Gauhati High Court
Commissioner Of Income-Tax vs Smt. Savitri Devi Dhandharia on 1 February, 1996
Equivalent citations: [1996]219ITR277(GAUHATI)
Author: N. Surjamani Singh
Bench: N. Surjamani Singh
JUDGMENT D.N. Baruah, J.
1. By this reference under Section 256(2) of the Income-tax Act, 1961, the following two questions have been referred by the Tribunal for the opinion of this court :
" (1) Whether, on the facts and in the circumstances of the case, interest paid by the firm, Dhandharia Tea Co., on the amounts of accumulated profits and other sums which were credited in the account of the minor son of the assessee in the books of account of the said firm was not income arising directly or indirectly to the minor son from his admission to the benefits of partnership and whether this was not includible in the total income of the assessee under Section 64(1)(iii) of the Income-tax Act, 1961 ?
(2) Whether there are any materials or evidence on record on the basis of which the Tribunal has treated the amounts lying to the credit of the minor son of the assessee as deposits and whether the finding of the Tribunal that though the deposits were treated as capital, interest was payable in respect of any other loans or deposits from third party is not based on surmise or on no evidence or on improper view of the relevant facts and whether the decision based on such findings is not untenable in law ?"
2. The assessee, Smt. Savitri Devi Dhandharia, along with four other persons formed a partnership firm and carried on business under the name and style of Dhandharia Tea Co. The partnership firm was formed by a deed of partnership dated January 1, 1970. The assessee's minor son, Bimal Kumar Dhandharia, was admitted to the benefits of partnership with the mutual consent of the parties. As per clause 10 of the said partnership deed, interest at the rate of six per cent. per annum was to he paid to each partner on the moneys for the time being standing to their respective credits. It was also agreed that by mutual consent the interest rate might be reduced, increased or waived.
3. An amount of Rs. 1,200 was paid on behalf of the minor, Bimal Kumar Dhandharia. Thereafter some more deposits had been made. The amount was credited with interest, dividend and share of profits. Thus, in the year 1969, the total amount with interest, dividend and share of profit became Rs. 95,743.19. The details of this account are quoted in paragraph 3 of the statement of case. For the assessment year 1970-71, the previous year being December 31, 1969, the Income-tax Officer included a sum of Rs. 10,352 as "share income from the firm, Dhandharia Tea Co., in the name of her minor son, Sri Bimal Kumar Dhandharia" in the assessment of Smt. Savitri Devi Dhandharia, the assessee.
4. Similar assessments had been made for the following two years, i.e., 1971-72 and 1972-73, in which sums of Rs. 6,451 and Rs. 2,962, respectively, were added. Thus, there were differences between the above figures and the amounts shown as interest in the accounts of Bimal Kumar Dhandharia as shown in paragraph 3 of the statement oi' case.
5. The assessee being aggrieved preferred an appeal before the Appellate Assistant Commissioner. It was contended before the said authority that the amounts added included interest on deposits which could not be related to the benefits of the partnership firm and, therefore, it was added under Section 64(1)(iii) of the Income-tax Act, 1961. The Appellate Assistant Commissioner accepted the contention of the assessee and deleted the addition. Further appeal was preferred by the Revenue before the Appellate Tribunal,
6. The Appellate Tribunal by its order in I. T. A. Nos. 286 and 257/Gau) of 1975-76 dated October 13, 1976, and I. T. A. No. 90/(Gau) of 1975-76 dated February 3, 1976, directed the Appellate Assistant Commissioner to investigate the facts regarding the nature of the interest received by the minor. The Appellate Assistant Commissioner, thereafter, passed the order dated March 21, 1978, in which he had accepted the contention of the assessee that there were no withdrawals by the minor since 1959 when the deposits were initially made and the amount referred to above was the accumulations of interest, share of profit, dividend, etc. The Appellate Assistant Commissioner also found that the deposits were not capital contribution and hence the interest was not includible under Section 64(1)(iii). He had accordingly directed the exclusion, of interest.
7. Further appeal was preferred by the Revenue before the Appellate Tribunal. It was contended on behalf of the Revenue that even accumulation of share of profit would be part of the benefit of partnership if there was an arrangement by which the interest was payable by the firm on such accumulations. The Appellate Tribunal placed reliance on clause 10 of the partnership deed by which the interest was paid at the rate of six per cent. per annum on the moneys standing to the credit of the partners. On the other hand, it was submitted on behalf of the assessee that there was no stipulation that the money of the minor should be kept with the firm and hence the interest derived cannot be regarded as part of the benefits of the partnership.
