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Judgment
Mukesh R. Shah, J.—Present Income Tax Reference at the instance of the Revenue has been made by the learned Income Tax Appellate Tribunal, Ahmedabad (hereinafter referred to as "Tribunal") under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "Act") to consider the following common question of law. "Whether on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the amounts of interest paid to the accounts of the minors from the partnership firms of (1) M/s. K.S. Patel & Co. (2) M/s. Patel Traders and (3) M/s. Shanabhai Jethabhai Patel & Co. were not liable to be clubbed under the provisions of Section 64(1)(iii) of the I.T. Act, 1961 with the income of the assessee?"
Facts leading to the present Reference in nut-shell are as under: 1.1 That the Assessing Officer clubbed the income from interest credited to the accounts of two minors Kaushikkumar and Sandeepkumar in the books of the firms under the provisions of Section 64(1)(m) of the Act [as it stood at the relevant time] for the assessment years 1976-77 to 1978-79. It appears that both the minors Kaushikkumar and Sandeepkumar were admitted to the benefits of the partnership firm in the following three firms either individually or together.
Patel Traders
K.S. Patel & Co.
Shanabhai Jethabhai Patel & Co.
The Assessing Officer apart from clubbing the share of the profit which fell to the account of the minors, also clubbed the interest paid to the account of the minors from the deposits with the firms under Section 64(1)(m) of the Act. According to the Assessing Officer, provision of Section 64(1)(m) of the Act cover the payments of interest made to minors on their deposits with the firms as the same amounted to income which arose indirectly to the minors within the meaning of the said section.
1.2 On appeal, the first appellate authority upheld the orders of the Assessing Officer for the years under consideration.
On further appeal to the learned Tribunal by the assessee, it was claimed that the partnership deeds of the said partnership firms did not provide for any capital contribution by the minors for their being admitted to the benefits of partnership and the amount lying with the partnership firms were received on partial partition of HUF, agricultural income, gifts etc. by the minors. According to the assessee as the minors were not under any obligation to contribute capital, the amount brought in by them from their independent source were of the nature of loan to the firm and interest thereon was credited to their account at the rate allowed to other depositors. That the learned Tribunal came to the conclusion that the amount had the character of deposit or loan received from the minors and the fact of crediting interest and profit in the said accounts would not alter the position. The learned Tribunal held that since the amounts were obtained as loan from minors and there was no stipulation to convert the loan account to capital account, the interest credited would not be hit by provisions of section 64(1)(m) of the Act. With the above observations and findings, the learned Tribunal allowed the appeal being ITA No. 2282/Ahd/80 for AY 1976-77. That the learned Tribunal also allowed the appeals of the assessee on the issue for the AY 1977-78 and 1978-79 in ITA Nos. 1197 and 1198/81.
1.3 That the reference applications made by the revenue came to be rejected by the learned Tribunal vide its order in Revision Application No. 115/Ahd/82 [arising out of ITA No. 2282/Ahd/1980 for AY 1976-77] and Revision Application 651/1982 & 652/1982 [arising out of ITA Nos. 1197/1981 and 1198/1981 for AY 1977-78 and 1978-79]. The reference applications made by the revenue to this Court under Section 256(2) of the Act also came to be rejected vide the order passed in ITA No. 151/1983 and ITA Nos. 63/1983 and 64/1983.
It appears that being aggrieved by the orders passed by this Court, rejecting the aforesaid reference applications, the revenue approached the Hon''ble Supreme Court and the Hon''ble Supreme Court vide its judgment and order dated 20.09.1994 passed in Civil Appeal Nos. 4569 & 4570 of 1990 with Civil Appeal No. 4988/1990 observed that the question raised by the revenue is a question of law involving interpretation of the provisions of section 64(1)(iii) of the Act on which there is no binding decision of that Court and therefore, the Hon''ble Supreme Court directed to state the case and to refer the following question to this Court.
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the amounts of interest paid to the accounts of the minors from the partnership firm of (1) K.S. Patel & Co. (2) M/s. Patel Traders and (3) M/s. Shanabhai Jethabhai Patel & Co. were not liable to be clubbed under the provisions of Section 64(1)(iii) of the I.T. Act, 1961 with the income of the assessee?"
Accordingly, the learned Tribunal has referred the aforesaid question to this Court for its determination.
Before considering the question which is referred to this Court, the relevant clauses in the respective partnership deeds of respective partnership firms are required to be referred to and considered.
