1. This appeal by the assessee is directed against the order of the ACC dated 16-8-1980, relating to the assessment year 1979-80. The issue in this appeal is whether the AAC erred in holding that Section 64(1)(vi) of the Income-tax Act, 1961 ('the Act') is applicable and as such the income accruing and arising to the minor Rakesh Kumar as share of profit from the firm of Karam Chand Rakesh Kumar is includible in the total income of the assessee.
2. The facts on the basis of which we have to determine this issue, lie in a narrow compass as under : On 13-5-1978, Shri Karam Chand son of Lala Walati Ram, Jiwan Kumar son of Karam Chand and Smt. Parmashri widow of late Walati Ram, entered into a partnership, as evidenced by an instrument, on the said date and admitted Rakesh Kumar, minor son of Karam Chand, to the benefits of partnership. Clauses 7 and 8 of this deed have been alluded to in the arguments of the parties before us and we, therefore, incorporate the same in this order as under : That at the close of the year a profit & loss account shall be drawn up and after defraying business/customary expenses the net profit or loss shall be divided in-between the parties as under :1st party 30 per cent 1/3rd2nd party 30 per cent 1/3rd3rd party 15 per cent 1/3rdRakesh Kumar minor 25 per cent nil 7. Karam Chand admitted into partnership for the benefits of the partnership.
8. That the parties shall contribute the finances towards the firm and they may or may not charge any interest on the finances so contributed.
Smt. Parmeshri Devi being the grandmother of minor Rakesh Kumar, out of love and affection, gifted an amount of Rs. 20,000 on 15-3-1979 to him.
3. When the assessment for the assessment year 1979-80 was made on the firm of Karam Chand Rakesh Kumar on 8-2-1980, the ITO in the body of the assessment order of the firm held that he had found that Shri Rakesh Kumar (minor), admitted to the benefits of partnership, made the entire investment of his share capital by receiving gifts from his grandmother, namely, Parmeshri Devi who was a partner in the firm and, therefore, the share of profit of Shri Rakesh Kumar minor was to be included in the hands of Parmeshri Devi within the meaning of Section 64(1 )(w). In the assessee's personal assessment made on 10-3-1980, the ITO added 25 per cent share of the profit earned by Shri Rakesh Kumar as determined in the case of the firm amounting to Rs. 10,312 into the total income of the assessee. This was challenged in appeal but the AAC confirmed the assessment, 4. We have heard the parties and we do not find any justification for the action taken by the authorities below. A careful perusal of the instrument of partnership dated 13-5-1978 shows that Rakesh Kumar (minor) was admitted to the benefits of partnership. In this regard, a perusal of clause 7 makes it abundantly clear wherein, the partners who were majors, have been recorded as the parties of the first, second and third part in the order described above by us and the minor has only been shown as some one admitted to the benefits of partnership.
Therefore, when the revenue argued that clause 8, which provides that the parties shall contribute the finances towards the firm and they may or may not charge interest on the finances so contributed, be read so as to include the minor Rakesh Kumar, it does not cut much ice because the minor was not sui juris on the date of the instrument and he was not a party to the contract. He was merely admitted to the benefits of partnership without any contribution of capital as no capital contribution is necessary for admission to the benefits of partnership.
5. The learned counsel for the assessee rightly submitted that the gift made by the grandmother of the minor on 15-3-1979, cannot be considered as capital contribution by the minor for obtaining the benefits of partnership. This is so because, firstly, there is no requirement of law that a minor can be admitted to the benefits of partnership only by contribution of capital. Secondly, the gift made by the grandmother on 15-3-1979 was not for enabling the minor to contribute capital in the firm in which he was admitted for its benefits. Therefore, there is not even a proximate connection between the admission to the benefits of partnership and the gift that his grandmother made to him. The reliance by the learned counsel for the assessee on the judgment of the Supreme Court in the case of CIT v. Prem Bhai Parekh  77 ITR 27 for the proposition that the connection between the transfer of assets and the income must be proximate is also well justified on the facts of the case. One has to remember that in this case itself the Supreme Court has further held that Section 16(3) of the 1922 Act (corresponding to Section 64 of the 1961 Act) creates an artificial income and it must receive a strict construction. But in this case, no such strict construction is necessary because, on facts, the action taken by the authorities below was without any basis. We, therefore, allow the appeal of the assessee by reversing the orders of the authorities below and directing the ITO to exclude from the total income of the assessee the share of profit that the minor got from the firm of Karam Chand Rakesh Kumar.