TaxTMI 
TaxTMI 
1969 (12) TMI 16
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....xcess of the capital, as well as the capital, will bear interest at 12% per annum subject to modification in the rate of interest by mutual agreement of partners and the same shall be treated as expenses of the business." Both the minors had contributed the required capital of Rs. 25,000 each in the said firm. In addition to the said capital of Rs. 25,000 each, the minors had also deposited some further sums which were treated by the firm as loans. Under clause 5 of the terms and conditions of the partnership deed, interest was payable at 12% per annum not only on the said capital of Rs. 25,000 but also on the additional amounts contributed or deposited by the partners subject to the modification in the rate of interest by mutual agreement. For the assessment year 1961-62 the following amounts were found credited in the accounts of the two minors : Minor C. Jehandran Interest on capital Rs. 3,000 Interest on loan Rs. 2,121 --------------------- Total Rs. 5,121 --------------------- Minor Jayakar Interest on capital Rs. 3,000 Interest on loan Rs. 2,120 --------------------- Total Rs. 5,120 ---------------------- The Income-tax Officer added the total amount of Rs. 10,24....
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....ing a distinction between the interest paid on the " fixed " capital and the interest paid on the " additional " capital and that the interest was paid to the minors only under the terms of the partnership and not in pursuance of an independent agreement. The learned counsel for the assessee submitted that the entire approach of the Tribunal to the question on hand was erroneous, that the Tribunal was not correct in taking the view that there was no distinction between the interest paid on the capital and the interest paid on other amounts deposited or invested by the minors in the partnership, that the interest paid on the amounts invested was not under the terms of the partnership and that such a benefit accruing to the minors was not as a result of their having been admitted to the benefits of the partnership. It was further submitted by the assessee's learned counsel that the minors, though entitled to the benefits of the partnership, are not partners as such and that interest payment made to the minors in relation to the amounts invested is outside the partnership deed and not under clause 5 thereof. The learned counsel submitted that the Tribunal is not justified in thinking....
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....ncome must have some connection, whether direct or indirect, with the fact of his admission. Any income that could have been derived by him without his being admitted to the benefits of the partnership cannot be said to have been derived by him from the admission. Once some connection between the receipt of income and the admission is established, the provision applies, whether the connection is direct or indirect ...... The income derived by each minor in the instant case was interest on the money paid by him to the partnership. He could pay the money to the partnership either by way of his contribution to the capital required for commencing the partnership business or by way of a loan or deposit to it. The money required to carry on a partnership business comes from the capital contributed by the partners and from loans taken from investors. A partner is not forbidden by law from being an investor ; merely because he can contribute to the capital, it cannot be said that any money that he pays is by way of contribution to the capital and can never be by way of investment ..... It cannot be stated as a matter of law that interest paid by a partnership to a minor admitted to its ben....
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....nvestment as such, and the other amounts deposited in excess of the capital amount and that the Tribunal is not justified in treating this excess amount deposited as additional capital without any basis whatever. There is obvious distinction between capital investment and other investments made by the minors. If it is a capital investment, it cannot be withdrawn except by the minors severing their connection with the firm. If it is not a capital investment it can be withdrawn at any time or it can be attached by creditors also. Further, interest on capital will be paid only on profit, while the interest on loan or deposit has to be paid whether the firm earns profit or not. The terms of the partnership required every one of the partners to contribute only Rs. 25,000 each as capital and they are not under an obligation to pay any additional capital. The revenue has not attempted to establish that any of the partners paid any additional capital and that the minors were also required to pay such additional capital as was done by the other partners, or that the excess amounts to the credit of the minors represents the accumulation of their share of profits. Where the revenue wants to t....