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income-tax Officer Vs. Gopi Chand - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Allahabad
Decided On
Judge
Reported in(1983)3ITD278(All.)
Appellantincome-tax Officer
RespondentGopi Chand
Excerpt:
.....the partnership deed, which is at page 1 of the paper book, shows that rajesh kumar and rakesh kumar (minors), sons of gopichand, are admitted to the benefits of the partnership. shri gopichand is also the partner in the firm. the hares of the partners in the profit and loss are as under : 6. it is also clear from para 5 of the partnership deed that the partners are entitled to 12 per cent interest on the amount of their respective credits in the firm.7. according to the aforesaid clause, s/shri rajesh kumar and rakesh kumar, minors, shall receive the interest at 12 per cent on the amount of their respective credit in the firm. so, the aforesaid minors received a sum of rs. 5,840 as the interest of their deposits for the year under consideration and not for being admitted to the.....
Judgment:
1. The revenue has preferred this appeal against the order dated 15-12-1977 of the AAC, Range I, Agra ; who allowed the appeal against the order dated 4-11-1976 of the ITO, Mainpuri.

2. In this appeal, the revenue has contended that the AAC has erred in law and in facts in holding that the interest income received by the minors from the firm in which they have been admitted to the benefits of the partnership could not be added to the income of the assessee ; that the AAC erred in law and on facts in deleting the addition of Rs. 5,840 made by the ITO to the income of the assessee, representing interest received by the minors from the firm in which they had been admitted to the benefits of partnership and thereby added that the order of the AAC being erroneous in law and facts be set aside and that of the ITO be restored. He relied upon the order of the ITO and the cases reported in L. Ram Narain Garg v. CIT [1965] 55 ITR 435 (All.), Bayang Lal v. CIT [1970] 77 ITR 309 (All.), CIT v. Rukmanand Kedia [1968] 69 ITR 557 (All.) and S. Srinivasan v. CIT [1967] 63 ITR 273 (SC).

3. On the other hand, Shri Jain, the learned counsel for the assessee, contended that the impugned order is justified and merited no interference.

4. We have heard the rival contentions and submissions and gone through the record before us.

5. The partnership deed, which is at page 1 of the paper book, shows that Rajesh Kumar and Rakesh Kumar (minors), sons of Gopichand, are admitted to the benefits of the partnership. Shri Gopichand is also the partner in the firm. The hares of the partners in the profit and loss are as under : 6. It is also clear from para 5 of the partnership deed that the partners are entitled to 12 per cent interest on the amount of their respective credits in the firm.

7. According to the aforesaid clause, S/Shri Rajesh Kumar and Rakesh Kumar, minors, shall receive the interest at 12 per cent on the amount of their respective credit in the firm. So, the aforesaid minors received a sum of Rs. 5,840 as the interest of their deposits for the year under consideration and not for being admitted to the benefits of the partnership. In other words, the interest received by the minors is not for initial capital investment.

8. The ITO has also not disputed it ; rather it is the stand of the revenue that if the minors have received interest income from the firm to which they are admitted to the benefits of partnership, then that income is to be added to the income of their father, irrespective of the fact that whether the income is from the credits of the minors deposited in the firm or from that being admitted to the benefits of the partnership.

9. The AAC has not accepted the stand of the ITO ; rather he found that interest income, which is received by the minors out of their being admitted to the benefits of the partnership, is to be added to the income of the firm and the onus is upon the revenue to establish the nexus between the interest income and the admission to the benefits of the partnership of the minors.

10. So, the AAC relied upon the decision reported in CIT v. Smt.

Triveni Devi [1971] 81 ITR 511 (All.) and concluded that the ITO was not justified in making the addition of Rs. 5,840 in the income of the assessee. We are of the opinion that the AAC is justified while the ITO is erroneous in his conclusion. The reason is that the interest received by the minors is from their respective credit deposited in the firm and not from their being admitted to the benefits of the partnership.

11. Apart from it, the ITO has not established the relationship between the interest income and the admission of the minors to the benefits of partnership which is to be established by it before adding the income of the minors to that of the assessee (father) and reliance can be placed on the decision of our, reported in Triveni Devi (supra). The cases relied upon by Shri A.B. Srivastava are distinguishable.

