1. In this departmental appeal the contention on behalf of the revenue is that the interest derived by the minors on the investments made with the firm was assessable in the hands of the mother under Section 64(1)(iii) of the Income-tax Act, 1961.
2. The assessee's minor son, master Kamlesh Kumar, was admitted to the benefits of partnership in Dauji Industries, Hathras. The share came to Rs. 33,505 and it was assessed in the hands of the mother.
3. The assessee came in appeal before the AAC who noted that besides the profit falling to the share of the minor, his account had been credited with interest of Rs. 6,720, on amounts standing to the credit of his personal account. This amount of interest also had been assessed by the ITO under Section 64(1)(iii). It was urged that the minor was under no obligation to provide capital to the firm and, therefore, there was no connection between the interest income and his admission to the benefits of partnership. The AAC was of the opinion that a critical analysis of Section 64(1)(iii) shows that if the credit in the account of minor is for consideration of getting the benefit of partnership, then the interest arising on that would be includible in the assessment of the parent, but if the deposit had nothing to do with his being conferred the benefits of partnership, then the interest income would not be liable to be included. There was in this case nothing in the partnership deed which required the minor to invest capital. In spite of it since the minor deposited the money with the firm, it would show that he found it profitable to make the investment with the firm to earn interest in the same manner as any other person would do. Therefore, the minor had given a loan to the firm. The ITO had failed to establish that the contribution made by the minor was by way of capital contribution and not by way of deposits simplicitor. The position of the profits left with the firm would, however, be different and in that regard the AAC followed the Supreme Court decision in the case of S. Srinivasan v. CIT  63 ITR 273 and held that interest on accumulated profits is liable to be included in the income of the parent. The AAC, therefore, held that to the extent of Rs. 4,320 which was estimated to be the interest accruing on the initial and other deposits, the same was not includible in the income of the parent under Section 64(1)(iii).
4. The department is aggrieved by this order and has come up in appeal.
We have heard the departmental representative and the counsel for the assessee. On pages 1-4 of the paper book a copy of the deed of partnership dated 2-4-1974 has been placed before us. There were earlier two partners, Smt. Rattan Devi and Smt. Munni Agarwal, and they admitted Kamlesh Kumar, minor, through his guardian, mother Smt.
Shushila Devi, to the benefits of partnership. In fact, we were informed that the minor had been admitted to the benefits of partnership with effect from 2-4-1973 and this is clear from Clause 1 of this deed, which shows that the minor had been admitted by Smt.
Rattan Devi and Krishan Kumar, husband of Smt. Munni Agarwal. Later on, Krishan Kumar retired from the firm and his wife became the partner.
The minor was given 50 per cent share while Smt. Rattan Devi had 10 per cent and Smt. Munni Agarwal 40 per cent share in the profits, but the losses were to be shared by the two partners equally to the exclusion of the minor. Clause 6 of this deed says that each of the above-named partners and the minor will be entitled to get interest from the firm on his or her investment. There is no clause in the partnership deed requiring any capital to be invested by any of the partners. On page 6 of the paper book is the balance sheet of the firm as on 7-4-1976. It shows that Smt. Rattan Devi had invested Rs. 41,362, Smt. Munni Agarwal Rs. 1,05,173 and the minor Kamlesh Kumar Rs. 1,10,705 in the firm.
These amounts are stated to be the capital accounts of the two partners and the minor, respectively. It was also stated before us on behalf of the assessee, on our enquiry, that the minor had deposited a sum of Rs. 43,000 as initial capital on 2-4-1974 when he was admitted to the benefits of partnership. The remaining amount to his credit is either profit or interest.
5. The question that arises, therefore, is whether on the facts before us the amount to the credit of the minor is his capital or a deposit as a loan. It is true that the partnership deed is silent as to the capital required to be invested by any of the partners. It is, however, also a fact that a business of this type cannot be done without any investment of capital. It is also a fact that the two partners have invested capital in the firm and so did the minor when he was admitted to the benefits of the partnership. Therefore, on the facts before us, the conclusion is irresistible that there is a direct connection between the admission of the minor to the benefits of the parntership and the interest earned on the initial capital introduced by the minor.
This is not a case where no such connection has been established between the interest earned and the admission of the minor to the benefits of partnership.
The rulings relied upon and cited on pages 14-16 of the paper book do not, therefore, help the assessee. Under the circumstances, therefore, interest earned on the capital investment would be includible in the income of the mother under Section 64(1)(iii).