So far as the partnership deed in the case of M/s. Shanabhai Jethabhai Patel & Co. is concerned, the relevant clause would be clause (3), which reads as under:
"(3) The required capital for this partnership firm is to be brought by each partner according to his own share in the firm. However, whether to bring more capital or not or to bring less capital will depend upon the mutual consent of all the partners. Moreover if the firm requires more capital at any time, the firm can being capital either on interest or on loan basis. On the capital invested by the partner/s, an interest at the rate of 12 per cent per annum is to be paid irrespective of profits or losses of the firm. If this rate of interest is required to be changed under certain circumstances, it can be done so on the mutual consent of all the partners."
So far as the partnership deed in the case of M/s. Kaushikkumar and Sandeepkumar Patel & Co. [K.S. Patel & Co.] is concerned, the relevant clause would be clause (3), which reads as under:
"(3) The required capital for this partnership firm is to be brought by party of the Third Part and Party of the Fourth Part and Party of the First Part and Party of the Second Part are working partners and will not bring any capital for the partnership firm. However, if they wish to invest any capital in the firm, they can do so. The capital brought by the partners shall carry on interest @ 7.5 p.a. The said rate of interest can be changed by the mutual consent of the partners. If Minor wants to invest capital in the said partnership firm he can do so and for that they will be paid interest."
So far as the partnership deed in the case of third firm viz. M/s. Patel Traders is concerned, the relevant clause would be clause (4), which reads as under:
"(4) The required capital for this partnership is to be brought by each partner according to their share in the firm. Moreover, if the business firm require more capital at any time, the firm can borrow capital either on interest or on loan basis and the firm shall pay interest thereon."
2.1 While passing the assessment orders and on interpretation of the relevant clauses in the partnership deeds and even considering the conduct on the part of the assessee more particularly considering the Profit & Loss account of the respective partnership firms/assessee, the AO observed that even the assessee themselves treated the account as capital account and not the loan or deposit account and therefore it is held that the amount of interest earned and credited / paid to the minors is to be clubbed into the accounts of the assessees considering the section 64(1)(iii) of the Act. That the respective appeals by the assessee before the learned CIT(A) came to be dismissed. However, on appeal, the learned Tribunal has held that the deposit on which the interest was paid and/or credited in the account of the minors was in the nature of loan and/or advance/deposit and cannot be treated as capital investment and consequently the learned Tribunal allowed the respective appeals.
2.2 That the learned Tribunal considered the concerned clause in the respective partnership deeds of respective firms individually and came to the conclusion that the amount which was deposited, on which the interest was paid to the minors was by way of loan/deposit/advance and not the capital investment/account.
2.3 Now, so far as the first firm M/s. Kaushikkumar and Sandeepkumar Patel & Co. is concerned, the learned Tribunal observed in para 5 as under:
"5. The first firm is stolid Kaushikkumar Suraykant Patel & Co. In this firm there are 4 major partners viz. Sureshbhai (25% share), Prabhudas (12% share), Nathiben (24% share) and Shardaben (20% share). Minor Kaushikkumar has been admitted to the benefits of partnership having 19% share in profit only. This partnership was formed in S.Y. 2022. The partnership deed stipulates vide clause (3) thereof that the capital of the partnership firm has to be contributed by Nathiben and Shardaben and not by other two partners were to contribute capital. Clause (5) recites that minor Kaushikkumar has been admitted to benefits of partnership and that he would have share in profit only. No other condition has been stipulated in this deed of partnership. Therefore reading the partnership deed as a whole it specifies obligation on the part of Nathiben and Shardaben to contribute capital. As also voluntary contribution by two other major partners if they so choose and no specific provision or obligation on the part of the minor to contribute any capital. Therefore it could be inferred that the amount standing to the credit of minor Kaushikkumar on which interest has been paid right from S.Y. 2021 when the initial deposit was made should be treated as loan account as a consequence interest paid on this account is not hit by provisions of sec. 64(1)(iii) of the Act."
