Calcutta High Court
Commissioner Of Income-Tax vs Santosh Kumar Kanoria. on 16 February, 1990
Equivalent citations: (1992)94CTR(CAL)225, [1992]193ITR655(CAL)
JUDGMENT
SUHASH CHANDRA SEN J. - The Tribunal has referred the following question of law to this court under section 256(1) of the Income-tax Act, 1961 :
"Whether, on the facts and in the circumstances of the case, and on a correct interpretation of section 64 (1) (iii), the interest credited to the account of the minor children, Master Anshuman and Miss Divita in the books of the firm, Messrs. Balaji Enterprises, in which the said minors are admitted to the benefits of partnership, are includible in the hands of the assessee ?"
The facts as narrated by the Tribunal in the statement of case are as under :
"The assessee is an individual and the assessment years in question are 1976-77 and 1977-78 The assessee follows the financial year as the accounting year.
There is a partnership firm by name Balaji Enterprises. The assessees minor children are admitted to the benefits of partnership in that firm. The profits were being credited every year in the accounts of the minor and interest on the amount outstanding is being credited in accordance with clause 7 of the partnership deed dated April 1, 1972, and in accordance with clause 7 of the subsequent deed dated July 17, 1975. The interest credited to the minors accounts was not included in the assessees hands up to and including the assessment year 1975-76. But, for the first time in the assessment year 1976-77, the interest credited to the accounts of the minor has been clubbed in the hands of the assessee by relying on section 64(1)(iii). Evidently, this has been done because of the amendment to the law brought about with effect from January 1, 1976. The Appellate Assistant Commissioner agreed with the Income-tax Officer.
Counsel for the assessee contended that, in view of the fact that there was no condition to contribute capital for being admitted to the benefits of the partnership, the amounts standing in the accounts of the minors must be treated as loan or deposit on which interest was being credited every year in accordance with clause 7.
It was, therefor, contended that the minor derived interest not on account of their being admitted to the benefits of partnership but because of their independent right or investing their amounts in the firm. Accordingly, learned counsel contended that section 64(1)(iii) had no application. The learned departmental representative, on the other hand, strongly relying on the order of the Appellate Assistant Commissioner contended that the decision of the Supreme Court in the case of S. Srinivasan v. CIT [1967] 63 ITR 273 squarely applies to the facts of the case. In replay, learned counsel for the assessee stated that the principle laid down in Srinivasans case had no application to the facts of the case on hand and the case was fully covered by the decision of the |Jaipur Bench of the Tribunal in I.T.A. No. 820/Jaipur of 1978-79 dated 14th August, 1980.
Before looking to the decision of the Supreme Court, it would be useful to recapitulate the factual position. The assessee was not a partner in the firm. The minors were admitted to the benefits of the partnership They had not contributed any capital nor was there any stipulation for contribution of capital. No doubt there was only one account in each of their names and it was not indicated as to whether it was capital account or not. Their share of profit was being credited to that particular capital account year after year. Right from the beginning, interest was credited to that account, obviously on the basis of clause 7 of the partnership deeds referred to above. Even in respect of other partners, interest was being credited in a similar fashion. It was, therefore, clear that the accumulated profits were treated as advance or deposit to the firm and, therefore, interest was credited.
The Tribunal considered the decision of the Supreme Court in Srinivasans case [1967] 63 ITR 273. There, the profit were being accumulated for several year. No interest might be credited to those accounts of the minor. It was held by their Lordships that, in the absence of any indication to convert the accumulated profits to deposit or loans, interest earned on the accumulate profits must be held to have arisen directly or indirectly on account of the minors being admitted to the benefits of partnership. The position before the Tribunal was different as already indicated. The minors were given the interest not by virtue of their being admitted to the benefit or partnership but because of their advance. There was, therefore, no nexus between payment of interest and their admission to the benefits of partnership. In the opinion of the Tribunal, therefor, section 64(1)(iii) in such circumstances had no application. It may be mentioned that the decision of the Supreme Court came up for consideration before the Madras High Court in the case of Addl. CIT v. Misrimul Sowcar [1979] 119 ITR 123 as well as by the (BOM)bay High Court in the case of CIT v. Chandanmal Kasturchand [1978] 112 ITR 296. The Jaipur Bench of the Tribunal also supported the view taken by the Tribunal. The clubbing of interest in respect of minors account in the hands of the assessee was, therefore, vacated."
