1979 (1) TMI 46 - HC - Income Tax

Court includes minor sons' interest income in assessee's income under Income-tax Act, strict interpretation of section 64.

Additional Commissioner Of Income-Tax, Madras-II Versus Misrimul Sowcar

Additional Commissioner Of Income-Tax, Madras-II Versus Misrimul Sowcar - [1979] 119 ITR 123, 13 CTR 308 Issues Involved:1. Inclusion of interest income in the hands of the assessee under section 64(1)(ii) of the Income-tax Act, 1961.2. Interpretation of section 64 and section 67 of the Income-tax Act.3. Distinction between interest on capital and interest on loan deposits.4. Applicability of previous judicial decisions on similar issues.Detailed Analysis:1. Inclusion of Interest Income in the Hands of the Assessee under Section 64(1)(ii) of the Income-tax Act, 1961:The primary issue was whether the interest of Rs. 8,416 credited to the accounts of the assessee's minor sons could be included in the assessee's income under section 64(1)(ii) of the Income-tax Act, 1961. The Tribunal had held that the interest could not be included, but this decision was contested by the revenue.2. Interpretation of Section 64 and Section 67 of the Income-tax Act:Section 64(1)(ii) mandates that any income arising directly or indirectly to a minor child from the admission to the benefits of a partnership in which the parent is a partner must be included in the parent's total income. Section 67 outlines the method of computing a partner's share of income in a firm, including interest paid to partners. The court emphasized that section 64 should be strictly construed as it enacts a legal fiction to prevent tax evasion.3. Distinction Between Interest on Capital and Interest on Loan Deposits:The court examined whether the interest paid on the minors' deposits could be distinguished from interest on capital. The partnership deed stipulated that any amount other than the capital standing to the credit of partners, including accumulated profits, would be treated as loan deposits bearing interest. The court held that merely labeling accumulated profits as loans in the partnership deed did not change their character. The interest on these amounts was still traceable to the minors' admission to the benefits of the partnership and thus includible under section 64.4. Applicability of Previous Judicial Decisions on Similar Issues:The court referred to several precedents, including:- S. Srinivasan v. CIT [1963] 50 ITR 160 (Mad): The interest on accumulated profits credited to minors' accounts was held to be includible in the parent's income.- S. Srinivasan v. CIT [1967] 63 ITR 273 (SC): The Supreme Court affirmed that interest earned on amounts allowed to remain with the firm due to the minors' admission to the benefits of partnership should be included in the parent's income.- Kalandhar Prasad Chaturvedi v. CIT [1971] 82 ITR 713 (All): Distinguished, as it focused on whether amounts were capital or deposits, not on subsequent agreements.- P. A. P. Chidambara Nadar v. CIT [1970] 77 ITR 84 (Mad): Interest was not assessable as it did not represent accumulated profits.The court concluded that the Tribunal's decision was incorrect, as the interest on accumulated profits should be included in the assessee's income under section 64(1)(ii). The judgment was thus in favor of the revenue, with the question answered in the negative and costs awarded to the revenue.Conclusion:The court ruled that the interest of Rs. 8,416 credited to the minor sons' accounts, arising from accumulated profits treated as loan deposits, must be included in the assessee's income under section 64(1)(ii) of the Income-tax Act, 1961. The decision was based on a strict interpretation of section 64 and relevant judicial precedents, emphasizing that the partnership deed's provisions could not alter the inherent nature of accumulated profits.