2.4 Now, so far as the second partnership firm M/s. Shanabhai Jethabhai Patel & Co. is concerned, the learned Tribunal has observed in paras 6 & 7 as under:
"6. The other partnership firm is stolid Shanabhai J. Patel & Co. which was brought into existence with effect from Kartak Sud 1 S.Y. 2014 i.e. with effect from 24.10.57 A.Y. 1959-60. This firm was reconstituted from A.Y. 1975-76 i.e. from 27.10.73 when Kaushikkumar & Sandeepkumar were admitted to the benefits of partnership. In this partnership there are three partners Shanabhai (25% share), Maganbhai (25% share) and Kishorebhai (20% share). Minor Sandeepkumar and Kaushikkumar have been admitted to benefits of partnership each having 15% share in profit only. Clause (3) of the partnership deed specifies that the partners have to being capital in proportion of their profit sharing ratio. It further specifies that whether to being larger or smaller amount of capital would depend upon the concern of the other partners. It also lays down that firm would bring the same at interest by borrowings and that the capital contributed by partners would bear 9% rate of interest. This deed of partnership also does not specify any condition for contribution of capital by minors for their being admitted to the benefits of partnership. Minor Kaushikkumar had deposited with the said firm from S.Y. 2021 on which interest has been paid and the balance is to his account comprise of various amounts received on partial partition, agricultural income, gifts etc. On first day of S.Y.2030 the opening balance stood at Rs. 73,087/- and to this account interest as well as share of profit has been credited. As pointed out earlier interest was credited to this account past which was treated as a loan account from very inception there is nothing to infer or show that the amount standing at the credit of minor Kaushikkumar was converted into capital account as his capital contribution. In other words the account continued to be a loan account as it was in the past.
Now so far as minor Sandeepkumar who was also admitted to the benefits of the partnership in the firm is concerned he had contributed Rs. 24,000/- in S.Y.2029. Before he became the partner in the firm and the amount due to his account as a loan account, the amount received on partial partition from K.S. Patel (HUF) account. In S.Y. 2030 when he was admitted to the benefits of partnership interest and share of profit was credited to this account. The opening balance stood at Rs. 23,926 and the deposit of Rs. 20,000 was made making a total of Rs. 43,926. As compared to this figure the minor Kaushikkumar''s balance in the account on the same day stood at Rs. 73,087 which fact would show that the amounts standing to the credit of the minors has no relevance to the capital contribution required. That apart the partnership deed does not stipulate that admission of the minors Sandeepkumar as also Kaushikkumar was dependent upon the contribution of capital to the partnership firm. Therefore in both the cases the amount standing to the credit of the respective accounts was treated as loan advanced to the firm. Thus the advance was dehorse the capital contribution in which case the interest credited to the account of the two minors would not be hit by section 64(1)(iii) of the Act."
2.5 Now, so far as the third partnership firm M/s. Patel Traders is concerned, the learned Tribunal has observed in para 8 as under:
"8. The third firm is stolid Patel Traders which came into existence from 20.06.72 i.e. some time in S.Y. 2028. The firm has two partners Rameshbhai (33% share) and Gordhanbhai (33% share). Minor Sandeep has been admitted to benefits of partnership having 34% share in profit only. The clause (4) of the partnership deed recites about the capital contribution according to which all the partners had to bring capital by mutual understanding an in case extra capital was required the same could be brought by the firm at interest or by loan. There is no stipulation in the deed of partnership for contribution by minor Sandeep for being admitted to the benefits of partnership. A sum of Rs. 25,000 was credited to this account in S.Y. 2028 by withdrawal from the account of Shanabhai from M/s. S.R. Patel & Co. and interest and profit has been credited to this account year after year. As pointed out earlier in absence of specific provision in the deed of partnership requiring the minor to contribute capital as a condition is being admitted to the benefits of partnership the interest credited to the benefits of partnership the interest credit to this account, in our opinion would not be his by provisions of section 64(1)(iii) of the Act."
By making above observations on interpretation and/or considering the relevant clauses of the partnership deeds with respect to the respective firms reproduced hereinabove, the learned Tribunal has held that the interest credited to the account of the aforesaid two minors would be hit by provision of Section 64(1)(iii) of the Act.
Shri K.M. Parikh, learned advocate appearing on behalf of the Revenue has vehemently submitted that as such the observations and the findings arrived at by the learned Tribunal are erroneous and on misinterpretation and/or misreading of the relevant clauses in the partnership deed of the respective partnership firms.