1. In my opinion, the interest income, received by the minors, S/Shri Rajesh Kumar and Rakesh Kumar, is on their capital invested in the firm by them and therefore, it is includible in the hands of their father, Shri Gopichand. The partnership commenced on 6-11-1973 with the following persons as partners : 1.2 On the first day of the commencement of this business, the aforementioned persons introduced the following sums in the firm : Rs. 1.3 These sums were credited to their respective accounts in identical fashion. During the course of the year further sums were contributed by the aforesaid persons, so that at the end of the year the balances outstanding in the accounts were as follows : 1.4 Interest on the above balances was paid by the firm to all the above persons at 12 per cent. Clause 5 of the partnership deed contained the provision for payment of interest. It reads as follows : That the partners shall be entitled to the interest on the amounts outstanding to their credit at 12 per cent per annum.

1.5 Interest and profit have been credited to the above accounts of the persons at the end of the year in identical manner. It is not in dispute that the accounts of the first three persons, containing the above entries, are their capital accounts The assessee's claim is that the accounts of the latter two persons, though maintained in identical fashion, are not capital accounts, but were deposit accounts of the minors. The copies of accounts of the minors in Chandoria Traders have been filed. It is noticed therefrom that they are not described as 'Deposit' accounts. They merely bear the names of the two minors just as the accounts of other partners bear their names. I am, therefore, unable to see any rationale for treating the accounts of the two minors differently from those of adult partners. If the latter are capital accounts, which they admittedly are, the former also are capital accounts. They have been maintained in identical manner, all the persons contributed their capital on the first day of the commencement of business and thereafter as and when the funds were needed, the contributions were credited to their personal accounts and at the end of the year, their specified shares in profit were credited to these accounts. To me, therefore, the accounts in question do not appear to be deposit accounts ; they are capital accounts simpliciter.

2. It is true that there is no clause in the partnership obliging the adult partners or the minors to contribute capital, but nevertheless they have all contributed and the deed visualizing that the partners would contribute capital provide, vide Clause 5, quoted above, that on individual capital contributions they will be paid interest at 12 percent per month. Nothing, therefore, in my opinion, turns on the facts that there was no clause in the partnership deed requiring capital contribution. Whether or not a contribution is capital or is a mere deposit will have to be determined with reference to the totality of the facts of the case and the manner of their treatment in the accounts, The absence of the clause re : capital contribution was as much relevant for the adult partners as it was for the minors. Despite its absence, the capital came in because the business needed it. It could not, therefore, be treated as capital in the hands of the adults and as deposit in the hands of the minors. Contribution came in from all in the same manner, was treated in accounts in the same manner and profits were credited to all of them in the same manner. Crediting of profit is, in my opinion, strong indicator of the nature of the contribution, profit is normally credited to a capital account and never to a deposit account, unless there are special circumstances to explain the crediting of the profit to the account in question. I am, therefore, of the view that what the minors had contributed was their capital and so interest paid on it is to be clubbed with their father's income under Section 64(1)(iii) of the Income-tax Act, 1961 ('the Act').

3. The facts of the case appear to me to be on all fours with those of Rukmanand Kedia (supra) relied upon by the revenue. I, therefore, allow the departmental appeal and reverse the order of the learned AAC. The order of the ITO is restored.

1. This appeal has been referred to me by the President of the Tribunal under Section 255(4) of the Income-tax Act, as there was a difference of opinion between the Accountant and Judicial Members, who had earlier heard it.

2. The issue relates to the inclusion of interest income earned by minors, Shri Rajesh Kumar and Shri Rakesh Kumar, from the firm of Chandoria Traders in the assessment of their father, Shri Gopi Chand, who is the assessee before us- Chandoria Traders came in existence on 6-11-1973, which constituted of three partners, namely, Shri Ganapat Kumar (also mentioned as Sanat Kumar in the deed), Smt. Vinod Kumari and Smt. Mamta Devi. Besides, two minors, Shri Rajesh Kumar and Shri Rakesh Kumar, sons of the assessee, were also admitted to the benefits of partnership in the above firm. A deed of partnership was also executed on 12-11-1973 to give effect to the above arrangement. Clauses 4 and 5 of this deed are relevant for our purpose and are reproduced below : 4. That the share of the partners in the net profit and loss of the said firm shall be as under : 5. That the partners shall be entitled to the interest on the amount standing to their credit at the rate of twelve per cent per annum.

