Clubbing of interest income from partnership credits linked to spouse and minor son upheld under income-tax law.

Interest credited to the assessee's wife and minor son in the firm was held includible in the assessee's total income under section 16(3)(a)(i) and (ii) because the funds remained with the firm in circumstances linked to their status in the partnership. The credits arose from partition of the joint family business and were carried into the new firm without any specific agreement converting them into ordinary loans or deposits. The arrangement was not treated as a normal outsider lending transaction, since the rate of interest was to be fixed by the partners and was payable irrespective of profits. The interest was therefore treated as arising at least indirectly from the wife's membership and the minor's admission to benefits of the partnership.

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Issues: Whether interest earned by the assessee's wife and minor son on amounts standing to their credit in the firm was liable to be included in the assessee's total income under section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922.

Analysis: The credits in the firm arose out of the partition of the joint family business and were brought into the new partnership in circumstances showing that the funds were allowed to be used by the firm because the wife and minor had an interest in its profits. The arrangement for interest was not the kind ordinarily made with a stranger lending money to the firm, since the rate was left to be determined from time to time by the partners and was payable irrespective of profits. In the absence of a specific agreement converting the credits into deposits or loans, and having regard to the principle that funds retained with the firm because of the contributor's status in the firm retain their character for clubbing purposes, the interest was treated as arising at least indirectly from the wife's membership and the minor's admission to the benefits of the partnership.

Conclusion: The interest income was includible in the assessee's total income under section 16(3)(a)(i) and (ii), and the answer was in favour of the Revenue.

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