8. The Tribunal upheld the order of the Appellate Assistant Commissioner and dismissed the Revenue's appeals. The Revenue, therefore, requested the Tribunal to refer the questions to this court for opinion. The Tribunal, however, refused to refer the same to this court.
9. Situated thus, the Revenue approached this court under Section 256(2) of the Income-tax Act and this court accordingly directed the Tribunal to refer the questions for the opinion of this court. Therefore, the present questions referred to above have come to this court for opinion.
10. We have heard both sides.
11. Mr. G. K. Joshi, learned standing counsel for the Revenue, assisted by the junior counsel Mr. U. Bhuyan, submits before us that the amount lying in the account of the minor should be treated as capital on the basis of Clause 7 of the deed of partnership. If it is treated as capital, definitely the interest accrued is for the benefit of the firm and, therefore, it was includible under Section 64(1)(iii) in the hands of the assessee, Smt. Savitri Devi Dhandharia. Mr. Joshi relies on Clause 7 as well as Clause 10 of the partnership deed. Pointing out Clause 7, Mr. Joshi submits that the partners agreed to treat the entire amount for the benefit of the firm as capital and accordingly on such basis the interest was paid as per Clause 10. He also submits that there was no stipulation in the partnership deed for payment of interest, on the deposit of the minor. The absence of such clause in the partnership deed goes to show that the amount lying with the partnership firm was treated as capital and not a mere deposit. Mr. Joshi, therefore, submits that it should be included in the income of the assessee under Section 64(1)(iii). Mr. Joshi also relies on a decision of the apex court in State of Orissa v. Titaghur Paper Mills Co. Ltd. [1985] 60 STC 213. According to Mr. Joshi the true meaning of Clause 7 and Clause 10 should be given after considering the entire documents. It is necessary to give a harmonious interpretation of Clause 7 and Clause 10 by considering the entire documents. Mr. Joshi has drawn our attention to a decision of the Supreme Court in Builders' Association of India v. Union of India [1989] 73 STC 370.
12. Mr. D. K. Misra, learned counsel, assisted by Mr. C. T. Jamir, appearing on behalf of the assessee-respondent, submits that the account of the minor began with a deposit of Rs. 1,200 and the amount was deposited by a cheque. Thereafter, with interest, share of profit and dividend, etc., the amount grew to Rs. 95,743.19. The manner in which the amount was kept in the partnership firm clearly indicates that it was only a deposit and cannot be treated as capital. Mr. Misra further submits that the partnership does not enjoin that the minor was required to make any contribution towards the capital.
13. On the rival contention of learned counsel for the parties it is now to be seen whether the amount of Rs. 95,743.19 standing in the name of the minor should he treated as deposit or capital contribution.
14. It is an admitted fact that a deed of partnership was made amongst the partners, Partner No. 3 is the assessee and the mother of the minor who was admitted to the benefits of the partnership. It is also admitted by learned counsel for the parties that the father of the minor is still alive. But he was not a partner to the firm. Therefore, the assessee was not the natural guardian of the minor at that point of time. As per Clause 7 of the partnership deed, the partners decided that all the assets should form the capital of the said firm contributed by the parties including the minor admitted to the benefits of the partnership to the extent of the balances standing to their respective credits in the books of account of the said partnership firm and also as per Clause 10 interest at the rate of six per cent. per annum should be paid to each partner on the moneys for the time being standing to their respective credits. The parties thereto might with mutual consent reduce, increase or waive the interest payable by the firm.
14. It is also an admitted fact that the amount of Rs, 1,200 was contributed by a cheque received from B. T. Co. (P.) Ltd. However, it is not known who gave the cheque. From the document it appears that the amount began to grow from 1959 to 1972 with interest, dividend and share of profit, etc., as will appear from pages 18 and 19 of the paper book. The minor was given interest in every year and also profits in some years. This indicates that this was either a loan or deposit. As per Section 13(c) of the Partnership Act, partners are entitled to receive interest on the capital subscribed by them only out of profits. From the accounts it is clear that dividends had been paid in some years in all probability when there were profits to the firm. Therefore, it cannot be said that the amount was capital, surely it was a deposit. As per Clause 7, all the assets, properties and business of the aforesaid firm should be vested in the firm and form the capital of the firm contributed by the parties including the minor. From this fact, it is patent and evident that before the execution of the deed of partnership those were not capital and only by agreement of the parties, those had been converted to capital. This would only mean that the amount of Rs. 95,743.19 was the absolute property of the minor kept in deposit with the partnership firm. Admittedly, the father who was the natural guardian was not a party to the agreement. Besides, we do not find any evidence on record to show that there was any agreement by the natural guardian to convert the said deposit of the minor to capital.
