Skip to content


Commissioner of Income-tax, Bombay City-ii Vs. Chandanmal Kasturchand - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference Nos. 27 of 1967 and 215 of 1971
Judge
Reported in[1978]112ITR296(Bom)
ActsIncome Tax Act, 1922 - Sections 16(3); Income Tax (Amendment) Act, 1961 - Sections 64
AppellantCommissioner of Income-tax, Bombay City-ii
RespondentChandanmal Kasturchand
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateS.E. Dastur, Adv.
Excerpt:
direct taxation - accrual of income - section 16 (3) of income tax act, 1922 and section 64 of income tax (amendment) act, 1961 - whether interest credited to accounts of respective minor sons of assessee liable to be included in assessee's total income under sections 16 (3) (a) (ii) and 64 (ii) though for different assessment years - interest had no direct or indirect connection with admission of minors to benefits of partnership so provisions of section 16 (3) (a) (ii) not applicable - specific arrangement between minors and firm - firm kept all money belonging to minors that were brought into partnership and treated as deposits on which interest was paid - no casual connection between earning of interest on such deposits belonging to minors that were either brought in or retained in.....tulzapurkar, j.1. these two references which have been made by the income-tax appellate tribunal to this court under section 66(1) of the indian income-tax act, 1922, and section 256(1) of the income-tax act, 1961, could be conveniently disposed of by a common judgment, inasmuch as the facts giving rise to the two questions which have been referred to us in each are common and the questions pertain to whether interest credited to the accounts of the respective minor sons of the assessee are liable to be included in the assessee's total income under section 16(3)(a)(ii) of the 1922 act, and under section 64(ii) of the 1961 act though for different assessment years. 2. in the first reference (no. 27 of 1967) the precise question referred to us for our determination runs thus : 'having.....
Judgment:

Tulzapurkar, J.

1. These two references which have been made by the Income-tax Appellate Tribunal to this court under section 66(1) of the Indian Income-tax Act, 1922, and section 256(1) of the Income-tax Act, 1961, could be conveniently disposed of by a common judgment, inasmuch as the facts giving rise to the two questions which have been referred to us in each are common and the questions pertain to whether interest credited to the accounts of the respective minor sons of the assessee are liable to be included in the assessee's total income under section 16(3)(a)(ii) of the 1922 Act, and under section 64(ii) of the 1961 Act though for different assessment years.

2. In the first reference (No. 27 of 1967) the precise question referred to us for our determination runs thus :

'Having regard to the terms of annexure 'A', are the sums of Rs. 1,626, Rs. 1,808 and Rs.2,008 credited to the accounts of the respective minor sons of the assessee as interest liable to be included in the assessee's total income under section 16(3)(a)(ii) of the 1922 Act for the assessment year 1961-62 and under section 64(ii) of the 1961 Act for 1962-63 and 1963-64 ?'

3. The question in the other reference (I.T.R. No. 215 of 1971) runs thus :

'Whether, on the facts and in the circumstances of the case, the sums of Rs. 7,177 and Rs. 7,265 credited in the accounts of the two minors with the firm were liable to be included in total income of the assessee under section 64(ii) of the Income-tax Act, 1961 ?'

4. The said question relates to the assessment year 1967-68.

5. The facts giving rise to the aforesaid two questions may now be stated :

The assessee, Chandanmal Kasturchand, is an individual. He has two major sons, Gulraj and Bhupatrai, and two minor sons, Mahendra Kumar and Devendra Kumar. He was also the karta of a joint family which carried on business in cloth in the name and style of Chandanmal Kasturchand Rathod at Mulji Jetha Market, Bombay. On October 31, 1959, there was a partial partition in the joint family, the facts whereof were recorded in a joint declaration dated February 22, 1962, made by the adult members of the joint Hindu family, viz., Chandanmal Kasturchand, Gulraj Chandanmal Rathod, Bhupatrai Chandanmal Rathod, and Jivabai, wife of Chandanmal. By that declaration, the declarants confirmed that the partial partition of certain assets of the joint family had taken place on October 31, 1959, and on such partition the said assets were divided in certain manner between the members of the joint family and it was further declared that the said joint family business that was being carried on in the name and style of Chandanmal Kasturchand was divided amongst the members of the said joint family and that such division had been recorded in the books of the said business. Admittedly, the capital of the joint family business was divided equally amongst the six persons (Chandanmal, Gulraj, Bhupatrai, Mahendra Kumar, Devendra Kumar and Jivabai) with effect from November 1, 1959. The business which was carried on by the family was converted into a partnership business under an agreement in writing dated October 19, 1960. Under the deed, the partnership was declared to have come into existence on April 26, 1960. There are three parties to this agreement, viz., the assessee, Chandanmal, and his two major sons, Gulraj and Bhupatrai. The two minor sons, Mahendra Kumar and Devendra Kumar have been admitted to the benefits of the partnership. In the account of each one of them on the opening date, namely, November 1, 1959, being the 1st day of Samvat year 2016, a sum of Rs. 25,788.89 was credited. It may be stated that the firm itself was registered under section 26A of the 1922 Act for the assessment year 1961-62 and under the corresponding provisions of the 1961 Act for the subsequent assessment years 1962-63 and 1963-64. The following sums were credited to each of the accounts of the two minor sons as interest, viz. : Rs.1961-62 1,5261962-63 1,8081963-64 2,008

