Per Shri Prakash Narain, Accountant Member - The only contention in this appeal is that the AAC has erred in deleting the addition of Rs. 15,369 from the total income of the assessee.
2. The assessee gifted certain sum to his grandson Ashok Kumar. Ashok Kumar invested the amount in the firm of Banilal Sukhanlal in which he was also admitted to the benefits of partnership. He received a sum of Rs. 15,369 as his share of profit from the above firm. The ITO included it in the assessment of the assessee acting under the relevant provision of section 64 of the Income-tax Act, 1961 (the Act).
3. The assessee appealed to the AAC. It was submitted before him that it was clause (iii) of section 64(1) which was applicable to the case. According to this clause, in computing the total income of an individual all such income as arose directly or indirectly to a minor child of such income as arose directly or directly to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm was to be included. It was, therefore, submitted before the AAC that the income of the minor was to be included only in the income of his father and not in the income of the assessee who was his grandfather. On the basis, the AAC deleted the addition.
4. The department is now in appeal before us. The learned departmental representative submitted before us that it was clause (vi) of section 64(1) which was applicable to this case. According to this clause, in computing the total income of an individual all such income as arose directly or indirectly to sons minor child of such individual from assets transferred directly or indirectly on or after 1-6-1973, to the sons minor child by such individual otherwise than for adequate consideration, was to be included. He submitted that there was no dispute that Ashok Kumar was the assessees sons minor child. He also submitted that the income from the firm of Banilal Sukhanlal had arise to Ashok Kumar from the funds gifted by the assessee. According to him, therefore, the order of the AAC required to be set aside and that of the ITO restored.
5. On the other hand, the learned counsel for the assessee made two submissions before us. His first submission was that it cannot be said that the profit from the firm of Banilal Sukhanlal had arise to minor Ashok Kumar either directly because of the receipt of gift by him from the assessee. To support his submission, he relied on the decision of the Supreme Court in CIT v. Prem Bhai Parekh : 77ITR27(SC) . He also relied on the decisions of the Calcutta and madras High Courts in the cases of Prahladrai Agarwala v. CIT : 92ITR130(Cal) and CIT v. S. Chandappa Iyer : 103ITR810(Mad) . His second submission was that the income of minor child could either be assessed in the hands of his father under clause (iii) of section 64(1) or under clause (vi) of the above section. His contention was that clause (iii) covered all the cases and the income arising to a minor child from his admission to the benefits of partnership of a firm required to be assessed in the hands of his father in preference to is assessment in the hands of any other person.
6. We have carefully considered the submissions placed before us. We agree with the first submission of the learned counsel for the assessee without pronouncing any decision on the second submission. The principle laid down by the Supreme Court in the case of Prem Bhai Parekh (supra) directly applies to the present case. In the cited case also the assessee had gifted Rs. 75,000 to each of his four sons, three of whom were minors. The minors were admitted to the benefits of partnership in a firm. The question was whether the income arising to the minors by virtue of their admission to the benefits of partnership in the firm could be included in the total income of the assessee under section 16(3) (a) (iv) of the Indian Income-tax Act. 1922. The Tribunal found that the capital invested by the minors in the firm came from the gift made in their favour by their father, that is, the assessee. It was held by this Court that the connection between the gifts made by the assessee and the income of the minors from the firm was a remote one and it could not be said that that income arose directly or indirectly from the transfer of assets. The income arising to three minor sons of the assessee by virtue of their admission to the benefits of partnership in the firm was held not to be includible in the total income of the assessee. This decision was followed by the Calcutta High Court in Prahladrai Agarwalas case (supra). While dealing with section 64(1)(iii) before its amendment by the Taxation Laws (Amendment) Act. 1975 with effect from 1-4-1976, the Court held :
'Where an individual gifts a sum of money to his wife and the wife invests the sum in a firm and becomes a partner and receives a share of the profits of the firm, such share of profits arises primarily because the partnership makes a profit. Though that has a connection with the gift it does not arise as a result of the gift. Secondly, the income arises only because the other partners had agreed to take the individuals wife as a partner and had allowed her to contribute to the capital of the firm. This is also not a result of the gift. The income from share of profits in the first arising to the individuals wife cannot, therefore, be included in the total income of the individual under the provisions of section 64(iii).' (p. 131)
Similar finding was also given by the Madras High Court in the case of S. Chandappa Iyer (supra) in which the principles laid down in the cases of Prembhai Parekh (supra) and Prahladrai Agarwala (supra) were applied. Following the principles given in the above cases, we hold that it cannot be said that the income to Ashok Kumar from the firm of Banilal Sukhanlal had arisen either directly or indirectly from the assets transferred by the assessee and, therefore, the provisions of clause (vi) of section 64(1) were not attracted. We, therefore, uphold the deletion of Rs. 15,369 from the income of the assessee, though for different reasons.
7. In the result, the appeal is dismissed.