3. On the first day of the commencement of the firm, i.e., 6-11-1973, the following amounts were introduced by the respective partners and the minors : 4. The above sums were credited to the respective accounts of the partners and the minors. Further sums, also contributed by the end of the closing balances outstanding in their accounts at the end of the assessment year 1974-75 were, as under : Interest on the above balances were also paid by the firm to all the above persons at 12 per cent as was laid down in Clause 5 of the partnership deed quoted above.

5. For the sake of appreciating the facts, I will also like to quote accounts of Shri Rakesh Kumar and Shri Rajesh Kumar in full for the assessment years 1974-75 to 1976-77. They are as under : In the books, of Chandoria Traders, Sirsaganj: (Rakesh Kumar's account Assessment year 1974-75) Rs. Rs. Rakesh Kumar's account (Assessment year 1975-76)To balance tonext year 24,657 By old balance 19,092 " Interest 2,291 Rakesh Kumar's account P.2 (Assessment year 1976-77)To income-tax 426 By old balance 24,657Balance to next year 27,773 " Interest 2,959 " Share of profit 583 Rajesh Kumar's account (Assessment year 1974-75) Rs.To Balance to next year 13,829 By Cash from Magniram Gopichand Rajesh Kumar's account (Assessment year 1975-76)To balance tonext year 24,012 By old balance 13,829 " Interest 1,909 Rakesh Kumar's account (Assessment year 1976-77)To income-tax 426 By old balance 24,012" Balance to next year 27,050 " Interest 2,881 " Share of profit 583 6. Besides including the share of profit falling to Shri Rakesh Kumar and Shri Rajesh Kumar in the firm of Chandoria Traders, the ITO also included the interest credited to their accounts amounting to Rs. 5,840 (Rs. 2,959+Rs. 2,881) in the assessment of the assessee under Section 64(1)(iii). This section states that in computing the total income of any individual, there shall be included all such income as arises directly or indirectly to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm. The ITO was of the view that the above interest of Rs. 5,840 arose to the minor children of the assessee from their admission to the benefits of the partnership in the firm of Chandoria Traders and, therefore, it was includible in the total income of the assessee.

7. The assessee appealed to the AAC. Before the latter, the reference was made to the decision of the Allahabad High Court in the case of Triveni Devi (supra). It was held in this case that in order to bring a case under Clause (ii) of Section 64, it was for the department to establish a connection between the partnership of the minor and the receipt of interest on the money brought in by the minor. In this case, it was nowhere found that the minor had contributed any capital to the firm and that the interest was paid to him in respect of his capital contributed to the firm. The partnership deed also did not make any provision for the contribution of capital either by the minor or by any other partner of the firm. According to the High Court, there were two findings given by the Tribunal. The first was that the deed of partnership did not contain any provision as regards contribution of capital by the minor or by any other partner of the firm. The second finding was that the sum brought in by the minor to the account of the firm was not in the nature of capital. From this, the High Court inferred that the money brought in by the minor was in the nature of a deposit or a loan. The High Court observed that it was for the department to establish a connection between the partnership of the minor and the receipt of interest on the money brought in by the minor and that in the instant case, no such connection had been established by the department. The Court, therefore, held that the interest was not includi-ble in the hands of the minor's mother under Clause (ii) of Section 64.

8. On the basis of the above decision, it was contended before the AAC that there was no direct relationship between the admission of the minor to the benefits of partnership and the interest received by him from the firm. The AAC agreed with the submission of the assessee. He found that there was no pre-condition that the partners shall contribute any capital on which they were to be paid any interest. He was of the view that the interest received by the minors was not by virtue of their admission to the benefits of the 'partnership in the firm, but because they had made a deposit with the firm, independent of the contribution of any capital. According to him, therefore, the case of the assessee was fully covered by the aforesaid decision of the Allahabad High Court and, therefore, the interest of Rs. 5,840 could not be included in the assessment of the assessee. He thus deleted the addition.