The argument advanced on behalf of the assessee is that the income that the minors derived in the case on account of interest being credited in the books of the firm in the names of the minors could not be treated as income arising directly or indirectly "from the admission of the minors to the benefits of partnership in the firm". It has been argued that any person can deposit any money and earn interest on such deposit. If a minor allows his share of profits in firm to remain in the firm and earn interest thereby then the interest paid by the firm cannot be treated as income arising from the admission of the minor to the benefits of a partnership firm. The earning of interest is an incident of lending of money by the minors to the firm. This may be done even by a partner of a firm. But that is an act independent of admission to the firm. It has been emphasised that there was no requirement of contribution of capital for being admitted as a member of the firm. The advocate appearing on behalf of the assessee placed reliance on the copy of the partnership deeds and contended that there is nothing in the partnership deeds which made it obligatory on a minor to make any contribution towards the capital of the firm.
There is a partnership deed dated April 1, 1972, entered into by Santosh Kumar Kanoria and Mothi Sagar Khanna. In this partnership deed, Santosh Kumar Kanoria joined as karta of his Hindu undivided family knows as Santosh Kumar Anshuman which consisted of himself, his wife and his children. In this partnership deed, it was recited as under :
"6. (i) That the profits of the firm shall be divided between the parties and the said minors in the following manner :
The party of the first part 40% The party of the second part 20% Master Anshuman Kanoria, minor, admitted to benefits 25% Miss Divita Kanoria, minor, admitted to benefits 15% 6 (ii) That the losses of the firms shall be borne by the parties in the following shares, namely :
The party of the first part 67% The party of the second part 33%
7. That the partners and the minors admitted to benefit shall be allowed interest at 12% per annum or at such other rate or rates that may be agreed upon by the partner on their accounts and it shall be after deduction to such interest that profit or losses shall be determined for the year for distribute among the partners and/or minors admitted for benefits."
By a deed of retirement dated July 17, 1975, Moti Sagar Khanna retired from the partnership with effect from July 17, 1975, and a second deed of partnership dated July 17, 1975, was executed by Santosh Kumar Kanoria and Sri. Amitabh Khemka. Santosh Kumar Kanoria, as stated before, joined the partnership as karta of a Hindu undivided family known as Santosh kumar Anshuman which consisted of himself, his wife and his children. It has been recited in the deed of partnership as follows :
"1. That the business of partnership (hereinafter also referred to as "the firm") shall be continued to be carried on under the name and style of Balaji Enterprises and /or such other name or names as the partners may from time to time agree upon.
2. That, after formation of the partnership, the partners have agreed to admit Master Anshuman Kanoria and Miss Divita Kanoria to the benefits of partnership with no obligation on the minors to suffer the losses of the firm. Sri. Santosh Kumar Kanoria, father and natural guardian of the minors, has given his consent and approval to the admission of the minors to the benefits of partnership.
3. That the partnership has commenced on and from the 17th day of July, one thousand nine hundred and seventy-five and shall continue until determined by the partners by mutual consent....
6(i) That the profits of the firm shall be divided between the parties and the said minors in the following manner :
The party of the first part 40% The party of the second part 20% Master Anshuman kanoria, minor, admitted to benefits of the partnership 25% Miss Divita Kanoria, minor, admitted to benefits of the partnership 15% 6(ii) That the losses of the firm shall be borne by the parties in the following shares, namely : The party of the first part 67% The party of the second part 33%
7. That the partners and the minors admitted to benefits shall be allowed interest at 15% per annum or at such other rate or rates that may be agreed upon by the partners on their accounts and it shall be after deduction of such interest that profits or losses shall be determined for the Year for distribution among the partners and/or minors admitted for benefits."
It would appear from the two partnership deeds, the relevant clauses whereof have been set out hereinabove, that the deeds provided that the minors would not only be admitted to the benefits of the partnership but will also be allowed interest on their accounts at the rate of 15 percent. per annum of such other sum as may be agreed upon by the partners. It was further agreed that after deduction of such interest the profits or losses shall be determined for the year for distribution among the partners and/or minors admitted to the benefits of the partnership. Therefore, the right to obtain interest on the outstanding amount in their accounts arose to the minors from the partnership deed itself. It is a right directly arising out of admission of the minors to the benefits of the partnership.
It is also to be noted that the minors in this case not only allowed their moneys to remain in the partnership but the amount of interest on these accounts paid to the minors and other partners were to be allowed as deduction from the partnership profits. The interest paid by a firm would normally be deductible from its income. By this process, the firm also benefited and its tax burden was lightened. The minors also benefited in that they got 15 per cent. interest on the deposits under clause 7 of the partnership deed. This right to get interest at the rate of 15 per cent. on the amount lying deposited in the firm was conferred upon the minors by the partnership deed itself.
