Commissioner of Income Tax vs B.P. Sikaria

Manisana, J.—This is a reference u/s 256(1) by the Tribunal at the instance of the Commissioner of Income Tax.

Facts : Pradip Kumar Sikaria is a minor son of the assessee and the minor has been admitted to the benefits of partnership in two firms, namely, Messrs Ashok Kumar Pradip Kumar and Messrs Bipin Trading Company. The profits of the firms falling to the share of the minor were with the firms. The firms paid interest to the minor. The Appellate Assistant Commissioner has held that the interest was not includible u/s 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 I.T.A. No. 198/(Gauhati) 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 a proper construction of Section 64(1)(iii), the interest paid by the firm to the minor sons on 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 rightly not included by the Income Tax Officer u/s 64(1)(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 deposit and that such deposits have no connection with the admission of the minors to the benefits of partnership are contrary to the weight of the record or are based on irrelevant considerations or without consideration of all the relevant facts and circumstances and whether the decision based on such findings is untenable in law ?"

Mr. D.K. Talukdar, learned counsel for the Department, contended that the 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 the accumulated profits of the minor was to be included in calculating the total income of the assessee u/s 64(1)(iii) of the Income Tax Act. Mr. Talukdar has further submitted that the use of the words "interest on their accumulated profits" in question No. 1 indicates that the share of 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. Commissioner of Income Tax, Madras, Commissioner of Income Tax Vs. Bilas Rai Tekriwal, H.C. Mehra Vs. Commissioner of Income Tax, and Commissioner of Income Tax, Gujarat II Vs. Chinubhai M. Modi, .

Mr. A.K. Saraf learned counsel for the assessee, contended that 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 u/s 64(1)(iii). Learned counsel has placed reliance on Bhogilal Laherchand Vs. Commissioner of Income Tax, Bombay City, and S. Srinivasan Vs. Commissioner of Income Tax, Madras, .

Considering the rival contentions of the parties, we are of the view that 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 I.T.A. No 198/(Gauhati) 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 I. T. A. No. 91/(Gauhati) of 1982.

The question which, therefore, arises is whether this court shall refer the case back to the Tribunal for submitting an additional statement. It is settled law that, if facts are not found in the statement of the case and the High Court finds any difficulty in answering a question, the High Court has to call for a supplementary statement of the case. The High Court has no jurisdiction to send for the records and look into them and base its findings on the new or supplementary facts stated by the High Court. But, in the present case, it cannot be said that the order of the Tribunal in I. T. A. No. 198/(Gauhati) of 1979 is not incorporated in the statement of the case. A part thereof has actually been referred to, although the order was not annexed as a part of the statement of the case.

Mr. Saraf has submitted that, in such a case, calling for a supplementary statement is not required and has referred us to a decision of the Bombay High Court reported as Orient Trading Co. Ltd. Vs. Commissioner of Income Tax (Central), Calcutta, . In that case, it has been held that (at page 737) :

"Although the order of the Appellate Assistant Commissioner has not been annexed as a part of the statement of the case, it is still incorporated in the statement of the case, and a part thereof has been actually referred to. It would be permissible for us to look at the whole order itself in order to understand what the part which has been reproduced in the statement of the case actually and correctly means."

We respectfully agree with the decision of the Bombay High Court. It is, therefore, held that, in such a case before us, a supplementary statement is not required. Accordingly, we directed any of the parties to produce a copy of the order of the Tribunal. We have perused the order of the Appellate Tribunal in I. T. A. No. 198/(Gauhati) of 1979 which has been produced before us by learned counsel for the assessee.

On perusal of the order of the Appellate Tribunal, it indicates that the finding of the Appellate Assistant Commissioner that the interest paid to the minor son of the assessee was on deposit was not challenged in the appeal before the Tribunal, that is to say, the finding of the Appellate Assistant Commissioner that interest was on deposit was accepted by the Department. In that view of the matter, it cannot be said that the finding of the Appellate Tribunal to the effect that the interest paid to the minor was on deposit was perverse or irrational. Accordingly, we answer the first part of question No. 2 in the negative and in favour of the assessee.

The next question which arises for consideration is whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the interest earned by the minor on deposit (share of profits) had no connection with the admission of the minor to the benefits of the partnership was perverse. Before dealing with this question, let us examine the cases cited before us.

The Patna High Court, in Commissioner of Income Tax Vs. Bilas Rai Tekriwal, and the Gujarat High Court in Commissioner of Income Tax, Gujarat II Vs. Chinubhai M. Modi, have held that the interest paid to the minor children of the assessee on the capital provided by the minors for the business of the partnership by reason of the partnership deed would be included in the total income of the assessee. These cases are inapplicable to the present case because interest was paid as agreed upon under the partnership deed on the capital provided by the minors, but, in the present case, interest was paid on the deposited share of profits of the minor.

In H.C. Mehra Vs. Commissioner of Income Tax, the Patna High Court has held that inclusion of income derived by the wife as a partner of the firm in the total income of the assessee was justified. This case also is of no assistance as interest either on the capital or on the share profit was not in question.

In Bhogilal Laherchand Vs. Commissioner of Income Tax, Bombay City, the Bombay High Court has held that interest earned by the minor on the deposits maintained in the firm could not be held to be a benefit which the minors received from their admission to the partnership in the firm. This decision will be relevant in this case.