6. In making the assessment for the aforesaid three years of the assessee (Chandanmal), the Income-tax Officer included the share of profit credited to the accounts of the two minor sons including the interest amounts mentioned above in the assessee's total income applying the provisions of section 16(3)(a)(ii) of the 1922 Act for 1961-62 and section 64(ii) of the 1961 Act for 1962-63 and 1963-64. The assessee appealed to the Appellate Assistant Commissioner and objected to the inclusion in the assessee's income the aforesaid amounts of interest credited to the accounts of his two minor sons and the Appellate Assistant Commissioner by common order for all the three years under consideration took the view that the money standing to the credit of the minors represented their capital investment in the firm and the interest thereon was properly includible in the income of the assessee under section 16(3)(a)(ii) of the 1922 Act and section 64(ii) of the 1961 Act for the relevant years and in support of his view he relied upon the two decisions, one of the Assam High Court in Chouthmal Kejriwal v. Commissioner of Income-tax (Assam) and the other of the Allahabad High Court in the case of L. Ram Narain Garg v. Commissioner of Income-tax : [1965]55ITR435(All) . The matter was carried by the assessee in further appeal to the Tribunal and it was contended on his behalf that under the partnership deed dated October 19, 1960, (annexure 'A') there was no clause which required contribution of capital by any of the minors and as such the interest earned on the amounts left in the firm could not be said to arise from admissions of the minors to the benefits of the partnership. On behalf of the department reliance was placed on clause 4 of annexure 'A' and it was contended that whatever capital was required for the business of partnership was to be brought in by the parties in such shares and proportions and in such manner in all respects as may be agreed to between them without reference to their shares in the partnership and, therefore, the provisions of section 16(3)(a)(ii) and section 64 were applicable. The Tribunal referred to two differing decisions which had dealt with similar question earlier, viz., the decision of the Allahabad High Court in L. Ram Narain Garg v. Commissioner of Income-tax : [1965]55ITR435(All) , on the one hand and the decision of this court in Bhogilal Laherchand v. Commissioner of Income-tax : [1954]25ITR523(Bom) on the other, and on a construction of clause 4 of annexure 'A', took the view that the expression 'parties' appearing therein had been used only with reference to three major persons who were parties to the document and held that the liability to bring in capital had only been cast on the three major persons to contribute any capital. It also noticed that there was no recital in the document showing that the admission of the minors to the benefits of the partnership was because of any contribution of funds by them. The Tribunal, therefore, held that the interest had no direct or indirect connection with the admission of the minors to the benefits of the partnership, and, therefore, the provisions of section 16(3)(a)(ii) of the 1922 Act or section 64(ii) of the 1961 Act did not apply. Accordingly, the Tribunal directed that from each of these assessments the interest credited to the respective minors' accounts and included in the share income should be excluded from the said assessments. At the instance of the Commissioner of Income-tax, the question in the first reference set out at the commencement of this judgment has been referred to us for our determination.

7. So far as the question referred to us in the second reference is concerned, the additional facts that required to be stated are these : That apart from crediting the interest on the initial amounts that stood to the credit of these two minors in their accounts in the firm the profits falling to the shares of each of the minors were also credited in their respective accounts year after year and it does appear that there were practically negligible withdrawals made by the minors from their respective accounts, with the result that in the beginning of Samvat year 2022 relevant for the assessment year 1967-68 under reference, a sum of Rs. 74,483.36 had remained accumulated in the account of Mahendra Kumar while a sum of Rs. 76,610.16 had remained accumulated in the account of Devendra Kumar on that date. At the end of Samvat year 2022 a sum of Rs. 7,116.59 was credited to the account of Mahendra Kumar as interest on the credit balance in his account while a sum of Rs. 7,265.16 was similarly credited in the account of Devendra Kumar. The Income-tax Officer included the aforesaid interest amount that had been credited in the two respective accounts of the minors at the end of Samvat year 2022 in the total income of the assessee under section 64(ii) of the 1961 Act. The assessee objected to such inclusion in the appeal which he preferred to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner excluded the interest amount, following the decision of the Tribunal in the assessee's appeal for the assessment years 1961-62 to 1963-64. The revenue thereupon preferred an appeal to the Tribunal and on behalf of the revenue it was contended that the credit balance in the account of the minors with the firm consisted of the amounts received by them on the partition of the family business and all the profits derived by them year after year and of the interest credited therein year after year and relying upon the Supreme Court's decision in S. Srinivasan v. Commissioner of Income-tax : [1967]63ITR273(SC) , it was urged that the aforesaid two interest amounts were liable to be included in the total income of the assessee under section 64(ii) of the Act. It appears that in Samvat year 2020, Bhupatrai Chandanmal, one of the major sons of the assessee, had retired from the partnership business leaving the same to be carried on as a going concern by Chandanmal and Gulraj and upon the retirement of Bhupatrai another partnership deed dated February 17, 1965, regarding the terms and conditions of such business came to be executed. One of the clauses being clause 3(a) of this deed dated February 17, 1965, was to the effect that if any moneys belonging to a minor admitted to the benefits of the partnership were brought into partnership or retained in the partnership, the same should be treated as deposit and interest shall be paid on it at nine per cent. per annum. Having regard to this term which was to be found in the deed of partnership dated February 17, 1965, the Tribunal took the view that the amounts of interest credited in the two minors' accounts for Samvat year 2022 was not includible in the assessee's total income under section 64(ii). It held that though the question of ineligibility of such interest on profits standing in the accounts of minors who had been admitted to the benefits of the partnership in which the assessee was also a partner was concluded by the Supreme Court's decision in S. Srinivasan's case : [1967]63ITR273(SC) , the Supreme Court in that case had taken into consideration the fact that there was no suggestion at that stage of either the wife or the minor sons or anyone on their behalf having entered into an arrangement with the firm to keep the accumulated profits as deposits and the Tribunal took the view that having regard to clause 3(a) of the deed dated February 17, 1965, the instant case fell within the exception carved out by the Supreme Court and the two amounts of interest could not be included in the total income of the assessee. The Tribunal, therefore, rejected the appeal of the revenue. The second reference is at the instance of the Commissioner of Income-tax.

