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Commissioner of Income-tax Vs. Ganeshi Lal - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference Nos. 280 of 1965 and 356 of 1967
Judge
Reported in[1973]88ITR29(All)
ActsIncome Tax Act, 1922 - Sections 16(3)
AppellantCommissioner of Income-tax
RespondentGaneshi Lal
Appellant AdvocateB.L. Gupta and ;R.R. Misra, Advs.
Respondent AdvocateShanti Bhushan and ;R.K. Gulati, Advs.
Excerpt:
..... this fact very clearly shows that the money standing to the credit of the partners and the person admitted to the benefits of the firm was contributed to the firm not as a loan or advance. the way in which the credits outstanding in the names of the various partners and the minor came into existence clearly shows that these credits have been entered in the names of various persons because of their being partners or persons admitted to the benefits of the firm. 21. learned counsel for the assessee strongly relied upon the circumstance that the partners and the minor were free to deal with the amount standing in their names in any manner that they liked. they could withdraw any part of that amount at any time they liked and invest it with any other firm. he argued that, in the..........of rs. 8,000 from out of the cash received by them. it was agreed that the three partners and the minor admitted to the benefits of the firm would get interest, not exceeding 6% per annum as the partners may from time to time think proper, on the amount for the time being standing to the credit of the members. interest was to be allowed whether the partnership made any profits or not and on any sum which for the time being stood to the debit of the partner, the firm was to charge interest at the same rate. the amounts introduced by the three partners and the minor were brought into the books of the firm on the opening day, i.e., on 22nd april, 1956. during the assessment years in question, amounts by way of interest calculated on the credits outstanding in the names of the partners and.....
Judgment:

H.N. Seth, J.

1. These are two references under Section 66(1) of the Income-tax Act and they can be conveniently dealt with together. The assessee in both these cases is one Sri Ganeshilal in his capacity as an individual. In I.T.R. No. 280 of 1965, the proceedings relate to the assessment year 1957-58, whereas in I.T.R. No. 356 of 1967 they relate to the assessment years 1958-59 and 1959-60.

2. The assessee, Ganeshilal, was karta of a joint Hindu family consisting of himself, his major son, Ram Charan, and a minor son, Ram Gopal. On 21st April, 1956, there was a partition in the family whereby certain assets shown in the books of the family were divided. The members agreed to divide the immovable properties belonging to the family through arbitration. The assets divided concerned the family business in cloth and banking. On the following day, i.e., on 22nd April, 1956, L. Ganeshilal, his wife, Kasturi Devi, and their major son, Ram Charan, entered into partnership and started a firm by the name, Messrs. Lalji Mal Tika Ram. They also admitted the minor son of L. Ganeshilal, Ram Gopal, to the benefits of the hrm. The new partnership took over the banking and the cloth business that was being carried on by the joint family. At the time of partition, the family business assets aggregating to Rs. 5,76,390 were equally divided amongst the members of the family, each of them getting Rs. 1,44,097-8-3. In addition, cash amounting to Rs, 33,837-10-0 was also divided amongst the members, each getting Rs. 8,459-2-6. On the commenccment, of the partnership, Lala Ganeshilal introduced a sum of Rs. 1,42,514-9-0, Smt. Kasturi Devi introduced a sum of Rs. 1,44,214-9-0, Ram Charan introduced a sum of Rs. 1,70,683-11-0 and the minor. Ram Gopal, introduced a sum of Rs. 1,44,214-9-0 from out of the assets received by them at the time of partition of the family business. Each of them further introduced a sum of Rs. 8,000 from out of the cash received by them. It was agreed that the three partners and the minor admitted to the benefits of the firm would get interest, not exceeding 6% per annum as the partners may from time to time think proper, on the amount for the time being standing to the credit of the members. Interest was to be allowed whether the partnership made any profits or not and on any sum which for the time being stood to the debit of the partner, the firm was to charge interest at the same rate. The amounts introduced by the three partners and the minor were brought into the books of the firm on the opening day, i.e., on 22nd April, 1956. During the assessment years in question, amounts by way of interest calculated on the credits outstanding in the names of the partners and the minor were credited in their accounts. The Income-tax Officer added the interest earned by Smt. Kasturi Devi, the wife, and Ramgopal, the minor son of the assessee in his individual income under the provisions of Section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922.

