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1991 Supreme(Gau) 221
GAUHATI HIGH COURT
R.K.Manisana Singh, J.Sangma, JJ.
Commissioner of Income Tax, NE Region, Shillong -Appellant
Versus
B.P.Sikaria -Respondent
Income Tax Reference No. 5 of 1985
Decided On : 18-12-1991
D.K.Talukdar, A.K.Saraf
Interest earned by a minor on deposited share profits of a partnership is not includible in the total income of the minor's parent under section 64 (1) (iii) of the Income-tax Act, 1961, if the interest has no connection with the minor's admission to the benefits of the partnership.
Headnote:
INCOME TAX - Admission of minor to benefits of partnership - Interest on accumulated profits - Whether includible in total income of individual - Section 64 (1) (iii) of the Income-tax Act, 1961.
Fact of the Case:
The assessee's minor son was admitted to the benefits of partnership of two firms. The profits of the firms falling to the share of the minor were allowed to accumulate in the account of the partnership and interest was paid to the minor. The Income Tax Appellate Tribunal held that the interest was not includible under section 64 (1) (iii) of the Income-tax Act, 1961 as it was on deposit.
Finding of the Court:
The court held that the interest earned by the minor on the deposited share profits had no connection with the admission of the minor to the benefits of the partnership and, therefore, was not includible in the total income of the assessee under section 64 (1) (iii) of the Income-tax Act, 1961.
Issues: Whether the interest paid by the firm to the minor son of the assessee was on deposit and had no connection with the admission of the minor to the benefits of the partnership.
Ratio Decidendi: The court held that the interest earned by the minor was not income which directly or indirectly arose from his admission to the benefits of the partnership because: * The interest was paid on the deposited share profits of the minor, not on the capital provided by the minor. * The minor had a right to the share of the profits of the firm only in the absence of any other agreement, and the interest received by the minor was not the profit of the firm. * The Department failed to show that the interest earned by the minor had any connection or relation with the admission of the minor to the benefits of the partnership.
Final Decision: The court answered both questions in the negative and in favor of the assessee, holding that the interest earned by the minor was not includible in the total income of the assessee under section 64 (1) (iii) of the Income-tax Act, 1961.
2. Facts,-Pradip Kumar Sikaria is a minor son of the assessee, and the minor has been admitted to the benefits of partnership of two firms, namely, M/s Ashok Kumar Pradip Kumar and M/s Bipin Trading Company. The profits of the firms falling to the share of the minor mere with the firms. The firms paid interest to the minor. The Appellate Assistant Commissioner has held that the interest was not includible under section 64 (1) (iii) of the Income-tax Act, 1961 as it was on deposit. The Income Tax Appellate Tribunal confirmed the decision of the Appellate Assistant Commissioner relying on an earlier decision of the same Tribunal made in IT A No 198 (Gau) as of 1979. Therefore, at the request of the Commissioner of Income Tax, the Tribunal has referred the following questions for the opinion of this Court.
"(i) Whether on the facts and in the circumstances of the case and having regard to the terms of the relevant partnership deed and on proper construction of section 64 (i) (iii) the interest paid by the firm to the minor sons or the amounts credited in their accounts with the firm including interest on their accumulated profits cannot be regarded as Income arising out of the admission of the minors to the benefits of partnership and whether such income from interest was not rightly included by the ITO under section 64 (i)(iii) in the hands of the assessee individual?
(ii) Whether on the facts and in the circumstances of the case and having regard to the terms of the relevant partnership deed, the implied findings of the Tribunal that interest paid by the firm to the two minor sons of the assessee was in deposits and that such deposits have no connection with the admission to the benefits of partnership are contrary to the weight of the record or are based on irrelevant consideration or without consideration of all the relevant facts and circumstances and whether the decision based on such findings is untenable in law ?"
3. Mr. D. K. Talukdar, learned counsel for the Department, has contended that amounts of profit falling to the share of the minor were allowed to accumulate in the account of the partnership and, therefore, the interest on accumulated profits of the minor was to be included in calculating the total income of the assessee under section 64 (1) (iii) of the Income-tax Act. Mr. Talukdar has further submitted that the use of the words "interest on their accumulated profit" in question No 1 indicates that the share profits of the minor were allowed to be used by the firms without any arrangement and/or without asking for interest. In support of his contention, Mr. Talukdar has referred us to the decisions reported as S. Srinivasan vs. CIT, (1967) 63 ITR 273; CIT vs. Bilas Rai Takriwal, (1966) 61 ITR 467; H.C. Mehira vs. CIT, (1966) 61 ITR 647 and CIT vs. China Bhai, (1968) 69 ITR 76.
4. Mr. A. K. Saraf, learned counsel for the assessee, has contended that the question No. 2 shows that on the facts and in the circumstances of the case, the Appellate Tribunal has held that interest was on deposit, and as such, the interest was not includible under section 64 (1) (iii). The learned counsel has placed reliance on Bhogilal Laharchand vs. CIT, (1954) 25 ITR 523 and S. Srinivasan vs. CIT, (1967) 63 ITR 273 (SC).
5. Considering the rival contentions of the parties, we are of the view that the question No. 2 is to be answered first. The question then is, whether the finding of the Tribunal that interest paid by the firms to the minor son of the assessee was on deposit was perverse or irrational? It may be stated here that in the statement of case submitted before this Court, the judgment or order made in ITA No. 198 (Gau) of 1979 was not included although the order has been mentioned in the statement of the case as well as in the judgment or order of the Tribunal made in ITA No. 91 (Gau) 1982.
The question