8. So far as the question in Reference No. 27 of 1967 is concerned Mr. Joshi appearing for the revenue has contended before us that, having regard to the facts and circumstances of the case, particularly the circumstances in which the joint family business came to be converted into a partnership business and the initial capital of the joint family business came to be divided equally amongst the assessee and his two major sons and two minor sons which amounts were credited to the respective accounts of each one of them in the books of the partnership and having regard to the terms of the deed of partnership dated October 19, 1960, the three sums of Rs. 1,526 (for the assessment year 1961-62), Rs. 1,808 (for the assessment year 1962-63) and Rs. 2,008 (for the assessment year 1963-64) which had been credited to the accounts of the respective minor sons of the assessee as interest will have to be regarded as includible in the assessee's total income under section 16(3)(a)(ii) of the 1922 Act and section 64(ii) of the 1961 Act. In that behalf strong reliance was placed by him upon the relevant clause contained in the joint declaration made on February 20, 1962, regarding the terms of the partial partition that had been orally arrived at on October 31, 1959, as well as the relevant clauses of the deed of partnership dated October 19, 1960, and on the two decisions, one of the Assam High Court reported in Chouthmal Kejriwal v. Commissioner of Income-tax and the other of the Allahabad High Court reported in : [1965]55ITR435(All) L. Ram Narain Garg v. Commissioner of Income-tax. He also referred us to the decision of the Gujarat High Court in Commissioner of Income-tax v. Chinubhai M. Modi : [1968]69ITR76(Guj) . On the other hand, Mr. Dastur for the assessee contended that on a proper construction of the terms and conditions of the deed of partnership dated October 19, 1960, it was abundantly clear that there was no obligation cast on the minor to bring in any capital in the firm and as such whatever amounts were standing to the credit of each of the minor's account in the books of the partnership, will have to be regarded as deposits or loans or advances made by the minors to the firm, and, therefore, the interest earned by these minors in their respective accounts for the relevant three years could not be said to have any causal connection and as such the three amounts could not be included in the total income of the assessee. Strong reliance was placed by him upon the decision of this court in Bhogilal Laherchand v. Commissioner of Income-tax : [1954]25ITR523(Bom) . The question is whether the instant case falls within the ratio of the decision of this court in : [1954]25ITR523(Bom) or there is a causal connection direct or indirect between the interest income and the admission of the two minors to the benefits of the partnership.

9. Before we consider the rival submissions it will be desirable to set out the relevant provisions of the 1922 Act as well as the 1961 Act. Section 16(3) of the 1922 Act, under which the interest amounts are sought to be included in the assessee's total income, runs thus :

'16. (3) In computing the total income of any individual for the purpose of assessment, there shall be included -

(a) so much of the income of a wife or minor child of such individual as arises directly or indirectly - ......

(ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner.'

10. The corresponding provision in to be found in section 64(ii) and the same is in almost identical terms which runs thus :

'64. 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.'