3. The assessee went up in appeal against the assessment orders made in respect of all the three years. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer adding the interest earned by the wife and the minor son of the assessee in computing his total income. The assessee then filed three appeals before the Income-tax Appellate Tribunal. The appeal in respect of the assessment year 1957-58 was taken up first. The Tribunal, by its order dated May 21, 1963, dismissed the appeal and upheld the addition made by the Income-tax Officer. Subsequently the two appeals in respect of the assessment years 1958-59 and 1959-60 came up for hearing before members who were different from those who had decided the appeal in respect of the assessment year 1957-58. This time the Tribunal by its order dated July 18, 1963, allowed the two appeals and held that the amounts standing to the credits of the wife and the minor son represented advances made by them to the firm and any interest earned by them on those amounts could not be treated as income accruing to them directly or indirectly because of their membership or being admitted to the benefits of the firm. In the circumstances, the interest income could not be added in the income of the assessee. The two appeals were consequently allowed and the Income-tax Officer was directed to modify the assessment accordingly.

4. As for the assessment year 1957-58 the decision of the Tribunal was against the assessee, he moved an application before the Appellate Tribunal, under Section 66(1) of the Indian Income-tax Act, 1922, for making a reference to this court. The Tribunal has accordingly submitted a statement of the case in respect of the following question:

5. ' Whether, on the facts and circumstances of the case, the sums of Rs. 4,838 and Rs. 4,958 being interest earned respectively by Kasturi Devi, wife of the assessee, and Ramgopal, minor son of the assessee, on the respective amounts standing to their credit in the firm, Messrs. Lalji Mal Tika Ram in which the assessee is a partner are liable to be included in his total income under Section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922?'

6. For the assessment years 1958-59 and 1959-60 the decision of the Tribunal was against the revenue. The Commissioner of Income-tax, therefore, moved the Tribunal for referring the question of law involved in the case for the opinion of this court. The Tribunal has accordingly referred the following question to this court for opinion :

' Whether, on the facts and in the circumstances of the case, the interest income earned by Kasturi Devi and Ram Gopal were liable to be included in the assessment of the assessee under Section 16(3)(a)(i) and 16(3)(a)(ii) of the Indian Income-tax Act, 1922 ?'

7. It will be seen that the questions referred in the two references cover the same field.

8. Section 16(3)(a)(i) and (ii) of the Act reads as follows :

' 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-

(i) from the membership of the wife in a firm of which her husband is a partner;

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

9. Main point that arises for consideration in the two references is whether the interest earned by the wife and minor son of the assessee on the credits standing in their names is income which accrued to them directly or indirectly because of their membership or admission to the benefits of the firm, Messrs. Laljimal Tika Ram, in which the assessee is a partner.

10. Learned counsel for the revenue argued that, in the circumstances of this case, the amount standing to the credit of the various partners and the minor, in the account books of the firm, represented their capital contributions and as such the interest earned on these credits was income which accrued to them directly or indirectly from their membership or being admitted to the benefits of the firm. For the proposition that interest earned on capital contributed by partners and persons admitted to the benefits of the firm, is income which accrues to them because of their being members or being admitted to the benefits of the firm, he relied upon the cases of Chouthmal Kejriwal v. Commissioner of Income-tax, [1961] 41 I.T.R. 570 (Assam), Ram Narain Garg v. Commissioner of Income-tax, [1965] 55 I.T.R. 435 (All.), Commissioner of Income-tax v. Chinubhai M. Modi, [1968] 69 I.T.R. 76(Guj.), Bajrang Lal v. Commissioner of Income-tax, [1970] 77 I.T.R. 309 (All.) and P.A.P. Chidambara Nadar v. Commissioner of Income-tax, [1970] 77 I.T.R. 84 (Mad.). He urged that even interest paid on accumulated profits standing to the credit of the wife or a minor child admitted to the benefits of the firm is includible in the income of the husband or father tinder Section 16(3)(a)(i) and (ii) as held by the Madras High Court in the case of S. Srinivasan v. Commissioner of Income-tax, [1963] 50 I.T.R. 160 (Mad.). According to the learned counsel, in the present case, the interest income earned by the wife and the minor son stood on the same footing as the interest which is paid to the partners on accumulated profits.