Therefore, in my judgment, the provision of section 64(1)(iii) of the Act are clearly attracted to the facts of this case. Section 64(1)(iii) provides as under :
"64. Income of individual to include income of spouse, minor child, etc. - (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly - ....
(iii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm."
"The benefits of partnership in a firm" will not only be the right to get the share of the profits of the firm but will also include other benefits which a minor may enjoy from his being admitted to the firm. The income by way of interest received by the minor was by virtue of a specific clause in the partnership. The Minor as well as other partners were entitled to get interest on their accounts in the firm. This is a specific provision in the partnership deed and because the minors were admitted to the benefits of the partnership firm they were given this interest on their accounts.
Another point has to be noted in this context. Any income which arises indirectly to minor by virtue of admission to the benefits of the partnership firm will also attract the provisions of section 64(1)(iii).
I shall now deal with the cases that were relied upon by the Tribunal. In the case of Addl. CIT v. Misrimul Sowcar [1979] 119 ITR 123, the Madras High Court examined the scope of section 64 (iii) of the Income-tax Act, 1961, as it stood before its amendment by section 13 of the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976.
In the case of S. Srinivasa v. CIT [1967] 63 ITR 273 (SC), the appellant, S. Srinivasan, was a senior partner in a firm in which the two other partners were his wife and a stranger. In addition, the two minor sons of the appellant had been admitted to the benefits of the partnership. Under the deed of agreement constituting the partnership, the shares in the profits of all the five persons were defined. It was specified that the losses were to be shared by the three partners only. There was a clause in the deed of partnership 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". The firm earned profits which were allocated amongst the partners and the two minors. The amount of profits falling to the share of the wife of the appellant and his two minors were allowed to accumulate in the accounts of the partnership for a number of years. Up to 1957-58, the amount was kept in the partnership without any interest. Thereafter, the partnership decided to allow interest at 9% per annum on these accumulated profits.
One of the questions before the Supreme Court in that case was (at p. 275 of 63 ITR) :
"Whether interest credited by the aforesaid firm to the assessees wife and minor children attributable to past profit accumulations only is includible in the assessment of the assessee under section 16(3)(a)(i) and (ii) ?"
The argument on behalf of the assessee before the Supreme Court was that though the profits earned from the partnership by the wife and the minor sons of the appellant were undoubtedly income arising to them directly from the partnership of the wife in the firm or the admission of the minors to the benefits of the partnership in the firm, the interest accruing on the accumulated profits should not be held to be arise either directly or indirectly from the same source. It was argued that the accumulated profits belonging to the wife and minor sons should be held to be in the nature of deposits made by them with the firm, or in the nature of loans could have no relationship with the membership of the firm of the wife or the admission to the benefits of the partnership of the minor sons.
The Supreme Court held (at p. 276) "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 get 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 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) of the Income-tax Act."
In the instant case, there was no agreement except the partnership deed and interest was paid by virtue of the provisions of the partnership deed. The source of the interest income is clause 7 of the agreement which had been set out earlier in the judgment. The right of the minors to get interest on their accounts standing with the firm was the direct incident of the membership of the firm.
In the case of L. Ram Narain Garg v. CIT [1965] 55 ITR 435 (All), it was pointed out by the Allahabad High Court that it be stated as a matter of law the interest paid by a partnership to a minor admitted to its benefits can never be said to be connected even indirectly with the fact of his admission to the benefits of the partnership. It was connected with the fact if the interest paid was on capital investment by the minor or on a loan advanced to the partnership by a minor and the partnership deed contained a bar to the raising of a loan from any person other than a partner or a person admitted to its benefits. It was not connected with the fact if the interest was paid on a deposit made, or loan advanced by the minor and the partnership was free to accept a deposit or a loan from any person even if not connected with it.
In the case of S. Srinivasan v. CIT [1967] 63 ITR 273, the Supreme Court referred to this judgment of the Allahabad High Court and observed as follows (at p. 278) :
"The principle enunciated by the Allahabad High Court does not envisage all circumstances in which interest may be earned by a minor on his money with the firm. The cases when interests is earned on a deposit or a loan differ from a case of the type before us where interest was earned on amounts of which the minors permitted the fues by the firm, because they were their accumulated profits arising from the firm itself and because of their interest in the firm as persons admitted to the benefits of the partnership."
In that view of the matter, the question is answered in the affirmative and in favour of the Revenue.
There will be no order as to costs.
BHAGABATI PRASAD BANERJEE J. - I agree.