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Judgment
Divan, J.—This reference has been made by the Tribunal at the instance of the Commissioner of Income Tax under the provisions of the
Income Tax Act, 1961 (hereinafter referred to as the Act). The question referred to us is as follows :
Whether, on the facts and in the circumstances of the case, the interest income of Rs. 5,002 earned by the minor son of the assessee on the
amount standing to his credit in the firm of Messrs. Central Watch Company was includible in the assessment of the assessee u/s 64(ii) of the
Income Tax Act, 1961 ?
This reference arises under the following circumstances : The assessee is an individual. The relevant assessment year is 1962-63, the previous
year being S.Y. 2017, i.e., October 21, 1960, to November 8, 1961. The assessee is a partner in a partnership firm called Messrs. Central Watch
Co. which carries on business in Ahmedabad. Prior to November 14, 1958, a business in the name of Central Watch Co. was being conducted by
a Hindu undivided family and the assessee was the karta of that Hindu undivided family. On November 14, 1958, the joint family consisted of the
assessee himself, his wife, Sulochana, his major son, Suresh, and his minor son, Hemendra. On November 14, 1958, there was a partial partition
of the business amongst the assessee and other members of the Hindu undivided family. The family itself continued to be joint with reference to the
other assets belonging to the family. A sum of Rs. 2,15,902 stood to the credit of the assessee in his capacity as the karta of the undivided Hindu
family so far as the books of the business were concerned. Out of this amount, an amount of Rs. 2 lakhs was divided between the assessee, his
wife, Sulochana, and his two sons. Out of this amount of Rs. 2 lakhs, an amount of Rs. 57,500 was allotted to Sulochana and the balance was
divided between the assessee and his two sons, each of these three individuals getting Rs. 47,500. On November 15, 1958, the assessee and his
major son, Suresh, started a partnership firm to carry on the same business in the same name and style. The minor son, Hemendra, was admitted
to the benefits of the partnership. The capital which formerly belonged to the Hindu undivided family, was divided amongst the various members
and it continued to be invested in the business of the firm. That is the finding available on the record of this case and that finding of the Appellate
Assistant Commissioner had not been disputed by either side before us. It, therefore, follows that the amount of Rs. 57,500 which was allotted to
Sulochana, also continued with the partnership firm, though Sulochna herself did not joint the firm as a partner; and the amount of Rs. 47,500
which was allotted to the assessee and his two sons each also remained in the business of the firm. It may also be pointed out that the amount of
Rs. 2 lakhs, which was thus divided amongst the four members of the family, was not available with the business in cash but was represented by
the assets of the business. It is clear that so far as the present judgment is concerned, no different arises because of the fact that this was assets and
not cash.
On November 15, 1958, a partnership deed was executed and it was agreed between the parties that the business should be deemed to have
started with effect from November 12, 1958, that being the first day of Kartak Sud, S.Y. 2015, i.e., commencement of S.Y. 2015. Under clause
6 of the partnership deed interest at 6% p.a. was be paid on the amount, if any, standing to the credit of the partners. Over and above the amount
of interest which was credited in the account of minor Hemendra in respect of the amount of Rs. 47,500 standing in his credit in his account, his
share in the profits of the firm was also credited in his account; and it appears from what has been found by the Tribunal and the taxation authorities
that the profits accumulated in his account and in the relevant assessment year, i.e., assessment year 1962-63 previous year being S.Y. 2017, an
amount of Rs. 14,055 was credited in the account of Hemendra as his share of the profit and another sum of Rs. 5,002 was credited to
Hemendra''s account as interest at 6% p.a. on the amount standing to his credit. There is no dispute between the assessee and the department that
the profit of Rs. 14,055 should be included in the income of the assessee for the purpose of assessment year 1962-63 but the question in whether
the amount of Rs. 5,002 credited to the account of the minor as interest should also be included in the total income of the assessee for the purpose
of assessment.
The liability to assessment of this income arises u/s 64, clause (ii), of the Act and that section is in these terms :
In computing the total income of any individual, there shall be included all such income as arises directly or indirectly - ...........
(ii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm in which such individual is a
partner;...............
It may be mentioned that section 64(ii) of the Act is in identical terms with section 16(3)(a)(ii) of the Income Tax Act, 1922; and, therefore, the
decisions interpreting section 16(3)(a)(ii) of 1922 Act have a direct bearing on the interpretation of section 64(ii) of the Act.
