1992 (2) TMI 81 - HC - Income Tax

Inclusion of Minors' Interest in Partnership Benefits as Assessee's Income

The High Court upheld the Tribunal's decision that interest paid to minors, who were admitted to partnership benefits in two firms, should be included in ... Clubbing Of Income Of Minor Child, Interest On Deposit By Minor, Interest Paid By Firm To Partner Issues Involved:1. Inclusion of interest paid to minors in the income of the assessee under section 64(1)(iii) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Inclusion of Interest Paid to Minors in the Income of the Assessee under Section 64(1)(iii) of the Income-tax Act, 1961:The central issue in this case is whether the interest paid to the minors, who were admitted to the benefits of partnership in two firms, should be included in the income of the assessee under section 64(1)(iii) of the Income-tax Act, 1961. The minors received interest on their accumulated profits from the firms, Vikas Textile Agency and Associated Sales Company. The Income-tax Officer assessed this interest in the hands of the assessee, invoking section 64(1)(iii).The assessee appealed to the Appellate Assistant Commissioner, who upheld the assessment. The Income-tax Tribunal also upheld the decision, referring to the Supreme Court's decision in S. Srinivasan v. CIT [1967] 63 ITR 273, which held that interest on accumulated profits is assessable in the hands of the assessee if it arises due to the minor's admission to the benefits of the partnership.Contentions of the Assessee:The assessee argued that the interest income accrued to the minors independently of their admission to the benefits of the partnership. The counsel for the assessee relied on the Bombay High Court decision in CIT v. Chandanmal Kasturchand [1978] 112 ITR 296, asserting that the interest was paid due to an independent contract and not due to the partnership deed.Contentions of the Department:The Department contended that the interest was paid because of the minors' admission to the benefits of the partnership, thus attracting the provisions of section 64(1)(iii). They argued that the Tribunal correctly applied the Supreme Court's decision in Srinivasan's case.Legal Provisions and Interpretation:Section 64(1)(iii) states that any income arising directly or indirectly to a minor child from the admission to the benefits of partnership should be included in the income of the individual (the parent). The Supreme Court in Srinivasan's case held that interest on accumulated profits arises indirectly due to the minor's admission to the partnership benefits and thus should be assessed in the hands of the parent.High Court's Analysis:The High Court examined various High Court decisions and the Supreme Court's decision in Srinivasan's case. It noted that any interest on accumulated profits is related to the minor's admission to the partnership benefits unless there is an independent contract converting the accumulated profits into a loan or deposit.The Tribunal found no evidence of such an independent contract in the present case. The resolutions passed by the partners did not convert the accumulated profits into loans or deposits. The resolutions were unilateral decisions by the partners and not agreements with the minors or their guardians.Conclusion:The High Court concluded that the interest on accumulated profits was assessable in the hands of the assessee under section 64(1)(iii). The Tribunal's decision was upheld, and the question was answered in the affirmative, in favor of the Revenue. There was no order as to costs.Judgment:The interest paid to the minors was includible in the income of the assessee under section 64(1)(iii) of the Income-tax Act, 1961. The question referred was answered in the affirmative and in favor of the Revenue.