MEHROTRA, J. - The following question of law has been referred to us for opinion by the Income-tax Appellate Tribunal, Calcutta Bench, under section 66 (1) of the Indian Income-tax Act (hereinafter called "the Act") :
"Whether on a proper construction of the provision of section 16 (3) (a) (ii) of the Indian Income-tax Act the interests earned by the minor sons of the assessee were liable to be included in the total income of the assessee in these cases ?"
The assessee Chouthmal Kejriwal, is a partner of the registered firm M/s. Bhimraj Chouthmal. Chouthmal had four sons. Two of them Prasanna and Om Prakash are minors and the other two Loknath and Gaurisankar are majors. For the assessment year 1954-55 in the account of Prasanna Kumar a sum of Rs. 9,547 has been credited - Rs. 7,056 as share of profit and Rs. 2,491 as interest. In the account of Om Prakash a total sum of Rs. 9,536 is credited which comprises of Rs. 7,055 as the share of his profit and Rs. 2,481 as interest. For the assessment year 1955-56 in the account of Prasanna Kumar a sum of Rs. 9,010 is credited comprising of Rs. 5,794 as the share of his profit and Rs. 3,216 as interest and in the account of Om Prakash Rs. 8,996 has been credited comprising of Rs. 5,794 as the share of his profit and Rs. 3,202 as interest.
Under a partnership deed dated 23rd March, 1953, entered into between the father, Chouthmal, and his two major sons, the two minor sons were admitted to the benefits of partnership. For the assessment years 1954-55 and 1955-56 the Income-tax Officer included the interest credited to the minor sons as a part of the allocation in the order passed by him under section 23 (6) of the Income-tax Act and assessed the total credits in the accounts of the two minors in the hands of their father, the assessee. Appeals were filed before the Appellate Assistant Commissioner against the assessments made by the Income-tax Officer and the order of the Income-tax Officer including the interest received by the minors in the total income of the father under section 16 (3) (a) (ii) was challenged. The Appellate Assistant Commissioner held that the father could not be taxed in respect of such interest received by the minors and directed that the minors should be assessed in respect of the amounts of interest. Against the decision of the Appellate Assistant Commissioner an appeal was filed by the Department to the Appellate Tribunal and the Tribunal took a contrary view holding that the interest accruing on the capital made in the accounts of the minors formed part of the profits from the partnership assessee. An application was made for reference to this court under section 66 (1) of the Act which was allowed and the question of law mentioned above has thus been referred to us.
Section 16 (3) (a) (ii) of the Act provides as follows :
"In computing the total income of any individual for the purpose of assessment, there shall be included so much of the income of a wife or minor child of such individual as arises directly or indirectly.... from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner."
Ordinarily under the Act it is only the income of an individual which can be taxed. An individual cannot be assessed to tax in respect of an income of somebody else. Section 16 (3) (a) (ii), however, provides that the income of a minor child can also be regarded under certain circumstances as the income of the individual. By this provision, therefore, an individual has been made liable to pay tax on the income of some one else and therefore such a provision has got to be strictly construed. Before the income of a minor child can be included in the income of the father, such an income must arise directly or indirectly from the admission of the minor to the benefits of partnership in a firm of which the father is a partner. If the income derived by the minor has no connection with his admission to the benefits of partnership directly or indirectly, such an income cannot be included in the income of the father. It is however also clear that the operation of section 16 (3) (a) (ii) is not confined to the share of the profits of the business. Any income which has resulted to the minor directly or indirectly by his admission to the benefits of the partnership will be included in the income of the father and not only the share of profits of the minor.
The question, therefore, to be determined is whether it can be said in the circumstances of the present case that the interest which the minor earned on his capital was directly or indirectly the result of his admission to the benefits of the partnership. If the minor partner gets interest on the capital, the interest is undoubtedly the result of his supplying the capital for the partnership and the supply of capital by him cannot be due to anything else except that he was admitted to the benefits of the partnership. But for his admission to the benefits of the partnership the question of his supplying capital would not arise at all. Cases of deposits by a minor partner may stand on a different footing. In the case of deposits the minor who has been admitted to the benefits of the partnership may not be under any obligation to made such deposits and in the absence of any such obligation on his part to make the deposit, it could not be said that the deposits which earned an interest was due to the fact that the minor was admitted to the benefits of the partnership. If it is optional for a minor who has been admitted to the benefits of the partnership to made a deposit, it cannot be said that the deposit was necessarily made as a result of his being admitted to the benefits of the partnership and if it could not be said that it was as a necessary result of his admission to the benefits of the partnership, any interest accruing on such a deposit cannot be said to arise directly or indirectly from the admission of the minor to the benefits of the partnership. But the case of a capital, to my mind, stands on a different footing. Unless there is anything express in the deed of partnership to the contrary, the supply of capital by the minor can only be the necessary result of his admission to the benefits of the partnership and, consequently, and interest accruing on the capital will be arising directly or indirectly from the admission of the minor to the benefits of the partnership. The operation of section 16 (3) (a) (ii) is not confined to the cases where an income accrues to the minor directly by his admission to the benefits of the partnership, but the provision is also attracted if the income of the minor arises indirectly from his admission to the benefits of the partnership. It was contended that there may be cases where a minor may be admitted to the benefits of the partnership. It was contended that there may be cases where a minor may be admitted to the benefits of partnership without supplying capital and, consequently, the supply of capital cannot be regarded as obligatory on the part of the minor before he could be admitted to the benefits of the partnership. It may be that a minor may be admitted to the benefits of the partnership without supplying any capital and to that extent the supply of capital may not be obligatory on him. But when a minor has been admitted to the benefits of the business and has supplied capital, any income accruing to him as an interest on the capital is certainly an indirect result of his being admitted to the benefits of partnership.