It was urged before us in the instant case on behalf of the assessee that the Tribunal has found in favour of the assessee and has found as a
matter of fact that the amount of Rs. 47,500 belonging to the minor was brought in the partnership as a deposit on behalf of the minor; and it was,
therefore, urged that this finding of fact by the Tribunal should not be interfered with by the High Court. It was in terms held by Tribunal that the
amount standing to the credit of Hemendra represented his advance to the firm. Now, it is true that, if a finding of fact is reached by the Tribunal on
the facts of a particular case, that finding must be challenged by the taxation authority, if they want the High Court to arrive at a different
conclusion. In the instant case, there has been no such challenge by the department to this particular finding of the Tribunal but at the same time it
must be borne in mind that when the Tribunal records a finding that a particular amount was advanced by a particular individual to a partnership
firm, or on the other hand in another case, that it was given by way of capital contribution of the particular partnership firm, such finding is as mixed
finding of law and fact because legal concepts have to be considered and applied for deciding whether a particular amount was paid by way of
deposit or advance or, on the other hand, as a capital contribution. This particular finding in the instant case that the amount standing to the credit
of Hemendra represented his advance to the firm, is, therefore, a finding on a mixed question of law and fact and though it has not been specifically
challenged by the department, it is open to us to examine the question for ourselves and find out whether, in view of the correct legal principles
applicable to the facts and circumstance of this case, it was in fact an advance or not.
So far as the interest of Rs. 5,002 credited to the account of Hemendra in the relevant year of account was concerned, it is clear on the record
of the case that this interest arose partly from the accumulated profits which were allowed to remain in the account of Hemendra and partly from
the interest payable on the amount of Rs. 47,500, which came to the share of Hemendra at the time of partition and which was credited to his
account at the time when the partnership was formed in November, 1958. In view of the decision of the Supreme Court in S. Srinivasan v.
Commissioner of Income Tax, it is clear that whatever the decision may be regarding that portion of Rs. 5,002 which is attributable to the interest
of Rs. 47,500, as regards the portion which is attributable to the amount of accumulated profits allowed to remain in the account of the minor, it
must be included in the income of the assessee. In view of this decision of the Supreme Court, therefore, in any event, it must be held that the entire
amount of Rs. 5,002 cannot be excluded from the total income of the assessee in the light of section 64(ii) of the Act.
In Bhogilal Laherchand v. Commissioner of Income Tax the Bombay High Court interpreted section 16(3)(a)(ii) of the 1922 Act. In that
particular case the assessee had started a partnership business along with his major son and admitted to the benefits of this partnership his two
minor sons. In the assessment year 1950-51, the share of the profit of each of the minors was sought to be included in the income of the assessee
under the provisions of section 16(3)(a)(ii). Each of the minors also received interest on the deposits which stood to their credit in the firm; and the
question that arose before the Bombay High Court in that case was whether the interest which the minors had receive could be included in the
income of the assessee. Chagla C.J. observed in that case that all that section 16(3)(a)(ii) required was that a minor must be admitted to the
benefits of the firm of which the assessee is a partner and income must arise either directly or indirectly to the minor from his admission to such a
partnership. Therefore, according to Chagla C.J., there must be a connection between the income and the admission of the minor to the
partnership. The connection need not be direct; it may even be indirect. After examining the different clauses of the partnership deed before him
Chagla C.J. observed as follows :
.......... can it be said that the interest which the minors earned was an income which directly or indirectly arose from their admission to the benefits
of the partnership ? It is clear that the minors earned interest primarily and substantially by reason of the fact that they deposited moneys in the firm.
It is not by reason of the fact that they were partners, nor was it by reason of the fact that they were obliged under the partnership deed to make
the deposits, that this interest was earned. Therefore, this income arose to the minors not from their admission to the benefits of the partnership, but
the income arose because the minors chose to keep moneys in the partnership firm.
This decision of Chagla C.J. was cited before the Assam High Court in Chouthmal Kejriwal v. Commissioner of Income Tax, but on the facts
and circumstances of that case, it was held that the money standing to the credit of the minor admitted to the benefits of the partnership was capital
brought in by the minor and it was, therefore, held that the interest paid on the amount standing to the credit of the minor was liable to be included
in the total income of the assessee.