11. On a reading of the aforesaid material provisions in the two enactments it will appear clear that in deciding whether a case falls under either of the aforesaid provisions, it is necessary to find out whether there is a connection between the income and the admission of the minors to the benefits of the partnership; the connecting need not be direct; it may be indirect and the question in the instant case is whether the three sums which were credited to each of the accounts of the two minor sons as interest for the three years in question have any connection direct or indirect with their admission to the benefits of the partnership of Chandanmal Kasturchand in which the assessee was admittedly a partner. At the outset it may be stated that the question whether the two sums of Rs. 25,788.89 each of which were initially credited in the names of the two minor sons in each one's account on the opening day of January 1, 1959, i.e., the 1st day of Samvat year 2016, and which credit was thereafter continued in their accounts even after the partnership had come into existence on April 26, 1960, represented the capital contribution or investment of each of the minors in the firm or not assumes importance because that is one of the ways in which the causal connection between the accrual of income and the minors' admission to the benefits of the partnership gets easily established; in other words, if these two sums represent capital investment of the two minors in the partnership firm then obviously the accruing interest thereon must be taken to be the direct result of the admission of the two minors to the benefits of the partnership. Therefore, on this principal question rival submissions were put forth before us by Mr. Joshi on behalf of the revenue and by Mr. Dastur on behalf of the assessee. It was urged by Mr. Dastur at the outset that having regard to the frame of the question in the first reference this court will have to answer that question by having regard only to the contents of the partnership deed dated October 19, 1960 (annexure 'A'), and the surrounding facts and circumstances obtaining in the case could not be gone into for the purpose of deciding the question as to whether the two sums of Rs. 25,000 and odd that were credited in the respective account of the two minors were capital contributions or not and in this behalf he particularly invited our attention to the fact that initially the Commissioner of Income-tax had suggested to the Tribunal the framing of the question in a particular manner, namely :

'Whether, on the facts and in the circumstances of the case, and having regard to the partnership deed dated October 19, 1960, the interest of Rs. 1, 526 credited to the accounts of two minor sons of the assessee is includible in the assessee's total income ?'

12. But the Tribunal, while framing the question and referring the same to this court, had omitted a reference to 'the facts and the circumstances of the case' and had merely framed a question in the manner set out at the commencement of the judgment. It is not possible to accept this submission of Mr. Dastur for the reason that by framing the question in the manner it has done, all that the Tribunal wanted to emphasise was that the terms of the partnership deed (annexure 'A') were an important aspect by reference to which the question may have to be decided but that does not mean that the question framed will have to be answered only by having regard to the terms of the deed of partnership ignoring the facts and circumstances of the case. The terms and conditions of the deed of partnership have themselves to be considered in the light of the facts and surrounding circumstances obtaining in the case and as we shall indicate later on, the facts and surrounding circumstances obtaining in the case and as we shall indicate later on, the facts and surrounding circumstances are not in dispute at all and, therefore, the question will have to be answered by having regard not merely to the terms and conditions of the deed of partnership but also to the facts and surrounding circumstances of the case. We may mention that the question raised in the second reference has been framed in such a manner that the question in expected to be answered by having regard to 'the facts and in the circumstances of the case' and since the question raised in both the references is identical and since the facts leading to the question in both are the same, it will be incongruous to answer the question in the first reference ignoring the facts and circumstances of the case and at the same time answer the question in the second reference by taking into consideration the facts and circumstances of the case. It was suggested at one stage by Mr. Joshi for the revenue that, if necessary, the court could reframe the question so as to include the consideration of 'facts and circumstances of the case', but we are clearly of the view that reframing of the question as suggested by Mr. Joshi is not at all necessary and the question will have to be considered as indicated above not merely by referring to the terms and conditions of the deed of partnership but also having regard to the facts and circumstances of the case.

13. On the factual aspect reference will have to be made to two or three glaring facts which indisputably emerge on record. In the first place, there was no dispute before us that initially the assessee as karta of the joint family was carrying on the business in the name and style of 'Chandanmal Kasturchand'. Admittedly, in the books of account pertaining to the business there was maintained a capital account. Thirdly, an oral partial partition was effected amongst the coparceners on October 31, 1959, and the terms thereof have been recorded in the joint declaration made by the adult members of the joint Hindu family on February 22, 1962. The material part of this declaration is to be found in clause 2 of the declaration which runs thus :

'We hereby record, declare and confirm that prior to 31st October, 1959, the declarant the said Chandanmal was carrying on joint family business in piece-goods in the name and style of 'Chandanmal Kasturchand' at Madhavrai Gully, Moolji Jetha Market, Bombay-2. We hereby further record, declare and confirm that a partial partition of certain assets of the said joint family took place on 31st day of October, 1959, and on such partition the said assets were divided in certain manner between the members of the said joint Hindu family. We the declarants hereby further declare that on such partial partition, the said joint family business which was being carried on in the name and style of 'Chandanmal Kasturchand' was divided amongst the members of the said joint Hindu family and that such division has been recorded in the books of the said business.'