3.1 It is further submitted by Shri Parikh, learned advocate appearing on behalf of the revenue that as such the learned Tribunal has materially erred in treating the amount deposited/lying with the firm on which the interest was paid to the minors as loan account/deposit. It is further submitted by Shri Parikh, learned advocate appearing on behalf of the revenue that so far as the first firm Kaushikkumar and Sandeepkumar Patel & Co. is concerned, the finding recorded by the learned Tribunal is on wrong premise and on the wrong facts. It is submitted that the learned Tribunal has given a finding and arrived at the conclusion by observing that there was no specific provision or obligation on the part of the minor to contribute any capital. It is submitted that the same is factually incorrect and as such contrary to clause (3) of the partnership deed. It is submitted that so far as the said partnership firm is concerned, clause (3) of the partnership deed provided that the required capital for the said partnership firm was to be brought by party of the third Part and party of the Fourth Part and party of the First Part and party of the Second Part were working partners and will not bring any capital for the partnership firm. It further provided that however, if they wish to invest any capital in the firm, they can do so. It is submitted that it further provided that the capital brought by the partners shall carry interest @ 7.5% p.a. It further provided that the said rate of interest can be changed by the mutual consent of the partners. It is submitted that it further provided that if the Minor wants to invest capital in the said partnership firm he can do so and for that they will be paid the interest. It is submitted that therefore the observation made by the learned Tribunal in para 5 of the judgment that there was no specific provision or obligation on the part of the minor to contribute any capital is factually not correct. It is submitted that on the premise that there was no specific provision or obligation on the part of the minor to contribute any capital, the learned Tribunal has observed and held that therefore it could be inferred that the amounts standing to the credit of minor Kaushikkumar on which the interest has been paid right from S.Y. 2021 should be treated as loan account and as a consequence the interest paid on the said amount is not hit by the provisions of sec. 64(1)(iii) of the Act. It is submitted that if the learned Tribunal would have properly interpreted and/or considered clause (3) of the partnership deed, which provided that it was open for the minor to contribute the amount in that case, the learned Tribunal would not have come to such an inference and the conclusion.
3.2 It is further submitted by Shri Parikh, learned advocate appearing on behalf of the revenue that even with respect to the partnership firm M/s. Shanabhai Jethabhai Patel & Co. is concerned, the learned Tribunal has misinterpreted and/or misread the relevant clause i.e. clause (3) in the partnership deed. It is submitted that the learned Tribunal has materially erred in observing that the deed of partnership does not specifically provides for any condition for contribution of capital by minors for their being admitted to the benefits of the partnership firm. It is submitted that clause (3) in the said partnership deed specifically provided that each partner was required to bring the required capital according to his own share in the firm. It is submitted that it includes the minors who were inducted as partners. It is submitted that therefore the finding recorded by the learned Tribunal is of a wrong premise and on misinterpretation and misreading of clause (3) of the partnership deed.
3.3 It is further submitted that even in the case of partnership firm M/s. Patel Traders, the learned Tribunal has also misread and/or misinterpreted the relevant clause i.e. clause (4) of the partnership deed. It is submitted that the learned Tribunal has held in favour of the assessee on considering clause (4) by observing that there is no stipulation in the deed of partnership for contribution for minor Sandeepkumar for being admitted to the benefits of the partnership. It is submitted that as such clause (4) provided that the required capital for partnership was to be brought by mutual understanding. It is submitted that therefore each partner was required to bring the required capital. It is submitted that only in a case where some of the partners or concerned partners were not required to bring the capital, it was required to be provided so. However, the learned Tribunal has held in favour of the assessee by observing that there was no stipulation in the deed of partnership for contribution by minor Sandeepkumar for being admitted to the benefits of partners. It is submitted that as such when each partner was required to bring the capital for the partnership firm inclusive of the minors and that was the condition to be continued and/or inducted as per partnership deed, there was no necessity to specifically mention in the deed of partnership about contribution by minor Sandeepkumar for being admitted to the benefits of the partnership as otherwise clause (4) was very clear under which every partner was required to bring the capital.
3.4 It is submitted by Shri Parikh, learned advocate appearing on behalf of the revenue that even otherwise there was no other material and/or reason for the learned Tribunal to treat the amount on which the interest has been earned by the minors as loan and/or advance. It is submitted that therefore when the findings recorded by the learned Tribunal to treat the amount on wrong premise and when the learned AO specifically observed and held that even the assessee also treated the same as capital account, the learned Tribunal has materially erred in allowing the appeals and in holding that the aforesaid amount of interest is not hit by provision of section 64(1)(iii) of the Act. It is further submitted by Shri Parikh, learned advocate appearing on behalf of the revenue that as per section 64(1)(iii) [as it stood at the relevant time] in computing the total income of any individual, 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 the partner in a firm was required to be included in the computing the total income of the individual. It is submitted that therefore in the present case when the amount of interest received by the minors was a capital account in the partnership firm, section 64(1)(iii) would be directed and the said income of interest was required to be included in computing the total income of the individual assessee. It is submitted that therefore the impugned common judgment and order passed by the learned Tribunal deserves to be quashed and set aside and the respective assessment orders are required to be restored.
Making above submissions it is requested to set aside the impugned judgment and order and answer the question referred to this Court in favour of the revenue and against the assessee.