15. Relying on the decision in State of Orissa v. Titaghur Paper Mills Co. Ltd. [1985] 60 STC 213 (SC), Mr. Joshi submits that the documents should be read as a whole to give a proper interpretation. We also feel that in order to give a proper interpretation the documents should be read as a whole. By reading the documents as a whole if the provisions are contrary to each other in any clause, the court may be inclined to give its own interpretation. Regarding the other submission that the entire amount lying to the credit of the minor should be treated as capital by giving a harmonious interpretation of Clauses 7 and 10 of the deed of partnership we are of the opinion that the amount of Rs. 95,743.19 standing in the name of the minor on the basis of the agreement amongst the partners cannot be converted from deposit to capital. There must be consent or agreement on behalf of the minor and it is the natural guardian or a guardian appointed by the court as the case may be who alone can give consent for such conversion. From the record we do not find anything to show that there was such agreement to convert the said deposit into capital. In the absence of any such agreement, we are unable to accept the contention of Mr. Joshi that interest was paid on the capital. Mr. Joshi has drawn our attention to a decision of the apex court in the case of S. Srinivasan v. CIT [1967] 63 ITR 273. In the said case, the apex court had the occasion to deal with a similar matter. In that case the appellant was the senior partner in a firm in which his wife and a stranger were partners and his two minor sons were admitted to the benefits of the partnership. One of the clauses of the deed of partnership provided that "if the firm requires any sum for meeting the expenses for its management and if any of the partners has and is willing to give such amount, he may advance (such amount) as loan. He may receive interest for such sum at the rate of 12 annas per cent. per mensem". For a number of years up to the previous year relevant to the assessment year 1957-58, the shares of profit of the wife and the minor sons were allowed to accumulate without interest. With effect from that previous year the firm decided to allow nine per cent. interest per annum on these accumulated profits. The question was whether the interest so allowed was assessable in the hands of the appellant under Section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922, now corresponding to Section 64(1)(iii) of the Act. In the said case, the apex court held thus (page 276) :
" It appears to us that these accumulated profits remaining in the hands of the firm cannot, on any principle, be equated with deposits made or loans advanced. The profits accumulated to the credit of the wife and the minor sons, because they did not draw their share of profits when distribution of profits took place, and allowed those profits to remain with the firm ; but there is no suggestion at all that, at that stage, either the wife or the minor sons, or anyone on their behalf, purported to enter into an arrangement with the firm to keep these accumulated profits as deposits. Similarly, there was no such contract which could convert those accumulations into loans and advanced to the firm by these persons. The facts and circumstances indicate that the wife and the minor sons had earned these profits because of their membership of the firm or because of their admission to the benefits of the firm, and having earned these profits in that capacity, they allowed the use of their profits to the firm without any specific arrangement as would naturally have been entered into if these funds had belonged to a stranger. They let the firm use funds of theirs, because they had interest in the profits of the firm. The facts also show that the use of these moneys was allowed to the firm without asking for any interest, and it was only at a later stage that the three partners of the firm decided to give interest on these amounts. When the decision was taken to give interest, the nature of the funds did not change.
They did not got converted into deposits or loans. They still remained accumulations belonging to a partner or persons admitted to the benefits of the partnership and allowed to be used by the firm. The interest also appears to have been allowed by the firm simply because these funds belonged either to a partner or to the minors who had been admitted to the benefits of the partnership. It is thus clear that the interest at least indirectly arose and accrued to the wife and the minor sons because of their capacity mentioned in Section 16(3)(a)(i) and (ii) in the Income-tax Act."
16. In the said decision, the facts are different. The wife and the two minor sons agreed that the profits should go back to the partnership firm and the interest was paid much later. But, in the present case, the amount was deposited and from that day onwards the interest was calculated and paid and profit was given. Therefore, in the present case, in our opinion, it was a deposit. We have no hesitation to come to a definite conclusion that it was a deposit and not a capital.
17. In view of the above, we answer the questions in the affirmative, in favour of the assessee and against the Revenue.
18. A copy of this judgment under the signature of the Registrar and the seal of the High Court shall be transmitted to the Income-tax Appellate Tribunal.