TaxTMI 
TaxTMI 
1979 (1) TMI 47
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....of the assets received by them on a partial partition of their HUF property. By a letter dated 1st of November, 1958, written by the assessee in his capacity as guardian of his three minor sons he instructed the firm to transfer a sum of Rs. 64,500 from the capital account of the two minors, A. S. Nashte and R.S. Nashte, and a sum of Rs. 42,000 from the account of the third minor son, K. S. Nashte, to the loan accounts to be opened in their respective names in the books of the firm. This letter said that the firm had to pay interest at the rate of 6% p.a. on these amounts transferred to the loan accounts. In subsequent years also some more amounts from the minors' capital accounts were transferred to the loan accounts in their respective names on which the firm paid interest to the minors. In assessment proceedings of the assessee for the assessment years 1962-63, 1963-64 and 1964-65, apart from including the share income of the three minor sons in the income of the assessee, the interest credited to these minors' loan accounts was also included in the income of the assessee by the ITO purporting to give effect to s. 64 (ii) of the I. T. Act, 1961, as the provisions stood at the ma....
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.... out of his own funds, but that a part of the capital account has been converted into a loan account and, therefore, the income must be said to arise directly or indirectly from the admission of the minor to the benefits of the partnership. Now, a bare reading of the provisions in s. 64(ii) would indicate that there must be some nexus direct or indirect between the income which accrues to a minor and his admission to the benefits of the partnership firm. It is not in dispute that the amounts which were originally contributed as capital and which were then transferred to the loan accounts belonged to the minors in their own right because they came to them as their share at the partition of the property of the joint Hindu family. The assessee acting as the guardian of the minors could well have invested moneys belonging to the minors in any other manner or, as it is not disputed by Mr. Joshi, they could initially have been advanced as loan to the partnership firm. There was no obligation on any of the minors to advance any moneys by way of loans to the partnership firm and it is not that unless he advanced that amount by way of loan, he could not be admitted to the benefits of the....
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....rs to maintain any deposits in the firm or upon the firm to keep any deposits made by the minors. The partnership deed had fixed the rate of interest and had provided that interest at that rate should be paid by the firm if there were any deposits or moneys standing to the credit of the minors. This court on those facts held that s. 16(3) must be very strictly construed and that the interest earned by the minors on the amounts standing to their credit in the firm could not be included in the total income of the assessee. Mr. Joshi on behalf of the revenue sought to distinguish this case, and, according to him, as already stated, the distinguishing feature was that in the present case a part of the capital amount was converted into a loan by transferring it to a loan account. That, in our view, would not make any difference so far as the scope of s. 64(ii) is concerned. We may also refer to another recent decision of this court in CIT v. Chandanmal Kasturchand [1978] 112 ITR 296 (Bom). It was pointed out in that case that in deciding whether a case falls under s. 16(3) (a) (ii) of the Indian I. T. Act, 1922, or s. 64(ii) of the Act of 1961, it is necessary to find out whether the....
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....ated profits and the question was whether the interest so allowed was assessable in the hands of the assessee under s. 16(3)(a)(i) and (ii) of the Indian I. T. Act, 1922. The Supreme Court held that the interest accrued to the wife and the minor sons at least indirectly because of their capacity mentioned in s. 16(3)(a)(i) and (ii) were, therefore, assessable in the appellant's hands. In that case, the Supreme Court also pointed out that the cases where interest is earned on a deposit or loan differ from cases where interest is earned on the accumulated profits arising from the firm itself. Mr. Joshi had relied on the decision in Srinivasan's case [1967] 63 ITR 273 (SC). But, as we have earlier pointed out, the ratio of that decision was considered in detail in Chandanmal's case [1978] 112 ITR 296 (Bom) and it was held by this court that where an arrangement with the firm to keep the accumulated profits as deposits could be made on behalf of the minor sons and if such an arrangement is found to have been made, the ratio of Srinivasan's case [1967] 63 ITR 273 (SC) would not be attracted. The argument of Mr. Joshi that a part of the capital account was converted into a loan accoun....