9. The department came in appeal to the Tribunal. The learned Judicial Member concurred with the view of the AAC that the interest received by the minors related to their respective credits made with the firm and not by virtue of their being admitted to the benefits of the partnership. He was further of the view that the ITO had not established any relationship between the income from interest and the admission of the minors to the benefits of partnership and, therefore, according to him, the assessee's case was squarely covered by the aforesaid decision of the Allahabad High Court in Triveni Devi's case (supra) as was also held by the AAC.10. The learned Accountant Member, on the other hand, took a contrary view. It will be relevant to quote paras 1.5,2 and 3 from his order as under: 1.5 Interest and profit have been credited to the above accounts of all the persons at the end of the year in identical manner. It is not in dispute that the accounts of the first three persons, containing the above entries are their capital accounts. The assessee's claim is that the accounts of the latter two persons, though maintained in identical fashion, are not capital accounts, but were deposit accounts of the minors. The copies of accounts of the minors in Chandoria Traders have been filed. It is noticed therefrom that they are not described as 'deposit' accounts. They merely bear the names of the two minors just as the accounts of other partners bear their names. I am, therefore, unable to see any rationale for treating the accounts of the two minors differently from those of adult partners. If the latter are capital accounts, which they admittedly are, the former also are capital accounts.

They have been maintained in identical manner, all the persons contributed their capital on the first day of the commencement of business and thereafter as and when the funds were needed, the contributions were credited to their personal accounts and at the end of the year, their respective shares in profits were credited to these accounts. To me, therefore, the accounts in question do not appear to be deposit accounts, they are capital accounts, simpliciter.

2. It is true that there is no clause in the partnership obliging the adult partners or the minors to contribute capital, but nevertheless they have been all contributed and the deed visualizing that the partners would contribute capital provide, vide Clause 5, quoted above, that on individual capital contributions they will be paid interest at 12 per cent per month. Nothing, therefore, in my opinion, turns on the facts that there was no clause in the partnership deed requiring capital contribution. Whether or not a contribution is of capital or is a mere deposit will have to be determined with reference to the totality of the facts of the case and the manner of their treatment in the accounts. The absence of the clause re : capital contribution was as much relevant for the adult partners as it was for the minors. Despite its absence, the capital came in because the business needed it. It could not, therefore, be treated as capital in the hands of the adults and as deposit in the hands of the minors. Contribution came from all in the same manner, was treated in accounts in the same manner and profits were credited to all of them in the same manner. Crediting of profit is, in my opinion, strong indicator of the nature of the contribution. Profit is normally credited to a capital account and never to a deposit account, unless there are special circumstances to explain the crediting of the profit to the account in question. I am, therefore, of the view that what the minors had contributed was their capital and so interest paid on it is to be clubbed with their father's income under Section 64(1)(iii).

3. The facts of the case appear to me to be on all fours with those of CIT v. Rukmanand Kedia [1968] 69 ITR 557 (All.) relied upon by the revenue. I, therefore, allow the departmental appeal and reverse the order of the learned Appellate Assistant Commissioner. The order of the Income-tax Officer is restored.

11. The question, which has been referred to me in terms of Section 255(4) is whether, on the facts and in the circumstances of the case, the AAC was justified in holding that the interest paid to the minor sons of the assessee by Chadoria Traders was not on their capital accounts but on their deposits and, therefore, it did not accrue to them on account of their admission to the benefits of partnership in the above firm and was also not includible in the hands of the assessee under Section 64(1)(iii).

12. I have heard the learned departmental representative. There was no representation from the side of the assessee. Section 64(1) has been amended by the Taxation Laws (Amendment) Act, 1975 with effect from 1-4-1976. Clause (ii) of Section 64(1) before its amendment, laid down that in computing the total income of any individual, there shall be included all such income as arises directly or indirectly to a minor child of such individual from the admission of the minor to the benefits of the partnership in a firm in which such individual is a partner. On the other hand, Clause (iii) of the amended Section 64(1), lays down that in computing the total income of any individual, ' there shall be included all such income as arises directly or indirectly to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm. The amendment having been effective from 1-4-1976 is also applicable to the assessment year 1976-77, which is now in dispute before me. From the above, it will also be seen that the only difference between Section 64(1)(ii) before the amendment and Section 64(1)(iii) after the amendment is that the words 'in which such individual is a partner' have been omitted in the amended provision. In other words, up to the assessment year 1975-76, income of a minor child from his admission to the benefits of a partnership in a firm was to be included in the hands of his father or mother only if the latter was also a partner in the same firm. However, that restriction has now been removed. Under the new section income of a minor child can be included in the income of his parent if he is admitted to the benefits of a partnership in any firm. Since there is no material change in the main language of the two provisions, the decisions relating to Section 64(1)(ii) before its amendment are equally applicable to Section 64(1)(iii) of its amended provisions.