14. The aforesaid recital clearly brings out the fact that in the partial partition that was effected on October 31, 1959, amongst the coparceners of the joint Hindu family, the assets of the aforesaid joint family business were divided amongst the members of the said joint family and it was also not disputed before us but in fact Mr. Dastur produced before us the relevant entries appearing in the books of account of the joint family business to show that as a result of the said division of assets of the said joint family business the capital was also divided and a sum of Rs. 25,788.89 forming part of the initial capital of the joint family business came to be credited in the name of each one of the coparceners including the two minor sons. It is, therefore, clear that this amount which was credited in the respective accounts of the two minor sons was straightaway brought into their account from the capital account which initially stood in the karta's name in the books of the joint family business. Mr. Dastur further stated before us that though the partnership business was commenced as per the deed of partnership dated October 19, 1960, with effect from April 24, 1960, the income of the business was disclosed to the income-tax authorities by filing a return as if the name was of the Hindu undivided family and it was on that basis that the income was assessed. Further, it was in such initial accounts of the two minors that were opened in the books of the partnership when the partnership business commenced, that the share in the initial Hindu undivided family capital which came to these minors on the partial partition were credited and it is on such amounts that interest was being credited year after year. From these facts which were not disputed the inference in our view could be said to necessarily arise that the two amounts of Rs. 25,788.89 which fell to the share of the two minors at the oral partition were thrown in the partnership business by their guardian, Chandanmal, as capital investments. It was pointed out by Mr. Dastur that the accounts into which these amounts were credited in the books were not headed as 'capital accounts' in the books of the firm. But this aspect in our view would be equivocal for, admittedly, even to the accounts of Chandanmal and his major sons in which their respective shares were crerdited, the title 'capital account' has not been given. One would have to consider and decide on the facts whether the amounts that were credited in the two respective accounts of the two minors in the two books of the partnership firm were 'capital investment' in the firm and, in our view, having regard to the aforesaid facts taken with the relevant clause 2 of the joint declaration recording an oral partition it appears to us clear that the partition of the Hindu undivided family business and formation of the partnership business was part and parcel of one single operation and the two amounts that were credited in the two accounts of the respective minors in the partnership books will have to be regarded as capital investment made by their guardian in the partnership business.

15. Along with the factual aspects the relevant clauses of the deed of partnership dated October 19, 1960, will have also to be properly construed. At the outset it may be stated that the three expressions 'the parties', 'parties hereto' and 'partners' have been very loosely used in the document and having regard to the loose manner in which these expressions have been used it would not be possible to give the same meaning to the particular expression at all places wherever it has been used by the parties in the document and every time the context will have to be seen for properly construing these expressions. With this preliminary observation we proceed to consider the relevant portions of the deed of partnership which is annexure 'A' to the statement of the case.

16. From the recitals it is clear that the document has been executed by three parties, viz., Chandanmal as party of the first part, Gulraj as party of the second part and Bhupatrai as party of the third part and it is also clear from the recitals that these three parties to the document being all majors, have admitted the two minors, Mahendra Kumar and Devendra Kumar, to the benefits of the partnership. The first two recitals which are important run thus :

'And whereas a partial partition of certain assets of the said joint family took place on the 31st day of October, 1959, and on such partition the said assets were equally divided between the party of the first part, his wife, Jivabai, his sons the party of the second part and the party of the third part and his two minors, Mahendra Kumar Chandanmal and Devendra Kumar Chandanmal, and whereas the parties hereto have become partners in the said business from 26th day of April, 1960, the wife of the said Chandanmal not calcimining any share and whereas the parties hereto being all majors have also admitted the said minors, Mahendra Kumar Chandanmal and Devendra Kumar Chandanmal, to the benefits of the partnership and whereas the parties are desirous of recording the terms of the partnership now these presents witness..........'

17. From the tenor of these recitals it is obvious that the expression 'the parties hereto' occurring therein has obvious reference to the majors (father and two major sons) who were parties to the document and who constituted the partnership. The next material clause is clause 4 which runs thus :

'Whatever capital is required for the business of the partnership shall be brought in by the parties in such shares and proportions and in such manner in all respects as may be agreed to between them without reference to their shares in the partership.' It seems fairly clear that the expression 'the parties' occurring in the aforesaid clause which deals with the topic of bringing capital refers to the majors and it would not be possible to accept Mr. Joshi's contention that the expression 'the parties' occurring in this clause should be read as including even the two minors who were admitted to the benefits of the partnership. It is, therefore, clear that on a proper construction of clause 4 the obligation to bring in capital was cast upon the major members, viz., the three partners, Chandanmal and his two major sons and there was no obligation whatsoever cast upon the minors to bring in capital. The next material clause is clause 5 and it runs thus :

'The net profits of the business shall be divided between the partners in the shares following, that is to say :

(i) The share of Chandanmal KasturchandRathod shall be 20 nP in a rupee.(ii) The share of Gulraj Chandanmal Rathodshall be 20 nP in a rupee.(iii) The share of Bhupatrai ChandanmalRathod shall be 20 nP in a rupee.(iv) The share of Mahendra Kumar Chandanmala minor, admitted to the benefits of thepartnership to the extent of 20 nP in a rupee.(v) The share of Devendra Kumar Chandanmal,a minor, admitted to the benefits of thepartnership to the extent of 20 nP in a rupee.----------------------Total 1.00----------------------and they shall in like proportion bear all losses including loss of capital, if any. Provided however and it is hereby expressly agreed between the parties hereto who are all majors that the said minors, Mahendra Kumar Chandanmal and Devendra Kumar Chandanmal, shall be entitled to the benefits of the partnership only and shall not be personally liable for any obligations of the said firm.'