In Akula Venkatasubbaiah v. Commissioner of Income Tax it was held that where a minor child of the assessee has been admitted to the
benefits of partnership in a firm of which the assessee is a partner, the interest paid by the firm to the minor child on capital contributed by him has
to be included in the assessee''s total income u/s 16(3)(a)(ii) of the Indian Income Tax Act, 1922. Thus, this decision of the Andhra Pradesh High
Court is on the same lines as the decision of the Assam High Court in Chouthmal Kejriwal''s case.
In S. Srinivasan v. Commissioner of Income Tax the Madras High Court dissented from the view of the Bombay High Court in Bhogilal''s
case. In the case before the Madras High Court, the assessee was a partner in a firm in which his wife was a partner and his two minor sons were
admitted to the benefits of the partnership. Under one of the clauses of the deed of partnership, any member or person admitted to the benefits of
the partnership was entitled to receive interest at 9% p.a. on any sum advanced as loan by him to the firm for meeting the expenses of the
management. For the first time in the relevant accounting year interest amounts were credited to the wife and to the two minor sons in the books of
account of the firm on the accumulation of their shares of profit; and the Madras High Court held that the interest credited to the wife and the two
minor sons arose directly from the membership of his wife in the firm and the admission of the minor sons to the benefits of this wife in the firm and
the admission of the minor sons to the benefits of the partnership and that, therefore, the interest credited to them had to be included in the total
income of the assessee u/s 16(3)(a)(i) and (ii) of the Indian Income Tax Act, 1922. At page and 169 of the report, Bhogilal''s case has been
considered by the Madras High Court; and the learned judges observed at page 169 of the report as follows :
We regret we are unable to adopt the reasoning of the learned judges of the Bombay High Court. For one thing, it appears to us that if the
partnership document itself provided that the firm should pay interest the accumulated profits of the members of the firm, such interest cannot but
be regarded as arising directly from the membership of the person or the admission of the person to the benefits of the partnership. It is true that in
the present case also it is not compulsory on the part of these persons to leave the amount in deposit with the firm. The clause states that the
member may receive interest for any sum advanced as loan if the firm required any such amount and the partners so advanced the amount. This
clause provides for an independent transaction creating the relationship of debtor and creditor and only provides that in case where the creditors is
a partner, he shall be entitled to nine per cent interest. Whether or not it is possible to treat the interest payment arising on foot of a separate
transaction as falling within the mischief of section 16(3)(a)(i) or (ii), it is not necessary to consider. In the present case, however, the payment of
this interest was fully and clearly rested on the solitary consideration, viz., that the party who was paid interest was either a member of the
partnership or a persons admitted to the benefits of the partnership. Let us look at the matter in a different way. If either the wife or the minor was
called upon to launch legal proceedings against the firm for recovery of the interest, it is manifest that they have to rely only upon the terms of the
partnership in enforcement of that claim. If that is the case, we see no reason why it should not be said that the interest payment arises directly from
the relationship as between them and the firm.
It is, therefore, clear that, according to this decision of the Madras High Court, the principle laid down by the Bombay High Court in Bhogilal''s
case was not correct and further that, if in a particular case, the partnership deed provided for the payment of interest to the partners at a particular
rate on the amount standing to their credit in the books of the firm and in fact interest was paid on that footing, then such interest would be
includible in the income of the assessee in case such interest was credited in the accounts of the minors admitted to the benefits of the partnership
or in case a particular partner happened to be the wife of the assessee, who was also a partner in the firm.
Against this decision of the Madras High Court, the assessee had gone in appeal to the Supreme Court and the decision of the Supreme Court
has been reported at [1967] S. Srinivasan Vs. Commissioner of Income Tax, Madras, . In the judgment of the Supreme Court it has not been in
terms held, as was held by the Madras High Court, that the decision of the Bombay High Court in Bhogilal''s case laid down any wrong principle.
On the contrary, at page 277 of the report after referring to the decision of the Bombay High Court in Bhogilal''s case the Supreme Court mentions
that that particular case was inapplicable to the facts of the case before the Supreme Court because in the case before the Supreme Court the
interest arising to the wife and the minor sons of the assessee was not the result of any deposits made by them in the firm. Therefore, it is clear that,
in the opinion of the Supreme Court, the decision in Bhogilal''s case was good law and it is on that footing that we will proceed in this case.
