Patna High Court
Commissioner Of Income-Tax vs Bilas Rai Tekriwal on 20 August, 1965
Equivalent citations: AIR1966PAT216, [1966]61ITR467(PATNA), AIR 1966 PATNA 216, 1965 BLJR 941, 1965 (2) ITJ 835, ILR 45 PAT 546, (1966) 61 ITR 467
JUDGMENT
1. Both these cases are references under Section 66(1) of the Income-tax Act and a question of law common for the assessment years 1955-56 and 56-57 has been referred for the opinion of the High Court, which is in these terms:
"Whether the sums of Rs. 6,005 and Rs. 7,200 being interest paid to the assessee's wife and to the three minor sons for assessment years 1955-56 and 1956-57 respectively are liable to be included in the assessee's total income under Section 16(3) (a) (i) and (ii) of the Income-tax Act?"
These cases have, therefore, been heard together with the consent of the parties and this judgment will govern them both.
2. On the facts found, it appears that up to the 5th November, 1953, Shri Bilas Rai, the assessee, was constituting a Hindu undivided family with himself as Karta, and his wife, Shrimati Sheo Bayee, his major son, Mantu Ram Tekriwal, and three minor sons, Kedarnath, Daulat Ram and Santosh Kumar, as members thereof. This undivided family was carrying on business in the name and style of Manoharlal Bilas Rao. On the 5th November, 1953, however, there was a partial partition in the family as regards the business assets only; the immovable properties remaining joint. A partition deed was executed on the same date and the business capital of the erstwhile Hindu undivided family totalling Rs. 1,33,463-1-0 was divided into six equal parts. On the very same day, the family business was converted into a partnership and a deed of partnership was executed between the assessee Bilas Rai, his wife and his major son, Manturam Tekriwal. The three minor sons were, on the same day, admitted to the benefits of the partnership; it being settled and decided between the major members of the partnership that the firm constituted under the deed of partnership will succeed to all the assets and liabilities of the Hindu undivided family business. The result was that the sum of money, namely, Rs. 22,243-13-6 which had fallen to the share of the wife and a like amount which had fallen to the share of each of the minor sons went to constitute the capital of the firm at its very inception and for purposes of accounts it stood credited in the accounts of the firm's books to the credit of the wife and the minor sons, respectively.
In the assessment of the assessee for the year 1955-56, the Income-tax Officer, while including the share income from the partnership arising to his wife and three minor children, excluded the interest paid by the said firm to the wife and the three minor children. On this coming to the notice of the Commissioner of Income-tax, a notice under Section 33B of the Income-tax Act (hereinafter referred to as "the Act") was issued to the assessee to show cause why the sum of Rs. 6,005, which represented the interest paid by the firm to the wife and the three minor children of the assessees, be not included in the total income of the assessee for the year 1955-56 for the purposes of assessment under the provisions of Section 16(3)(a)(i) and (ii) of the Act, After giving a hearing to the assessee, the Commissioner, by his order dated the 1st February, 1958, directed the aforesaid sum of Rs. 6,005 to be included in the total income of the assessee. Thereupon, there was an appeal by the assessee to the Income-tax Appellate Tribunal, Calcutta Bench, Calcutta. The members of the Tribunal examined Clause (4) of the deed of partnership dated the 5th November, 1953, and, while accepting all the facts as had been found by the Commissioner, they took the view that, as there was nothing in the said clause indicating any compulsion on the wife and the minor sons to either contribute or maintain any capital to and with the firm, the amount of interest paid to the wife of the assessee and credited to the accounts of the three minor sons could not be considered as income arising to the wife as a member of the partnership or to the minors for their admission to the benefits of the said partnership, either directly or indirectly, and, accordingly, Section 16(3)(a)(i) and (ii) of the Act was not attracted; and, therefore the said sum of Rs. 6,005 could not be included in the total income of the assessee for the assessment of Income-tax in respect of the assessment year 1955-56.
In respect of the assessment year 1956-57, the Additional Income-tax Officer, Bhagalpur included the sum of Rs. 7,200, being the interest paid to the assessee's wife and to the three minor sons in the total income of the assessee for the purpose of assessment under Section 16(3)(a)(i) and (ii) of the Act. An appeal to the Appellate Assistant Commissioner having failed, the assessee took the matter to the Appellate Tribunal, and the Tribunal, in view of its decision with reference to a similar question arising in respect of the assessment year 1955-56, referred to above, directed that the said sum of Rs. 7,200 must be excluded from the total income of the assessee.