18. The aforesaid clause in our view is very important inasmuch as it not merely indicates the shares of the five persons named therein in the profits of the partnership business, viz., the three major persons as well as the two minor sons but also contemplates that these named persons shall in like proportion bear all losses including capital loss, if any. In the first place, the expression 'the partners' occurring in the opening words of clause 5 has been clearly loosely used, for if under the clause the shares in the net profits of the business belonging to the partners were to be indicated then the names of only three major persons, namely, Chandanmal and his two major sons should have been specified but the clause not merely specifies the shares of Chandanmal and his two major sons by their names but also goes to specify the share of each of the two minor sons by their names, thereby by treating the two minors as 'the partners'; alternatively, the shares of all the five persons by their names could have been indicated without using the expression 'the partners' at the commencement of the clause. That the two minors have not been made full-fledged partners but have been merely admitted to the benefits is abundantly clear and that is why we feel that the expression 'the partners' in clause 5 has been very loosely used. That apart, the clause after setting out the shares in the net profits of five named person mentioned therein goes on to say,

'and they shall in like proportion bear all losses including loss of capital, if any.'

19. It seems to us very clear that the expression 'they' is referable to all the five named persons in the clause and this clearly suggests that it was with in the contemplation of the parties that the capital, if any, brought in on behalf of the two minors shall also suffer a reduction or diminution in the event of the business making losses but that the minors shall not be personally liable for any obligations of the firm (vide proviso at the end of the clause).

20. Mr. Dastur contended that the expression 'including loss of capital' occurring in the phrase 'they shall in like proportion bear all losses including loss of capital' must be taken as being referable to loss of a capital nature as distinguished from loss of a revenue nature. We are unable to accept this contention of Mr. Dastur. In our view losses of both the kinds, whether they were of capital nature or of revenue nature, would 'including loss of capital'. It is, therefore, clear that the phrase 'and they shall in like proportion bear all losses including loss of capital, if any' in clause 5 clearly suggest that it was within the contemplation of the parties that if at all any capital was brought in on behalf of the minors, such capital should suffer diminution or reduction if the partnership suffered any losses and this aspect of the matter is emphasized by reason of the proviso which follows this particular phrase in the clause. It has been made clear that though the capital, if any, brought in on behalf of the minors may suffer reduction or diminution, it was expressly agreed between the parties who were all majors that the said minors shall be entitled to the benefits of the partnership only and shall not be personally liable for any obligation of the said firm. In other words, since the two minors were being admitted to the benefits of the partnership they shall have no personal liability in respect of any obligations of the firm. But so far as the capital, if any, brought in on behalf of the minors through their guardian was concerned the same may suffer diminution. Mr. Dastur contended that such interpretation of the aforesaid material phrase in clause 5 would be illegal and not in consonance with the legal principle that the minor is merely to be admitted to the benefits of the partnership and should never be liable for any losses that may be suffered by the partnership business. We do not wish to express any opinion one way or the other on this legal submission which has been made by Mr. Dastur but the important aspects that emerge from clauses 4 and 5 read together are that there was no obligation cast on the minors to bring in any capital but at the same time there was no bar to their bringing in capital. It was not disputed before us by Mr. Dastur that in law there was nothing to prevent a guardian of a minor from investing minors' moneys in partnership business as and by way of capital investment and indeed this position is amply clear in view of two decision of the Supreme Court in Commissioner of Income-tax v. Shah Mohandas Sadhuram : [1965]57ITR415(SC) and Commissioner of Income-tax v. Shah Jethaji Phulchand : [1965]57ITR588(SC) .

21. The next material clause of the deed is clause 6 which runs thus :

'Interest at such rate as may be agreed to between the parties and failing agreement at the rate of six per cent. per annum shall be allowed to each partner on the amount of capital for the time being standing to his credit.'

22. It appears to us clear that it was in view of this clause 6 that interest at the rate of 6% per annum was credited not merely to the balance that had been credited in the respective accounts of the three major partners but also in the respective accounts of the two minors who had been admitted to the benefits of the partnership. It was sought to be urged by Mr. Dastur that even in clause 6 the expression 'parties' must be referable to the majors and the clause would authorise the firm to credit interest at the rate of 6% per annum to each of the partners on the amount of capital for the time being standing to his credit. It seems that the expression 'parties' in this clause has a reference to the majors, namely, the assessee and his major sons but here again the expression 'partner' seems to have been similarly loosely used and that expression must mean such person who or on whose behalf capital is brought in since it was open to the minors to voluntarily bring in capital in the partnership through their guardian and since on the facts indicated above the two accounts of the two minors were in the nature of capital investment, interest at 6% seems to have been credited in their accounts also under clause 6.

23. On the reading of the aforesaid relevant clauses of the partnership deed two or three things appear very clear. In the first place, on a fair construction of those clauses it is clear that no obligation had been cast upon the minors to bring in any capital but at the same time it cannot be disputed that there was no bar indicated anywhere in the deed preventing the minors from making capital investment in the partnership. On a fair reading of clause 5 it appears to us very clear that parties did not contemplate that minors, if they thought fit, may bring capital in the partnership business and if they did, interest at 6% would be paid. Having regard to this position which emerges very clearly on a proper construction of the partnership deed and having regard to the factual circumstances which we have indicated above, the position in our view is quite clear that the two amounts of Rs. 25,788.89 which were initially credited in the respective accounts of the two minor sons in the books of the partnership were as and by way of capital investment made by them through their guardian and that is how they were admitted to the benefits of the partnership and, if that be so, interest earned on these two respective individual amounts which was credited to their accounts in the partnership books will have to be regarded as having a connection with their having been admitted to the benefits of the partnership and as such the interest will be includible in the total income of the assessee under the relevant provisions of the 1922 Act and the 1961 Act.

