1976 (8) TMI 57 - AT - Income Tax

Tribunal rules interest not payment to minors, firm exempt from Section 40(b)

The Tribunal ruled in favor of the assessee, dismissing the departmental appeal. It held that the interest credited to the account named 'Estate of A ... - Issues:Interpretation of Section 40(b) in relation to interest credited to an account named 'Estate of A Seeniappa Nadar' in the books of accounts of a firm.Detailed Analysis:1. The issue in this case revolves around the interpretation of Section 40(b) concerning the interest credited to an account named 'Estate of A Seeniappa Nadar' in the firm's books of accounts. The Income Tax Officer (ITO) contended that the interest credited was essentially payment to the partners and thus hit by Section 40(b).2. The nexus between the partners and the interest amount is established through the late Seeniappa Nadar's will, where he earmarked certain credit balances in the firm's account for his grandsons. The ITO argued that the interest credited to the Estate account actually belonged to the two minor sons of Shri Kalidasa Nadar, who were admitted to the benefits of partnership, making Section 40(b) applicable.3. The Appellate Assistant Commissioner (AAC) accepted the assessee's contention that the minor partners had no immediate right to the corpus until the youngest son attained the age of 18, relying on a Supreme Court decision. The AAC also noted that the payment of interest was made to Shri Kalidasa Nadar as a trustee, not as a partner, and the minor partners were not entitled to the interest during the accounting year.4. The Department contended on appeal that the interest credited to the Estate account solely belonged to the two minor partners, despite the interposition of a trustee. The counsel for the assessee argued that the beneficiaries were not clearly defined, including unborn children, and that Shri Kalidasa Nadar functioned as an executor until the estate administration was complete, during which the interest belonged to the estate.5. The Tribunal analyzed the capacity of Shri Kalidasa Nadar, concluding that he transitioned from an executor to a trustee once the estate administration was completed before the accounting year. The beneficiaries were determined to be only the two minor partners, based on the terms of the late Seeniappa Nadar's will and the application of the Indian Succession Act.6. Regarding the payment made by the firm, the Tribunal ruled in favor of the Department, acknowledging that a payment was made as per normal standards. However, the key consideration was whether the amount could be allowed as a deductible expenditure under Section 40(b), which restricts certain payments to partners.7. The Tribunal emphasized that for a payment to be subject to Section 40(b), there must be an accrual of a right to receive the payment by the partners. Citing a Supreme Court decision, it was established that since the minor partners did not have a right to the interest until the youngest son reached 18, no income had accrued to them, and thus, Section 40(b) did not apply.8. Consequently, the Tribunal dismissed the departmental appeal, affirming the reasoning of the AAC and concluding that no payment was made to the minor partners, thereby exempting the firm from the provisions of Section 40(b.