1990 (2) TMI 10 - HC - Income Tax

Interest income for minor children's accounts linked to partnership benefits deemed part of assessee's income under Section 64(1)(iii).

The High Court held that interest income credited to minor children's accounts arose directly from their admission to the partnership benefits, making ... Inclusions In Total Income, Total Income Issues Involved:1. Inclusion of interest credited to minor children's accounts in the assessee's income under Section 64(1)(iii) of the Income-tax Act, 1961.Detailed Analysis of Judgment:Issue 1: Inclusion of Interest Credited to Minor Children's Accounts in the Assessee's IncomeFacts and Background:The assessee, an individual, had minor children admitted to the benefits of a partnership firm, Balaji Enterprises. The minors' profits and interest on their accounts were credited annually per the partnership deeds dated April 1, 1972, and July 17, 1975. While the interest was not included in the assessee's income up to the assessment year 1975-76, it was clubbed in the assessee's hands for the first time in the assessment year 1976-77, following an amendment to Section 64(1)(iii) effective January 1, 1976.Arguments:- Assessee's Counsel: Argued that since there was no obligation for the minors to contribute capital to the partnership, the amounts in their accounts should be treated as loans or deposits. Therefore, the interest earned was a result of their independent right to invest, not due to their admission to the benefits of the partnership. Hence, Section 64(1)(iii) should not apply.- Departmental Representative: Contended that the Supreme Court's decision in S. Srinivasan v. CIT [1967] 63 ITR 273 applied, where interest on accumulated profits was considered income arising from the minors' admission to the benefits of partnership.Tribunal's Findings:The Tribunal noted that the minors were admitted to the benefits of the partnership without any capital contribution requirement. The interest credited to their accounts was treated as advances or deposits, not as a result of their admission to the partnership. Therefore, the Tribunal concluded that Section 64(1)(iii) did not apply.High Court's Analysis:- The partnership deeds explicitly provided that minors would be allowed interest on their accounts, indicating that the right to interest arose directly from their admission to the benefits of the partnership.- The interest paid by the firm was deductible from its income, benefiting both the firm and the minors, who received 15% interest on their deposits.- The court emphasized that Section 64(1)(iii) includes income arising indirectly from the admission of minors to the benefits of the partnership.Relevant Case Law:- S. Srinivasan v. CIT [1967] 63 ITR 273 (SC): The Supreme Court held that interest on accumulated profits, allowed to be used by the firm without specific arrangements, arose indirectly from the minors' admission to the partnership benefits.- Addl. CIT v. Misrimul Sowcar [1979] 119 ITR 123 (Madras HC): Examined the scope of Section 64(iii) pre-amendment, highlighting that income arising indirectly from admission to partnership benefits is includible.- L. Ram Narain Garg v. CIT [1965] 55 ITR 435 (Allahabad HC): Distinguished between interest on capital investments/loans connected to partnership benefits and interest on independent deposits/loans.Conclusion:The court concluded that the interest income arose directly from the minors' admission to the benefits of the partnership, making Section 64(1)(iii) applicable. The question was answered affirmatively in favor of the Revenue, and the interest credited to the minors' accounts was includible in the assessee's income.Order:No order as to costs.Concurrence:BHAGABATI PRASAD BANERJEE J. concurred with the judgment.