24. Mr. Dastur on behalf of the assessee strongly relied upon the decision of this court in Bhogilal Laherchand v. Commissioner of Income-tax : [1954]25ITR523(Bom) , and he contended that since in the instant case there was no obligation cast on the minors to bring in any capital in the partnership business under the deed of partnership the amounts that stood to the credit of these two minors in their respective accounts will have to be regarded as deposits or advances made by them to the firm and as such there was no causal connection between the interest earned on these amounts and their admission to the benefits of the partnership. He also pointed out that the Tribunal in that behalf had observed that not merely was there no obligation cast on the minors under the deed but there was also no recital in the document showing that the admission of the minors to the benefit was because of any contribution of funds by them. However, as stated earlier, there was no bar to the minors bringing in their capital investment through their guardian and the genesis of converting Hindu undivided family business into partnership business and the manner in which the shares of the minors in the capital of the Hindu undivided family business was credited to their respective accounts in the partnership books as their capital investment clearly shows the connection between their capital investment and their admission for the benefits of the partnership.

25. In our view the decision of this court in Bhogilal's case : [1954]25ITR523(Bom) is clearly distinguishable on facts; in that case the assessee who was an individual started a new partnership business with his major son and the question was whether interest which the minors had received on deposit standing to their credit in the firm should be included in the total income of the assessee under section 16(3)(a)(iii) of the 1922 Act. It was in the context of that position which obtained in that case that this court observed that the partnership deed did not cast any obligation on the minors to make any deposit in the firm or upon the firm to keep any deposit made by the minors and, therefore, this court held that in the absence of any such obligation the interest earned by the minors on the amount should not be included in the total income of the assessee. In the instant case before us the position is entirely different. Initially, there was a joint family business which was comprised of six coparceners of which the assessee was the karta. In such joint family business there was a capital account maintained in the books of that business, that there was an oral partition on October 31, 1959, at which certain assets including the assets of the joint family business were divided equally between the coparceners and certain amounts going to the share of each of the five persons, namely, the assessee and his two major sons and two minor sons representing in the aggregate total capital standing in the books of the family firm came to be entered or credited in the individual account of the assessee, his two major sons and two minor sons. It is also clear that though under the deed of partnership no obligation was cast on the minors to bring in any capital there was no bar to the minors voluntarily doing so and that the partnership deed does suggest that the partners did contemplate that the minors through their guardian could bring in any capital and having regard to the admitted facts which we have mentioned above, the initial credits that were made in the two respective accounts of the two minors in the books of the firm clearly appeared to be capital investments made by the minors through their guardian and that is how they were admitted to the benefits of the partnership. In our view, therefore, on the facts which are obtaining in the instant case as well as having regard to the relevant clauses appearing in the deed of partnership the instant case is clearly distinguishable from and does not fall within the ratio of Bhogilal's case [1954} 25 ITR 523. In our view having regard to the peculiar facts that obtain in the case as also the relevant clauses of the partnership deed, the instant case is somewhat akin to the Gujarat High Court's decision in : [1968]69ITR76(Guj) Commissioner of Income-tax v. Chinubhai M. Modi and there being causal connection between the interest income credited to the minors' accounts and their admission to the benefits of the partnership the question in the first reference will have to be answered in favour of the revenue.

26. Turning to the question referred to us in the second reference it was argued on behalf of the revenue before us that the two sums mentioned in the question represented interest not only on the amount stated to have been received as a share on partition of the family but also on the accumulated profits in the firm which had not been drawn by the minors and that, therefore, it was urged that the accounts of the two minors represented a combined account of capital as well as the funds brought in as a result of the partition and in the light of these facts it was urged that section 64(ii) was attracted. The Tribunal decided the issue in favour of the assessee relying on the decision of the Supreme Court in S. Srinivasan v. Commissioner of Income-tax : [1967]63ITR273(SC) . That decision has a material bearing on the point at issue and so it will be necessary to deal with that case in some detail. The facts in that case were these : The appellant was the senior partner in a firm in which his wife and a stranger were partners and his two minor sons were admitted to the benefits of the partnership. One of the clauses of the deed of partnership provided that if the firm requires any sum for meeting the expenses for its management and if any of the partners has and is willing to give such amount, he may advance (such amount) as loan. He may receive interest for such sum at the rate of 12 per cent. per mensem. For a number of years up to the previous year relevant to the assessment year 1957-58, the shares of profits of the wife and the minor sons were allowed to accumulate without interest. With effect from that previous year the firm decided to allow 9% interest per annum on these accumulated profits. The question was whether the interests so allowed was assessable in the hands of the appellant under section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922. The court held that the interest accrued to the wife and the minor sons at least indirectly because of their capacity mentioned in section 16(3)(a)(i) and (ii) and was, therefore, assessable in the appellants' hands. The court has also pointed out that the cases where interest is earned on a deposit or loan differ from cases where interest is earned on the accumulated profits arising from the firm itself. It may be stated that on behalf of the appellant, reliance was placed upon the decision of this court in Bhogilal's case : [1954]25ITR523(Bom) and the Supreme Court took the view that the ratio of that decision was not applicable to the case before it. The Supreme Court pointed out that in Bhogilal's case : [1954]25ITR523(Bom) , it was held by this court that interest earned by minors on deposits maintained in the firm could not be held to be a benefit which the minors received from their admission to the partnership of the firm, and since in the case that was before the court the question related to the ineligibility of the interest arising to the wife and the minor sons of the appellant on the accumulated share of profits that had been credited to their account the ratio of the Bombay High Court decision was not applicable. The material observations appear at page 276 of the report and run as follows-See : [1967]63ITR273(SC) :