11. Learned counsel for the assessee, on the other hand, contended that thereal nature of the credits standing in the names of the wife and the minorson represented loans advanced by them to the firm and as such interestearned on these credits could not be said to be the income arising directlyor indirectly because of their being partners or being admitted to the benefitsof the firm. In support of the contention that the interest received by thewife or a minor, on sums advanced to a firm as loan, cannot be said to beincome arising because of their being partners or being admitted to thebenefits of the firm, learned counsel relied on the case of Bhogilal Laherchandv. Commissioner of Income-tax, [1954] 25 I.T.R. 523 (Bom.) and also the observation made by theMadras High Court in the case P.A.P. Chidambara Nadar v. Commissioner ofIncome-tax.

12. In the present case, for the assessment year 1957-58 the Tribunal came to the conclusion that the amounts standing to the credits of the wife and minor son represented their capital contribution and, therefore, interest earned on it was income which arose to them directly or indirectly because of their membership or admission to the benefits of the firm. In coming to this conclusion, the Tribunal relied on the fact that the family business in cloth and banking was transferred to the firm as a going concern. Almost the entire amount allotted to the various members of the family on partition was brought into the books of the firm on the opening day and credited in their respective accounts. The Tribunal's attention was invited to Clause (5) of the partnership deed in which it was provided that on the credits standing in the names of the partners or the person admitted to the benefits of the firm, interest at a rate not exceeding six per cent. per annum would be payable. The Tribunal thought that there was nothing in this clause which went to indicate voluntary nature of the deposit. It held that all the partners and the minor introduced capital in the business. Relying upon the case of Chouthmal Kejriwal v. Commissioner of Income-tax, [1961] 41 I.T.R. 570(Assam), it held that the interest earned on those credits was covered by Section 16(3)(a)(i) and (ii) of the Act.

13. For the assessment years 1958-59 and 1959-60 the Tribunal took the view that the amount introduced by the wife and the minor could not in law be considered to be the capital contributed by them. It pointed out that by capital of a partner is meant the aggregate of the sums contributed by him for the purposes of commencement or carrying on of partnership business and which is intended to be risked by him in that business. Capital is a sum which is fixed by an agreement between the partners and in the present case there was no such agreement. In the opinion of the Tribunal a partner could not be compelled to furnish more capital than that he had agreed to do. Moreover, provisions of Section 12(c) and (d) of the Indian Partnership Act showed that a partner is entitled to interest on the capital subscribed by him. Such interest is to be paid only from out of the profits. It took into consideration the provisions of Clause (5) of the partnership deed which provided for payment of interest, not exceeding 6 per cent. per annum, as may be agreed by the partners from time to time, on the amounts for the time being standing to the credit of the partners or the minor and that the interest was to be paid whether the partnership made profits or not, and held that inasmuch as the interest was to be paid on the amount outstanding in the name of the partner or the person admitted to the benefits of the firm irrespective of whether profit is earned, it showed that the amount introduced did not partake of the nature of capital. According to it, normally no part of capital contributed by partners or persons admitted to the benefits of a firm can be withdrawn without the consent of all the partners, and since in this case a partner or the minor was free to withdraw the amount standing to his credit without obtaining the consent of other partners it also indicated that the amount did not partake of the nature of capital. In the end it held that the amount so introduced was really in the nature of advance or loan. The Tribunal further pointed out that capital can be contributed only under a specific agreement. Since a minor cannot enter into an agreement, the amounts standing in the name at least of a minor could not possibly be considered to be capital contributed by him.

