Clubbing of interest income from a minor's deposit upheld, but taxable computation limited to original principal and consequential adjustment allowed

Interest credited on a deposit standing in a minor child's name was treated as includible in the assessee's hands under the clubbing provision because the claimed waiver for part of the year was not satisfactorily established and the deposit continued to accrue interest on normal accrual principles. However, the taxable computation was confined to interest on the original gifted principal, excluding interest-on-interest. Where the full interest was brought to tax in the assessee's hands, a corresponding re-adjustment of the assessee's share income from the firm was required. The substantive clubbing was upheld, but the matter was remitted for limited verification on computation and consequential adjustment.

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Issues: (i) Whether interest credited on the deposit standing in the name of the minor son was liable to be included in the assessee's hands under section 64; (ii) whether, if includible, the addition had to be confined to interest on the original gifted amount and whether a corresponding re-adjustment of the assessee's share income was required.

Issue (i): Whether interest credited on the deposit standing in the name of the minor son was liable to be included in the assessee's hands under section 64.

Analysis: The clubbing provision was held to apply on the facts because there was no satisfactory basis for the claimed waiver of interest for part of the year, and the deposit continued to yield interest according to the normal accrual principle.

Conclusion: The addition of interest in the assessee's hands was upheld.

Issue (ii): Whether, if includible, the addition had to be confined to interest on the original gifted amount and whether a corresponding re-adjustment of the assessee's share income was required.

Analysis: The computation was directed to be restricted to interest on the original gifted amount and not on interest-on-interest. It was also held that, if the entire interest was brought to tax in the assessee's hands, the assessee's share income from the firm required corresponding re-adjustment.

Conclusion: The matter was remitted for fresh verification on the limited question of computation, and the assessee was held entitled to corresponding re-adjustment of share income.

Final Conclusion: The appeal succeeded only to the extent of the manner of computation and consequential adjustment, while the substantive inclusion of interest remained undisturbed.

Ratio Decidendi: Interest accruing on a deposit connected with a minor child may be clubbed in the assessee's hands under the applicable provision, but the taxable amount must be confined to the original principal and consequential income adjustments must be made where the computation affects the assessee's share income.

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