Shri Bhargav Karia, learned advocate appearing on behalf of the assessee has tried to support the impugned order passed by the learned Tribunal and the view taken by the learned Tribunal. It is submitted that now so far as the case of partnership firm M/s. Kaushikkumar and Sandeepkumar Patel & Co. is concerned, the learned Tribunal has rightly observed that as there was no specific provision or obligation on the part of the minor to contribute any capital and therefore, the learned Tribunal has rightly interfered with the amount standing to the credit of the minors when the initial deposit was made should be treated as loan account and as a consequence the learned Tribunal has rightly held that the interest paid on the said account is not hit by provision of section 64(1)(iii) of the Act.
4.1 It is submitted that as such there is no misinterpretation and/or misreading of the clause (3) of the partnership deed of the said partnership firm as sought to be contended on behalf of the revenue. It is further submitted that similarly in the case of other two partnership firms also, the learned Tribunal has correctly read and interpreted the relevant clauses in the partnership deeds and learned Tribunal has rightly come to the conclusion that the amount standing to the credit of the respective minors on which the interest have been paid is not hit by provision of section 64(1)(iii) of the Act and therefore, are not required to be included in the total income of the individuals/assessees.
Making above submissions it is requested to answer the question referred in favour of the assessee and against the revenue.
Heard learned advocates appearing on behalf of respective parties at length. At the outset it is required to be noted that the question which is referred to this Court is whether the learned Tribunal was right in law in coming to the conclusion that the amounts of interest paid to the accounts of the minors for the partnership firms namely (1) Patel Traders, (2) K.S. Patel & Co. and (3) Shanabhai Jethabhai Patel & Co. were not liable to be clubbed under the provisions of section 64(1)(iii) of the Act with the income of the assessee? Therefore, while considering the aforesaid questions it is required to be considered whether the amounts standing to the credit of respective account of the respective minors on which the interest have been paid was required to be treated as capital or as loan advanced to the firm and/or the deposit. The relevant clauses in the respective partnership deeds are already reproduced hereinabove.
5.1 In the case of Kaushikkumar and Sandeepkumar Patel & Co., the relevant clause would be clause (3). Clause (3) of the partnership deed provided that the required capital for the partnership firm is to be brought by party of the Third Part and party of the Fourth Part and party of the First Part and party of the Second Part are working partners and will not bring any capital for the partnership firm. However, it further provided that if the minor wants to invest any capital in the said firm, he can do so and for that they will be paid the interest. Therefore, it is not that the minors were not required to invest the capital. It was voluntary. That the learned Tribunal has observed and held in favour of the assessee by observing on the premise and by observing that as there was no specific provision or obligation on the part of the minor to contribute any capital and therefore, it could be inferred that the amount standing to the credit of the minor on which the interest was paid should be treated as loan account. Therefore, the learned Tribunal has committed error and has misinterpreted and/or misread the relevant clause (3) of the partnership deed. Clause (3) did provide that it was open for the minor to invest the capital in the partnership deed. Under the circumstances, finding arrived at by the learned Tribunal that the said account be treated as loan and/or advance and not the capital is on a wrong premise, which cannot be sustained. As such there was no other material and/or basis for the learned Tribunal to come to the said conclusion.
5.2 Similarly, in the case of other two firms i.e. in the case of Shanabhai Jethabhai Patel & Co. and in the case of Patel Traders, considering clauses (3) & (4) of the respective partnership deeds, it specifically provided that each partners were required to bring the capital. Each partner would include the minors also. The learned Tribunal has held in favour of the assessee by observing that it is not specifically mentioned that the minor was not required to bring the capital. Only in a case where the intention was that the minor was not required to bring the capital then and then only it was specifically required to be mentioned in the partnership deed. However, when each partner was required to bring the capital, other negative was not required to be mentioned. Under the circumstances, finding arrived at by the learned Tribunal that the account on which the interest has been paid may not be treated as a capital account and the same is to be treated as loan and/or advance cannot be sustained as the same is on misinterpretation and misreading of the relevant clauses in the partnership deeds. As stated herein above, as such there was no other material and/or basis for the learned Tribunal to come to the conclusion that the aforesaid account in the respective partnership firms were the loan and/or advance. Considering the relevant clauses in the partnership deeds the amount credited in the account of the respective minors on which interest has been paid, is to be treated as capital investment. Under the circumstances, if that be so, section 64(1)(iii) of the Act [as it stood at the relevant time] would be attracted and the learned AO rightly clubbed the interest earned by the respective minors on the amount lying that the partnership firm while computing the total income of the assessee.
Accordingly, the question referred to this Court by way of present Income Tax Reference is held in favour of the Revenue and against the assessee and is, answered, accordingly.