1983 (12) TMI 114 - AT - Income Tax

Minors' Partnership Interest Excluded from Parent's Tax

The Tribunal held that the interest income derived by minors from the firms where they were admitted to the benefits of partnership should not be included ... Transfer Of Assets, For Benefit Of Spouse Or Minor Child Issues Involved:1. Whether the interest derived by minors on the capital standing in their names in the firms in which they were admitted to the benefits of partnership is liable to be included in the hands of their parent under section 64(1)(iii) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Background and Facts:The appeals relate to the assessment years 1976-77 to 1978-79. The primary issue is whether the interest derived by minors on their capital in the firms where they were admitted to the benefits of partnership should be included in the income of their parent under section 64(1)(iii) of the Income-tax Act, 1961. The minors, Master K. Satish Kumar and Baby K. Usharani, were admitted to the benefits of partnership in two firms: Kunchakarra Bhaktavatsala Rao and Gella Parthasaradhi (first firm) and Mamata, Kunchakarra Bhaktavatsala Rao and Gella Parthasaradhi (second firm).2. Partnership Deeds and Contributions:The partnership deeds of both firms stated that capital contributions by partners were according to their convenience and capacity. The minors had credit balances in their accounts from a previous firm, which were carried forward to the new firms. The interest on these amounts was credited to their accounts separately from the profits.3. Initial Assessments and Revisions:For the assessment year 1976-77, the interest amounts were not included in the hands of the parent, but the Commissioner revised this decision under section 263, directing the inclusion of interest amounts. For the subsequent years, the Income Tax Officer (ITO) included the interest amounts based on the Commissioner's view, which was upheld by the Assistant Appellate Commissioner (AAC).4. Arguments by the Assessee:The assessee argued that minors were not obliged to contribute capital under the partnership deeds and that the interest received was not from their admission to the benefits of partnership. The assessee relied on previous decisions, including the Bombay High Court's decision in CIT v. S.V. Nashte, which held that interest on loans advanced by minors to a partnership firm was not income arising from their admission to the benefits of partnership.5. Arguments by the Department:The department argued that the definition of 'partner' in the Income-tax Act includes minors, and thus they were obliged to bring in capital. The department also cited the Supreme Court's decision in S. Srinivasan v. CIT, which held that interest on accumulated profits of minors admitted to the benefits of partnership should be included in the parent's income.6. Tribunal's Analysis and Decision:The Tribunal found that the minors were not obliged to contribute capital under the partnership deeds. The amounts credited to the minors were not accumulated profits but were brought in as cash or cloth stock. The Tribunal distinguished the present case from S. Srinivasan's case, noting that the amounts were not accumulated profits and were brought in at the time of admission to the partnership.The Tribunal relied on previous decisions, including the Bombay High Court's decision in S.V. Nashte and various orders of the Tribunal, which supported the assessee's contention that interest on loans advanced by minors should not be included in the parent's income under section 64(1)(iii).7. Conclusion:The Tribunal concluded that the interest income derived by the minors from the firms was not income arising directly or indirectly from their admission to the benefits of partnership. Therefore, the interest income should not be included in the hands of the parent under section 64(1)(iii). The appeals were allowed, and the interest amounts were directed to be excluded from the parent's taxable income.