We may mention at this stage that in the course of the arguments before us, it was contended that when moneys are found credited in the
account of a partner or of a person admitted to the benefits of the partnership, such amount can fall only in one of the two categories, viz., it can
either be a capital contribution of the partner to the capital of the firm or it can be an advance or a deposit made by the partner of the firm.
According to this contention, there is no other category in which the amount standing to the credit of the partner or of a person admitted to the
benefit of the partnership can fall. We may also mention here that this argument appears to have appealed to the Tribunal when it passed the order
in the instant case. But a page 277 of the report, the Supreme Court after mentioning the cases of Chouthmal and Akula has observed that these
were cases where interest was paid to the minors on the capital provided by them for the business of the partnership. According to the Supreme
Court in those cases it was held that the interest on the capital contributed by the minor sons was the benefit arising from the admission of the
minors to the benefit of the partnership and consequently that interest had to be include in the total income of the father in his assessment; and then
the Supreme Court has observed :
These two cases are of no assistance, because the nature of the amount on which interest has accrued to the wife and the minor sons of the
appellant is different and is not on capital advanced by them or on their behalf.
It is clear from this decision of the Supreme Court in Srinivasan''s case that the court did not treat the amount standing to the credit of the wife
or the two minor sons as deposit or advance kept by the wife or the minor sons with the firm and still the Supreme Court held that the interest paid
to the wife and to the minor sons in respect of the amount standing to their credit in their respective accounts was includible in the assessment of the
assessee u/s 16(3)(a)(i) and (ii). Therefore, according to this decision of the Supreme Court, even though a particular amount standing to the credit
of a minor admitted to the benefits of the partnership may not be a deposit or advance and may not be a capital contribution but still if there is a
causal connection between the amount standing to the credit of the minor and his admission to the benefits of the partnership, such connection
being either direct or indirect, then the interest accruing on that account to the minor will be includible in the assessee''s total income. It is, therefore,
clear that the cases of this kind have to be approached keeping the language of the section in mind and apart from the two categories, viz., deposit
or advance on the one hand and capital on the other.
According to the judgment of Supreme Court, the facts and circumstances of Srinivasan''s case indicated that the wife and the minor sons had
earned profits because of their membership in 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 of the case
before the Supreme Court also showed that the use of the moneys was also allowed to the firm without asking for any interest for a number of
years and it was only at a later stage that the partners of the firm decided to pay interest on these amounts, and because of the decision to pay
interest, the nature of the funds did not change and the funds were not 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. According to the Supreme Court,
the interest also appeared to have been allowed by the firm simply because this fund belonged either to a partner or minors who had been admitted
to the benefits of the partnership and hence the interest at least arose indirectly and accrued to the minor sons because of the capacity mentioned in
section 16(3)(a)(ii) of the 1922 Act. The ultimate test, therefore, applied by the Supreme Court was whether, on the facts and circumstances of the
case, the interest which was credited in the account of the minor admitted to the benefits of the partnership arose directly or indirectly and accrued
to the minor because of the particular capacity mentioned in the section.
Since the decision in Bogilal''s case is still goods law, it is in the light of the principles laid down in that decision of the Bombay High Court that
we will consider the facts of the instant case and, as observed above, the correct approach is to find out whether there is a connection between the
income and admission of the minor. That connection need not be direct; it may even be indirect.
Coming to the fact of the instant case, it is clear that up to November 14, 1958, the business of Central Watch Co. was being carried on by a
Hindu undivided family where the assessee was the karta. Out of the total assets of that business, a sum of Rs. 2 lakhs was divided by a particle
partition among the members of that Hindu undivided family and, as stated above, Sulochana, the wife of the assessee, was allotted Rs. 57,500
and the assessee, his major son, Suresh, and, his minor son Hemendra, were allotted Rs. 47,500 each. The deed of partition also provided as
follows :
The partnership business shall be carried on under the firm name and style of M/s. Central Watch Company (Manilal C. Modi).
The profits of the partnership business shall be distributed among the parties hereto in the following proportion :
Chinubhai Manilal Modi 33 1/3%
Suresh Chinubhai Modi 33 1/3%
Minor Hemendra Chinubhai 33 1/3%
Minor Hemendra who is admitted to the benefits of partnership shall not be bound to suffer any losses.