14. The Supreme Court had an occasion to consider the meaning and scope of the words ' income of minor or wife ' arising directly or indirectly from their membership of or being admitted to the benefits of a firm far the purpose of Section 16(3)(a)(i) and (ii) of the Act in the case of S. Srinivasan v. Commissioner of Income-tax, [1967] 63 I.T.R. 273, 276, 278; [1967] 1 S.C.R. 727 (S.C.). In this case the Supreme Court considered the nature of interest received on accumulated profits standing to credits of partners and minors admitted to the benefits of the firm, in the account books of the firm, and held that in such a case the interest accrued to the wife and minor sons at least indirectly because of their capacity mentioned in Section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, A persual of this decision shows that the Supreme Court proceeded on the footing that various decisions of several High Courts wherein it had been held that interest received by a wife or a minor child on advances made by them to a firm would not be covered by Section 16(3)(a)(i) or (ii) and also the cases wherein it has been held that interest earned on the capital invested by them will be so covered, lay down correct law. The Supreme Court, however, observed that there may be a third class of cases where the credits standing in the name of the wife and the minor son may not be capital contributed by them, and still it may be covered by Section 16(3)(a)(i) and (ii) of the Act. The credits standing in the account books of the firm in that case represented accumulated profits of the wife and minor son as also the interest paid on such accumulations. It was argued that the accumulated profit which belonged to the wife and the minor child should have been treated as loans advanced to the firm and that the interest earned on such deposits or loans did not have any relationship with the membership of a wife in the firm or admission of a minor to the benefits of partnership. Learned judges repelled this argument and observed as follows :

' 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 profits took place, and allowed those profits to remain with the firm ; but there is no suggestion at all that, at that stage, either the wife or the minor sons, or any one 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 could 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 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 had 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) of the Income-tax Act.'

15. Towards the close of the judgment the Supreme Court made the following observation:

' The cases when interest is earned on a deposit or a loan differ from a case of the type before us where interest was earned on amounts of which the minors permitted the use by the firm, because they were their accumulated profits arising from the firm itself and because of their interest in the firm as persons admitted to the benefits of the partnership. In the circumstances, the answer returned by the High Court to the second question was also correct. '

16. An analysis of the aforementioned observations made by the Supreme Court shows that in order to find that the credits standing in the name of a partner or a person admitted to the benefits of a firm is a loan, there should be an arrangement between the firm and the person in whose name the credits stand, for treating those credits as loans. This arrangement should be of the same nature as is entered into with a stranger who agrees to advance a loan to the firm. Otherwise, the interest earned on the funds which the partner or the person admitted to the benefits of the firm has allowed to be used because of their interest in the profits of the firm will be such which can be said to have been earned by them directly or indirectly from their membership or being admitted to the benefits of the firm and the provisions of Section 16(3)(a)(i) and (ii) will be attracted. For this purpose, the fact that the partner or the person admitted to the benefits of the firm can withdraw the money from the account at his will, is not very material.

17. A perusal of the order made by the Tribunal in respect of assessment years 1958-59 and 1959-60shows that it proceeded on the footing as if the amounts standing to the credit of the partners and the minor did not represent capital contributed by them. Inasmuch as the persons in whose names the credits stood were entitled to withdraw any amount from thataccount without obtaining the consent of other persons, the credits represented the loan advanced by them to the firm and that in such a case it is not possible to say that interest paid on those credits represent income arising to the partner or the persons admitted to the benefits of the firm, because of their membership or being admitted to the benefits of the firm.

18. We have to examine the case in the light of the observations made by their Lordships of the Supreme Court in the case of S. Srinivasan v. Commissioner of Income-tax, [1967] 68 I.T.R. 273; [1967] 1 S.C.R. 727 (S.C.).

