Interest earned by minor in partnership firm is considered partnership income under tax law

Commissioner Of Income-Tax Versus Bansilal Bhaiya

The court held that the interest earned by a minor in a partnership firm, where she was admitted to the benefits of the partnership, should be considered ... Total Income Issues: Assessment of interest earned by a minor with her own funds in a partnership firm for the assessment year 1976-77 under section 64(1)(iii) of the Act.Analysis:The judgment addressed the question of whether the interest earned by a minor with her own funds in a partnership firm, in which she was admitted to the benefits of the partnership, should be considered as income attributable to the benefit of the partnership under section 64(1)(iii) of the Act. The court examined the facts, which showed that the minor had contributed monies towards the capital of the firm and received interest on that capital. The partnership deed required the minor to bring capital, and the interest income in question was earned on the capital standing to the credit of the minor. The court emphasized that to apply section 64(1)(iii), it must be demonstrated that the minor received a benefit from the firm due to being admitted to the partnership's benefits. In this case, the interest earned by the minor was a direct benefit resulting from her admission to the partnership.The court rejected the argument that the funds contributed by the minor were received as gifts from sources other than the assessee, and therefore, the interest earned should not be included in the father's assessable income. It clarified that the source of the funds used by the minor to contribute capital to the firm was irrelevant for invoking section 64(1)(iii). As long as the benefit derived is a direct consequence of the minor's admission to the partnership, it must be included in the parent's assessment under section 64 of the Act.The judgment referred to the decision of the Assam High Court and the Supreme Court to support its conclusion. The Assam High Court decision emphasized that the benefit received by a minor from supplying capital to a partnership firm is a result of being admitted to the partnership's benefits. The Supreme Court decision held that interest earned by minor children in a firm should be included in the father's assessment due to their admission to the partnership's benefits. The court highlighted that any benefit resulting from the minor's admission to the partnership must be included in the parent's total income.Additionally, the court distinguished a previous case where interest on deposits made by a minor was not considered a direct result of admission to the partnership's benefits. In the present case, the minor's admission was based on the capital contribution, making the interest earned a direct consequence of the partnership admission. Ultimately, the court answered the question in the negative, in favor of the Revenue and against the assessee, awarding costs to the Revenue.