The Assistant Commissioner relied upon the case of Bhogilal Laherchand v. Commissioner of Income-tax. That was a case of a deposit by the minor. The assessee in that case was partner in the firm of M/s. Bhogilal Laherchand. The two minor sons of the assessee were admitted to the benefits of partnership of the firm. In the relevant year of account in the books of the firm the two minors were each credited with interest of Rs. 43,210 on the moneys standing to their credit in the books of the firm. The Income-tax Officer included the share in the profits of the firm of the two minors amounting to Rs. 2,10,154 and the interest amounting to Rs. 86,420 in the total income of the assessee. The inclusion of interest by the Income-tax Officer earned by the minors in the income of the father was challenged. Clause 3 if the deed of partnership which was relevant in that case was as follows :
"Interest at the rate of six per cent. per annum shall be paid to each partner on the moneys for the time being standing to his credit out of the gross profits of the business and such interest shall be cumulative so that any deficiency in any one year shall be made up out of the gross profits of any succeeding year or years."
It was held by the Bombay High Court that the interest could not be included in the income of the father. It was observed as follows :
"If therefore this be the true position under the partnership deed, 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 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. They could have earned interest on their deposits by keeping the deposits in any other firm, and really apart from the fixing of the rate of interest there is no connection whatsoever between the minors being admitted to the benefits of the partnership and their earning interest on the deposits which they have made or on the moneys that stand to their credit. The position undoubtedly would have been different if there was any obligation upon the minors to make deposits or, on the other hand, if the partnership firm was under an obligation to keep the moneys of the minors, whether they needed them or not."
At another place (at page 527) it was observed as follows :
"If one were to look at the partnership Act, under section 13 (d) a partner is entitled to receive 6 per cent. if he brings into the firm any moneys beyond what he is liable to bring under the partnership deed, and that payment of 6 per cent. interest to the partner would be independent of the firm making profits or not. There is nothing to suggest here that there was any obligation upon the minors to bring in moneys into the firm or to contribute any capital. Therefore even independently of the partnership deed they would be entitled to 6 per cent. interest under section 13 (d) of the Partnership Act."
These observations, therefore, make it clear that the ratio of the decision of that case was that as there was no obligation on the minors, being admitted to the benefits of the partnership, to necessarily make a deposit, the deposits could not be regarded as having any connection with his admission to the partnership, the interest accruing on such a with his admission to the partnership, the interest accruing on such a deposit would not be said to have arisen directly or indirectly by his admission to the benefits of the partnership. But in cases where the deed itself provides that the minor has contributed to the capital of the business, the same reasoning, to may mind, will not apply. If the contention of the Advocate-General is accepted the result will be that section 16 will only be operative with regard to the actual share of the profits of the minors and not to any other benefit accruing to them or arising out of their admission to the partnership. In that view of the matter the word "indirectly" used in the section becomes redundant. In the present case the two relevant provisions of the partnership deed may be referred to. Clause 3 provides that "the capital of the partnership is the sum of the business capital of the family firm on the day of its taking over after distribution of the said capital amongst the partners in their profits sharing ratios." In the opening part of the deed the minors are also shown as the second party to the deed. The shares of the minors are shown to be one-fifth each. The shares of the minors in the joint family assets on the date of the partnership were taken over as their contribution towards the capital of the new partnership business. It is therefore clear by perusal of clause 3 that the capital was supplied in this case by the minors and, to my mind, the minors supplied capital only because they were admitted to the benefits of the partnership.
Clause 4 of the deed of partnership, on which reliance has been placed by the Advocate-General, is as follows :
"Interest at market rate as determined amongst the partners shall be paid to each party on the capital for the time being standing to his credit and likewise interest will be payable to the firm if any partners balance becomes a debit."
It is argued by the Advocate-General that interest was payable on the capital irrespective of the profits earned by the partnership and secondly the capital was fluctuating. There was going to be no fixed capital. He further pointed out that in case the account showed an overdrawing by the partners, interest will be payable by the partners to the firm. That also shows that there may be occasions when the partners had no part of their capital to their credit in the account books and still there is nothing in the deed to sow that they will cease to the partner. It is argued from this that the contribution of the capital was not obligatory.
In my opinion, there is no substance in this contention. Firstly, the mere fact that the capital may be fluctuating does not necessarily negative the contention that the minors contributed capital as a necessary result of their being admitted to the benefits of the partnership. The fluctuation of capital will only affect the amount of interest which the minors may be entitled to get. But it does not help at all in deciding whether the supply of capital by the minors was the result of their being admitted to the benefits of the partnership or otherwise. As regards the other question that clause 4 of the partnership deed envisaged a contingency where the account of the partners shows that they have no capital invested in the partnership but they still remained partners, it is enough to point out that even if the partners may not cease to be partners, if they have overdrawn as against their capital investment, it does not necessarily follow that the partners, when they are getting interest on their capital, are getting it on any other consideration except that they have been admitted to the benefits of the partnership. Reference was then made to the case of Popatlal Bhikamchand v. Commissioner of Income-tax. That case, to my mind, is distinguishable from the facts of the present case. In the result therefore we would answer the question in the affirmative. The Department will be entitled to its costs, which we assess at Rs. 100.
SINHA, C. J. - I agree.
Question answered in the affirmative.