Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Segu Harnath on 15 February, 1988
Equivalent citations: [1988]171ITR318(AP)
JUDGMENT Y.V. Anjaneyulu, J.
1. This reference under the income-tax act relates to the three assessment years 1978-79, 1979-80 and 1980-1981. The commissioner of Income-tax sought this reference and the following three questions were referred by the Income-tax Appellate Tribunal under section 256(1) of the Income-tax act.
"1. Whether, on the facts and in the circumstances of the case the Appellate Tribunal is right in holding that the interest of Rs. 9435 debited to the capital account of the minor and paid to the firm in which she was a partner is deductible from the share income arising to her from the partnership firm, especially when the interest is paid to the firm itself and not to any outsider ?
2. Whether, on the facts and in the circumstances of the case the Appellate Tribunal is right in holding that the interest of Rs. 8839 debited to the capital account of the minor and paid to the firm in which she was a partner is deductible from the share income arising to her from the partnership firm, especially when the interest is paid to the firm itself and not to any outsider ?
3. Whether, on the facts and in the circumstances of the case the Appellate Tribunal is right in holding that the interest of Rs. 8533 debited to the capital account of the minor and paid to the firm in which she was a partner is deductible from the share income arising to her from the partnership firm, especially when the interest is paid to the firm itself and not to any outsider ?"
We may point our that questions No. 1, 2, and 3 relate to the assessment years 1978-79, 1979-80, 1980-81, respectively.
2. The questions arise for consideration in the following circumstances :
The assessee as well as his minor daughter were partners in a firm known as M/s Krishna Dall and Flour Mill, Bhavanipuram, Vijaywada. The partnership was constituted under a deed of partnership executed on February 15, 1977. There were four major partners and two minor partners admitted to the benefits of the partnerships, including the assessee's minor daughter. It would appear that all the partners including the minor partners own sites in Bhavanipuram and on the sites a dall mill was constructed by all the partners contributing the money together. It is an undisputed fact that on behalf of the minor, funds were borrowed and invested in the partnership firm for construction of the dall mill.
3. In connection with the income-tax assessment for the year 1978-79 of the assessee the income of the minor daughter was not included initially under section 64(1)(iii) of the Act. For the assessment years 1979-80 and 1980-81, the Income-tax officer released that the share income of the minor daughter was liable to be included in the total income of the assessee under section l64(1)(iii) of the Act. Consequently in the regular assessment for the years 1979-80 and 1980-81, the share income arising to the minor daughter was so included. In connection with these two assessments the assessee claimed that interest on monies borrowed and invested in the partnership firm on behalf of the minor for the purpose of construction of dall mill should be deducted from the share income and only the resultant income included in his total income under section 64(1)(iii) of the Act. It was claimed that interest of Rs. 8839 and 8533 were paid on the monies borrowed by the minor daughter and deduction of these two sums from share incomes was claimed. The income-tax officer declined to accept the aforementioned claim of the assessee. At the same time, the income-tax officer revised the income-tax assessment for the year 1978-79 under section 154 of the income-tax act as if there was a patent and self evident error. In an order passed under section 154 of the act, the Income-tax, officer likewise included the share income of the minor daughter in the total income of the assessee rejecting the contention that the interest of Rs. 9435 paid for this assessment year should be allowed as a deduction.
4. Aggrieved by the assessments made by the income-tax officer, the assessee filed appeals before the Appellate assistant commissioner who, by his order dated March 12, 1982, confirmed the assessments and dismissed the appeals filed by the assessee. The assessee filed second appeals before the Income-tax appellate Tribunal. The assessee retreated his contention for deduction of the interest paid on the monies borrowed by the minor daughter for construction of the dall mill. The Tribunal upheld the assessee's claim and directed that the interest paid for all the three assessment years should be allowed as a deduction from the share income of the assessee's minor daughter and only the resultant income after such deduction should be included in the total income of the assessee under section 64(1)(iii) of the Act. The commissioner was aggrieved by the decision of the Tribunal and consequently he sought reference to this court of the three questions already mentioned above.
5. The contention of standing counsel for the Revenue is that when section l64(1)(iii) authorized the inclusion of the share income arising to a minor child, it is the gross income that is referable and not the net income. According to learned standing counsel, the share income of the minor daughter liable to be included in the total income of the assessee must be ascertained without giving any deductions to which the minor daughter may be entitled if she had been directly assessed. In that view of the matter, learned standing counsel submitted that the Tribunal was in error in directing that the interest paid for the three years should be deducted.
6. We find no authority for the proposition made by learned standing counsel. While section 64(1)(iii) of the Act authorities the inclusion of the share income of the minor child, it obviously refers to the share income determined in the hands of the minor child by applying all the provisions of the Act. section 67(3) of the income-tax act provides that :
"Any interest paid by a partner on capital borrowed by him for the purposes of investment in the firm shall, in computing his income chargeable under the head 'profits and gains of business or profession' in respect of his share in the income of the firm, be deducted from the share."
7. It is not denied that the minor admitted to the benefits of the partners ship is regarded as a partner for all purposes. That beings so, full effect must be given to the provision in section 67(3) The minor partner's entitled to claim deduction of the interest paid on capital borrowed for the purpose of investment in the firm. There is no dispute about the fact that on behalf of the minor daughter, the assessee borrowed funds and invested the same in the partnership firm in the name of the minor daughter. Consequently the interest payable on capital borrowed by the assessee on behalf of the minor daughter qualifies to be deducted under section 67(3) is provided first as contemplated therein and only the resultant income included in the total income of the assessee under section 64(1)(iii) of the Act. The Tribunal was perfectly justified in holding that the interest paid by the assessee in respect of the monies borrowed on behalf of the minor daughter for investment in the partner-ship firm is liable to be deducted from the share income and only the resultant income could be taxed in the hands of the assessee by applying the provisions of section 64(1)(iii) of the Act. We accordingly answer the reference in the affirmative that is to say in favour of the assessee and against the Revenue. No costs.