19. Coming now to the undisputed facts in the present case we find that the amount which was allotted to various members of the joint family on partition of the family business on 21st April, 1956, represented the value of their share in the assets of the joint family business and cash totalling Rs. 33,836-10-0. The business of the joint-family was taken over by the newly constituted firm as such. Thereafter, the accounts of various partners and the minor were opened in the books of the firm in which the amount representing the value of their respective assets which had been taken over from the family business was mentioned as standing to their credit. Clause (5) of the partnership deed provided as follows :

' Such rate of interest not exceeding 6% per annum as the partners may from time to time think proper, will be allowed to each partner on the amount for the time being standing to his or her credit, interest to the said minor shall be allowed at the same rate on the amount for the time being standing to his credit. Interest shall be allowed whether the partnership makes profit or not. On any sum for the time being to the debit of the partners interest at the same rate will be charged. '

20. A perusal of this clause shows that at the time of contributing the assets and executing the partnership deed the parties did not agree about payment of any specific amount as interest on the contributions made by them. It was left to the sweet will of the partners of the firm to decide as to how much interest was to be paid by the partners and the persons admitted to the benefits of the firm. This interest was not to exceed six per cent. per annum. Naturally, the rate of interest was to be determined by the partners from time to time depending upon the exigency of the partnership business. It is clear that the arrangement under which the interest was to be paid on the amount standing to the credit of the partners and the persons admitted to the benefits of the firm was not such which would have been entered into between the partners and a stranger who might agree to advance a loan or made a deposit with the firm. If the money had been advanced by a stranger, the rate of interest would also have been fixed in agreement with him, and it would not have been possible to change the rate of interest, from time to time, unilaterally at the instance of the partners of the firm alone. This fact very clearly shows that the money standing to the credit of the partners and the person admitted to the benefits of the firm was contributed to the firm not as a loan or advance. It was contributed because the partner and the minor who had been admitted to the benefits of the firm had an interest in the profits of the business of the firm. The money was allowed by the contributors to be used for the business of the firm so that they may earn profit. The way in which the credits outstanding in the names of the various partners and the minor came into existence clearly shows that these credits have been entered in the names of various persons because of their being partners or persons admitted to the benefits of the firm.

21. Learned counsel for the assessee strongly relied upon the circumstance that the partners and the minor were free to deal with the amount standing in their names in any manner that they liked. They could withdraw any part of that amount at any time they liked and invest it with any other firm. He argued that, in the circumstances, whether they continued to keep it invested with the firm, Lalji Mal, or deposited it with another firm after withdrawing it from that firm (sic). According to him this circumstance clearly shows that the nature of the credit was that of a loan on the principle of the decision in the case of Bhogilal Lakerchand's case, [1954] 25 I.T.R. 523 (Bom.), wherein it has been said that a case where a firm maintains accounts of its partners representing their accumulated profits and pays interest on the amounts standing to the credit of various persons the position is the same. Each partner can withdraw any part of the accumulated profits at any time that he likes without the consent of the other partners. As pointed out earlier, the Supreme Court in the case of S. Srinivasan v. Commissioner of Income-tax, [1967] 63 I.T.R. 273 (S.C.) has held that the accumulated profits do not get converted into a loan or an advance in the absence of a specific agreement between the parties to that effect. Mere fact that the partner or the person in whose name the account stood was free to withdraw the money and to reinvest it in any manner he liked will not mean that the amount outstanding was necessarily a loan or an advance made by the persons concerned. We are of opinion that in view of the pronouncement of the Supreme Court in the case of S. Srinivasan, it is not possible to say that merely because a person in whose name the accounts stood was free to withdraw any amount at any time, it necessarily showed that the amount standing to his credit was loan or advance made by him to the firm. This argument raised on behalf of the assessee therefore has rto force. Amount standing to the credit of the wife and the minor child was contributed by them in their capacity of a partner or a person admitted to the benefits of the firm. As such, the interest on the credits standing in their names, accrued to them as partner or person admitted to the benefits of partnership. The interest income of the wife and minor son was, therefore, includible in the income of the assessee under the provisions of Section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922.

22. We answer the question referred to us in I.T.R. No. 280 of 1965, in the affirmative and in favour of the revenue. We also answer the question referred to us in I.T.R. No. 356 of 1967, in the affirmative and in favour of the revenue. Since in respect of different assessment years the Tribunal took a different view of the question, we direct the parties to bear their own costs of these references. Counsel's fee is assessed at Rs. 200 in each of the two references.


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