Aggrieved by the decision of the Appellate Tribunal in respect of both the assessment years, namely, 1955-56 and 1956-57, as aforesaid, two applications were filed before the Appellate Tribunal for making a reference to this Court, one in regard to one assessment year. The Tribunal has stated the case in respect of both the years in one statement and has referred the question set out above for the opinion of this Court.
3. Section 16(3) (a) (i) and (ii) of the Act reads as under:
"In computing the total income of any individual for the purpose of assessment, there shall be included-
(a) so much of the income of a wife or minor child of such individual as arises directly or indirectly-
(i) from the membership of the wife in a firm of which her husband is a partner;
(ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner;"
It is quite clear that both these clauses of Section 16(3) (a) are absolute in terms and not subject to any exception. Under this section, in the total income of an individual, the income of the wife or minor child arising directly or indirectly "from the membership of the wife" in the firm and "from the admission of the minor to the benefits of partnership" in the firm of which the individual is a partner has to be included for the purposes of assessment. The question in both these cases is whether the interest paid by the firm to the wife and to the minor children of the assessee, in the facts and circumstances of this case, can be said to arise directly or indirectly from their membership of the firm. This precise question has been answered in the affirmative and in favour of the Department in four cases of four different High Courts, namely, (i) in the case of Chouthmal Kejriwal v. Commissioner of Income-tax, Assam, (1961) 41 ITR 570 by the Assam High Court; (ii) in the case of Akula Venkata Suhbiah v. Commr. of Income-tax, (1963) 47 ITR 458 by the Andhra High Court; (iii) in the case of S. Srinivasan v. Commr. of Income-tax, Coimbatore, (1963) 50 ITR 160: (AIR 1963 Mad 348) by the Madras High Court; and, finally, (iv) in the case of L. Ram Narain Garg v. Commr. of Income-tax, U. P. (1965) 55 ITR 435 by the Allahabad High Court. The facts of these cases are, in our opinion, more or less, on all fours with the facts of the present two references. All these cases, except, perhaps, that decided by the Andhra High Court, have distinguished the earlier decision of the Bombay High Court in Bhogilal Laherchand v. Commr. of Income-tax (1954) 25 ITR 523; ((S) AIR 1955 Bom 16) on grounds, inter alia, that the Bombay case was a case of voluntary deposit by the partners in question, and thus in that case the interest earned was quite clearly not referable to their capacity as a partner but to a different capacity altogether, namely, the capacity of a depositor. There seems to be no doubt that the income received from the firm by the wife or the minor children under a separate contract with the firm or in any other capacity than a member, e.g., as a lender, a depositor or a landlord, will not be covered by any of the two clauses of Section 16(3) (a) of the Act; but there is equally no doubt that, if the income derived by the wife or the minor children is referable to their capacity as a member in the firm, the clauses are necessarily attracted. In view of the fact that we are in respectful agreement with the view taken in the aforesaid cases, both on merits of the controversy in the present case as also on the question that the earlier decision of the Bombay High Court was clearly distinguishable from the facts of the present case, it is not necessary to examine in any detail the basis or the ratio of those decisions. It might suffice to mention that the Allahabad decision referred to above has put the matter quite succinctly in the following words:
"In order that the provision may apply to it, the receipt of the income 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 above observation applies with full force to the case of the wife as well who derives income by way of interest on the amount of capital contributed by her to the capital of the firm. In the present case, as the facts already mentioned indicate, the wife as well as the minor children of the assessee, in form as well as substance, contributed to the capital of the firm and the interest paid on that amount is derived by them from the fact of their being members of the Arm, and not in any other capacity. Learned counsel appearing for the assessee was unable to point out to us from either the Commissioner's order or from the respective orders passed by the Appellate Tribunal any finding anywhere which would go to suggest that in the present case either the wife or the minor children of the assessee had deposited any sum with the partnership firm and that the interest earned in respect of both the years in question was interest on those deposits.
4. In the circumstances and for the reasons given above, it follows that the answer to the question referred must be in the affirmative and decided in favour of the Department. The Department will be entitled to their costs. Hearing fee Rs. 250.