It is, therefore, i.e., on November 15, 1958, that the partnership deed was executed and in that partnership deed that share of minor
Hemendra is 1/3 in the profits of the firm and the shares of the assessee and his major son, Suresh, are also 1/3 each. Since Hemendra was a
minor admitted to the benefits of the partnership, it was provided in clause 7 of the partnership deed that the losses of the partnership business
including loss of capital shall be borne equally by the assessee and his major son, Suresh, and minor Hemendra, who was admitted only to the
benefit of the partnership, was not bound to suffer any losses. Clause 6 of the partnership deed also provides that interest at 6% p.a. should be
paid on the amount, if any, standing to the credit of the partner. In the recitals of the partnership deed, the fact that previously the business of
Central Watch Co. was being carried on by the assessee as the karta and manager of the Hindu undivided family has been mentioned and the fact
of partition has also been recited.
A significant feature of this case is that though Sulochana, the wife of the assessee, was entitled under Hindu law to a 1/4th share in the amount
of Rs. 2 lakhs which was the property divided on partial partition, the share allotted to her was Rs. 57,500 and not Rs. 50,000 that being the 1/4th
share of the assets which were being partitioned. The explanation given in the course of the proceedings before the taxation authorities was that
Sulochana was given a higher share at the time of the partition because she was not to be made a partner in the business which was to be carried
on by the partnership firm after partition. That explanation seems to be correct because each of the three other members of the Hindu undivided
family to whom shares were allotted on partition appears to have received Rs. 2,500 less, from his share of Rs. 50,000 and they three seem to
have jointly provided the additional amount of Rs. 7,500 which was paid to Sulochana in addition to her share of Rs. 50,000, that being her 1/4th
share in the total amount of Rs. 2 lakhs. Thus, it having been decided that Sulochana Would not joint in the new partnership firm, which was to be
formed immediately after petition, and the formation of the partnership being in contemplation at the time when the partition deed was executed, it
is clear that the three persons, namely, the assessee, his major son and the person acting on behalf of the minor son, Hemendra, all contributed
jointly in equal proportion to pay the additional amount of Rs. 7,500 to Sulochana, over and above her 1/4th share. Under these circumstances, it
is clear that when the amount of Rs. 47,500, which came to the share of minor Hemendra, was kept in the partnership firm after the firm started
business under the partnership deed of November 15, 1958, it was so kept because both the partition and the formation of the partnership were
parts of one and the same transaction. The two partners of the firm viz., the assessee and his major son, Suresh, also received Rs. 47,500 and their
amounts together with the amount coming to the share of the minor all remained in the business of the partnership firm. The fact that the amount of
Rs. 57,500, which was allotted to the share of Sulochana at the time of the partition also continued to be invested in the business of the firm had no
relevance, in our opinion, so far as the question before us is concerned. Sulochana was total stranger so far as the partnership firm was concerned
and the fact that she allowed her amount of Rs. 57,500 to continue to be invested in the business of the firm does not mean that it was on the same
footing as this amount of Sulochana that the amount of Rs. 47,500 belonging to the minor continued to be invested with the firm. The very fact of a
lesser share coming to the minor at the time of the partition as also the lesser amounts coming to the shares of the assessee and his major son, goes
to indicate that this amount of Rs. 47,500 of the minor was brought into the partnership because the minor was admitted to the benefits of the
partnership. It is clear that if the minor''s share on partition, viz., Rs. 47,500, were not to be invested in the partnership firm, he would not have
been admitted to the benefits of the partnership; the act of bringing in the amount of Rs. 47,500 and his being admitted to the benefits of the
partnership were inter-dependent upon each other and were thus connected. There was thus a clear causal connection between bringing in of the
amount of Rs. 47,500 of the minor into the partnership and the minor being admitted to the benefit of the partnership. In view of that causal
connection, it is clear that even that portion of Rs. 5,002 which is attributable to the amount of Rs. 47,500 and the accumulated interest paid for
the previous years on that amount of Rs. 47,500 is, to use the language of the section, income which arose directly or indirectly to the minor from
his admission to the benefits of the partnership. Applying the test laid down in Bhogilal case and by the Supreme Court in Srinivasan''s case, it is
clear that once the causal connection between the income accruing to the minor from the partnership business and his being admitted to the benefits
of the partnership has been established, then that income of the minor must be included in the total income of the assessee.
Under these circumstances, we answer the question in the affirmative. The assessee will pay the costs of the Commissioner.
Question answered in the affirmative.