In S. Srinivasan Vs. Commissioner of Income Tax, Madras, the amount of profits falling to the share of the wife of the assessee and his two minor sons were allowed to accumulate in the account of the partnership for a number of years without any interest. There was a clause in the deed of partnership that, if the firm required any sum and if any partner was willing to advance such sum, he could advance such amount as loan and the firm would pay interest at the rate of 12 annas per cent. per mensem. Afterwards, the partners decided to allow interest at 9 per cent. per annum on those accumulated profits. In the context of the case, the Supreme Court has held (at page 278) :

"The cases when interest 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 use 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."

Learned counsel for the parties were relying on the above-quoted passage. Mr. Talukdar, learned counsel for the Department, contended that the Supreme Court has observed that the amounts of the profit falling to the share of the minors were allowed by the minors to be used by the firm without asking for any interest and without any specific arrangement as it would have belonged to a stranger. Therefore, the decision of the Supreme Court squarely applies to the present case. Learned counsel for the assessee, Mr. Saraf, contended that the decision of the Supreme Court quoted above indicates that, if the interest is earned on a deposit, that interest would not be included in the total income of the assessee and that the decision of the Bombay High Court in Bhogilal Laherchand Vs. Commissioner of Income Tax, Bombay City, has been impliedly affirmed by the Supreme Court.

Coming to the question, u/s 64(1)(iii), in computing the total income of any individual, there shall be included all such income as arises directly or indirectly to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm. Therefore, there must be a connection between the income of the minor and the admission of the minor to the benefits of the partnership. u/s 30(1) of the Partnership Act, a minor cannot be a partner, but a minor can be admitted to the benefits of a partnership. However, u/s 2(23) of the Income Tax Act, a minor who has been admitted to the benefits of partnership is a partner or is to be treated as a partner, although the definition u/s 2(23) cannot be imported into the Partnership Act. u/s 30(2) of the Partnership Act, a minor who has been admitted to the benefits of partnership in a firm has a right to such share of the property and of the profits of the firm as may be agreed upon. The right of the minor with regard to income under the Partnership Act is the right to a share in the profits of the firm only in the absence of any other agreement. The interest received by the minor is not the profit of the firm. In other words, interest is not share of profit of the minor.

The question now, is--whether the interest which the minor earned was income which directly or indirectly arose from his admission to the benefits of the partnership ? The Tribunal has held that no material was placed before it to connect the interest earned by the minor with the admission of the minor to the benefits of the partnership, but it is to be examined whether the finding of the Tribunal was perverse in view of question No. 2. Mr. Saraf, learned counsel for the assessee, contended that the burden lies on the Department to establish that such income of the minor has some connection with the admission of the minor to the benefits of the partnership. But no connection was established by the Department. He has referred us to a decision of the Madras High Court reported as P.A.P. Chidambara Nadar Vs. Commissioner of Income Tax, in support of his contention.

The facts and circumstances of the case indicate that money that was kept in the firm by the minor was a deposit in the sense that it was payable by the firm to the minor at any time whenever the minor liked and it was not in the nature of capital. If that be the position, the interest earned by the minor was as deposit and had no relation with the admission of the minor to the benefits of the partnership, on the principles laid down by the Supreme Court in S. Srinivasan Vs. Commissioner of Income Tax, Madras, in which the decision of the Bombay High Court in Bhogilal Laherchand Vs. Commissioner of Income Tax, Bombay City, has been approved impliedly by the Supreme Court. That is our view. In such a situation, the Department has 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 or as a partner u/s 2(23), Income Tax Act. But, no material has been placed before us to connect the interest earned by the minor with his admission to the benefits of the partnership. In P.A.P. Chidambara Nadar Vs. Commissioner of Income Tax, the Madras High Court has held (at page 89) :

"Where the Revenue wants to treat such income of the minors as the income of the assessee u/s 16(3)(a)(i) and (ii), it is for the Revenue to establish that there was some connection, direct or indirect, between the accrual of interest and their interest in the partnership. If the deposits of the minors had been made independent of their interest in the partnership then as per the decision of the Supreme Court in S. Srinivasan Vs. Commissioner of Income Tax, Madras, any amount so deposited by the minors has to be treated as a loan or deposit and the interest paid on such deposits or loans cannot be included in the income of the assessee u/s 16(3)(a)(i) or (ii) of the Act."

We are in agreement with the above decision of the Madras High Court. Therefore, on the facts and in the circumstances of the case, it is held that the interest which the minor earned was not income which, directly or indirectly, arose from his admission to the benefits of the partnership. For these reasons, the findings of the Tribunal that the interest earned by the minors had no connection with the admission of the minors to the benefits of the partnership is/was not perverse. Accordingly, the second part of question No. 2 is also answered in the negative and against the Revenue.

For the foregoing reasons, question No. 2 is answered in the negative and in favour of the assessee. With regard to question No. 1, its answer depends on the answer to question No. 2, and, therefore, question No. 2 has been dealt with first. In view of the answer to question No. 2 and discussion above, we answer question No. 1 also in the negative, in favour of the assessee and against the Department. The reference is disposed of accordingly.