13. I will at first analyse the position whether the various amounts deposited by Shri Rakesh Kumar and Shri Rajesh Kumar in their respective accounts quoted above are in the nature of capital or they are in the nature of mere deposits. As pointed out by the learned Accountant Member in his order, both of them have made deposits of Rs. 2,100 each on 6-11-1973, i.e., the day the firm of Chandoria Traders was constituted along with similar amounts deposited by the other two partners, namely, Smt. Mamta Devi and Smt. Vinod Kumari. This makes it clear that the amounts were deposited by both the minors as contribution to their capital. This inference is further established from the fact that the shares of profit were also credited to these very accounts. There is no separate account in the name of either of the minors for crediting their share of profit from the firm. The mixing of the initial contribution with subsequent contributions and the share of profit earned by them from the firm as also credit of interest to their accounts both on their contributions as well as on their accumulated profits clearly goes to show that the amounts outstanding to their credit at the beginning of the year under appeal were in the nature of capital. In this respect, I am in full agreement with the findings arrived at by the learned Accountant Member. It is true that there is no specific clause in the partnership dated 12-11-1973 requiring either of the partners or minors to contribute any capital. However, there is also no specific agreement with the minors or in fact with any other partner that their contributions even though made on the 1st day of the constitution of the firm will be treated as their deposits and not as their capital contributions. As stated above, Clause 5 of the deed provides for the payment of interest at the rate of 12 per cent on the amounts standing to the credits of the partners and the minors. This clause also does not suggest that the amounts standing to the credits of the persons concerned were their deposits and not their capitals. I have also stated above that the Allahabad High Court in the case of Triveni Devi (supra) had decided the issue in favour of the assessee also, on the ground that the sum brought in by the minor to the account of the firm was not in the nature of capital.

My finding therefore, is that the balance of Rs. 24,657 and Rs. 24,012 standing to the credits of minors Shri Rakesh Kumar and Shri Rajesh Kumar respectively at the beginning of the assessment year under appeal were in the nature of capital contributions by them.

14. Having come to the above finding of fact that the amounts standing to the credit of the aforesaid two minors represented their capital contributions in the firm of Chandoria Traders, I will now briefly deal with the legal aspect of the matter. The leading case on the subject is that of the Supreme Court in S. Srinivasan (supra). It was held in this case that the interest credited on the accumulated profits accrued to the wife and the minor sons of the assessee at least indirectly and was, therefore, assessable in the assessee's hands. It was held that when the decision was taken to give interest, the nature of the funds did not change and that they did not get converted into deposits or loans. The Allahabad High Court in Rukmanand Kedia (supra) has clearly held that where interest accrues upon capital introduced in a firm by a minor admitted to the benefits of partnership, the interest is income which has arisen from such admission and that it is liable to be included in the income of the father under the provisions of Section 16(3)(a)(ii) of the 1922 Act. The present case is fully covered by the principle laid down in this case. The decision of Allahabad High Court in the case of Triveni Devi (supra) is not applicable to the facts of the present case. As already stated above, the finding in the cited case was that the sum brought by the minor to the account of the firm was not in the nature of capital. I do not consider it necessary to deal with other cases. All of them are erroneous in their approach that the interest paid by the firm to its members on their contributions to the capital of the firm or on their accumulated profits arises directly or indirectly from their membership in the firm and falls within the provisions of Section 64(1)(iii). On the other hand, they also lay down that the interest on loans or voluntary deposits is not so includible.

This case falls in the first category. I am, therefore, in agreement with the finding of the learned Accountant Member that the interest of Rs. 5,840 paid by Chandoria Traders to Shri Rakesh Kumar and Shri Rajesh Kumar was rightly assessed by the ITO in the hands of the assessee, their father under Section 64(1)(iii).

15. The case will now go back to the Bench for passing an order in accordance with nay above opinion.


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