'The argument was that the accumulated profits belonging to the wife and the minor sons should be held to be in the nature of deposits made by them with the firm, or in the nature of loans advanced by them to the firm, and interest earned on such deposits or loans can have no relationship with the membership of the firm of the wife or the admission to the benefits of the partnership of the minor sons. It appears to us that these accumulated profits remaining in the hands of the firm cannot, on any principle, be equated with deposits made or loans advanced. The profits accumulated to the credit of the wife and the minor sons, because they did not draw their share of profits when distribution of profit took place, and allowed those profit to remain with the firm; but there is no suggestion at all that, at that stage, either the wife or the minor sons, or anyone on their behalf, purported to enter into an arrangement with the firm to keep these accumulated profits as deposits. Similarly, there was no such contract which would convert those accumulations into loans advanced to the firm by these persons. The facts and circumstances indicate that the wife and the minor sons had earned these profits because of their membership of 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 the funds of theirs, because they had interest in the profits of the firm. The facts also show that the use of these moneys was allowed to the firm without asking for any interest, and it was only at a later stage that the three partners of the firm decided to give interest on these amounts. When the decision was taken to give interest, the nature of the funds did not change. They did not get 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. The interest also appears to have been allowed by the firm simply because these funds belonged either to a partner or to the minors who has been admitted to the benefits of the partnership. It is thus clear that the interest at least indirectly arose and accrued to the wife and the minor sons because of their capacity mentioned in section 16(3)(a)(i) and (ii) in the Income-tax Act.'

27. In the lengthy passage which we have quoted above, the Supreme Court has clearly carved out an exception where an arrangment with the firm to keep these accumulated profits as deposits could be made on behalf of the minor sons and that if such an arrangement can be said to have been made the ratio of the decision would not apply. In this behalf the Tribunal as well as Mr. Dastur before us relied upon clause 3(a) of the deed of partnership dated February 17, 1965, that was executed by the parties on the occasion of one of the major sons retiring from the partnership in Samvat year 2030. Clause 3(a) of that deed runs thus :

'Interest at the rate of nine per cent. per annum shall be paid to each partner on the capital for the time being standing to his credit. It is expressly agreed that if any money belonging to a minor admitted to the benefits of the partnership are brought into partnership or retained in the partnership, the same shall be treated as a deposit and interest shall be paid on it at nine per cent. per annum.'

28. Relying on this clause it was urged by Mr. Dastur that there was a case where a specific arrangement had been made on behalf of the minor sons with the firm to keep all moneys belonging to the minors that were brought into the partnership or retained in the partnership should be treated as deposits and the interest thereon shall be paid at 9 per cent. per annum, and that being the position, it was urged that the causal connection between the earning of the interest on such moneys belonged to the minors that were either brought in or retained in the partnership firm with their admission into the partnership would not be there and, therefore, the provisions of section 64(ii)64(ii) would not be applicable. There is considerable force in this contention of Mr. Dastur and we are inclined to accept the same. Mr. Dastur, however, urged that under this clause even interest earned on the initial capital amount said to have been invested by the two minors through their guardian for the years subsequent to entering into partnership dated February 17, 1965, was also not includible in the assessee's total income. It is not possible to accept this contention of Mr. Dastur. In our view, the initial contribution made by the two minors through their guardian will be outside the provisions of this clause since the material expression used in the clause is :

'3. (a) that if any moneys belonging to a minor admitted to the benefits of the partnership are brought into the partnership or retained in the partnership.'

29. This expression in our view will cover moneys that were either brought in or retained in the partnership subsequent to February 17, 1965, being the date on which the partnership under this deed came into effect.

30. Having regard to the above discussion, our answer to the question in first Reference No. 27 of 1967 is in the affirmative and in favour of the revenue and our answer to the question in the second Reference No. 215 of 1971 will be as follows :

(i) In the affirmative and in favour of the revenue as regards such portions of the two sums as are attributable to interest paid by the firm on the initial contribution of Rs. 25,788.89 made on behalf of each of the two minors; and

(ii) In the negative and in favour of the assessee as regards the remaining portion of the two amounts.

31. There will be no orders as to costs in both the references.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //