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K.i. John Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Cochin
Decided On
Judge
Reported in(1983)4ITD381(Coch.)
AppellantK.i. John
Respondentincome-tax Officer
Excerpt:
.....each of the minor children by the firm, which was included, is as under:name of the minor current account capital account loan account total rs. rs. rs. rs.kum. reeba john 1,331 900 720 2,951kum. marina john 1,331 900 720 2,951kum. susan john 1,331 900 720 2,951kum. reena john 1,332 900 720 2,952 according to the ito all that was required to be established was proximity of the admission to the benefits of partnership and the income derived therefrom. he held that there was a direct and close affinity and, therefore, the amount in question had to be included.2. in appeal, the aac referred to the decision of the bombay high court in cit v. chandanmal kasturchand [1978] 112 itr 296, relied on behalf of the assessee. he, however, referred to clause 7 of the partnerships deed which reads as.....
Judgment:
1. This appeal by the assessee relates to the assessment year 1978-79.

In making the assessment of the assessee, an individual, the ITO included the interest received by four of his minor daughters, who were admitted to the benefits of partnership in a firm styled, Kottayam Printers & Publishers, in which the other partners were V.I. Joseph, maternal uncle of the appellant, K.I. Baby, brother of the appellant, and Miss Susy Joseph, daughter of V.I. Joseph. The interest paid to each of the minor children by the firm, which was included, is as under:Name of the minor Current account Capital account Loan account Total Rs. Rs. Rs. Rs.Kum. Reeba John 1,331 900 720 2,951Kum. Marina John 1,331 900 720 2,951Kum. Susan John 1,331 900 720 2,951Kum. Reena John 1,332 900 720 2,952 According to the ITO all that was required to be established was proximity of the admission to the benefits of partnership and the income derived therefrom. He held that there was a direct and close affinity and, therefore, the amount in question had to be included.

2. In appeal, the AAC referred to the decision of the Bombay High Court in CIT v. Chandanmal Kasturchand [1978] 112 ITR 296, relied on behalf of the assessee. He, however, referred to clause 7 of the partnerships deed which reads as under : "7. Each partner and the minors admitted to the benefits of the partnership shall be entitled to draw out of the partnership business any sum or sums of money not exceeding Rs. 500 per month for his or her own use, such sums to be duly accounted for on each succeeding settlement of accounts and division of profits of the partnership and any excess of the drawings found on such settlement shall he refunded." The AAC stated that the minors were entitled to draw only Rs. 500 per month and, therefore, the parties could not withdraw their accumulated profits and invest it anywhereelse and they were compelled to retain the accumulated profits in the firm itself and, hence, there was a proximity between the admission of the minors to the benefits of partnership and the receipt of interest. Therefore, according to the AAC, the provisions of Section 64(1)(iii) of the Income-tax Act, 1961 ('the Act'), were applicable and he dismissed the appeal.

3. Before us, the assessee submitted that clause 7 of the partnership-deed dated 15-6-1970, which we have set out already, only enabled each of partner, including the minors, to draw out an amount not exceeding Rs. 500 per month irrespective of the fact whether there was a profit or not and this clause placed no restriction in withdrawing the profits when they accrued. He also placed reliance on the decisions of the Bombay High Court in the case of Chandanmal Kasturchand (supra) and CIT v. S.V. Nashte [1979] 119 ITR 130.

According to him, there was no warrant for making any addition of the interest in the present case under the provisions of Section 64(1)(iii).

4. The learned departmental representative relied on the commentary in relation to the provisions of Section 64(1)(iii) in Chaturvedi and Pithisaria's Income-tax Law, Third Edition, Vol. 2 at pp. 1845 and 1846, where there is a full narration of the case law for supporting aggregation. He also submitted that the minors were required to contribute capital in terms of clause 4 of the partnership-deed and since this was one of the conditions for admission to the benefits of partnership, at least so far as the interest relating to capital was concerned, the same was rightly added under the provisions of Section 64(1)(iii).

5. We have considered the rival submissions. In our opinion, since clause 4 of the partnership-deed required contribution of capital by the partners, including the minors, the departmental representative is correct in his submission that the interest on capital would have to be aggregated under the provisions of Section 64(1)(iiii) in the hands of the appellant because such interest has been received consequent on the admission of the minors to the benefits of partnership and there is a direct nexus. Therefore, in the case of each of the minors, the interest of Rs. 900 being interest on capital invested by each of them would have to be aggregated in the hands of the appellant. The total amount to be included on this score would be Rs. 3,600.

6. There were accumulated profits from year to year and those were transferred to the current account and Joan account and interest was given to the minors. We are unable to agree with the AAC that clause 7 of the partnership-deed contained any prohibition for withdrawing profit and investing such amounts in any place that was chosen by the minors. Clause 7 places only a restriction on monthly drawings without reference to profit. Therefore, their keeping any amount of profit in the current account and loan account was not a pre-condition for the minors being admitted to the benefits of partnership and receipt of interest on such balance did not have a direct nexus or even indirect nexus with the admission of the minors to the benefits of partnership.

Having regard to the various judicial pronouncements referred to, we consider that the ratio of the decisions of the Bombay High Court relied on by the assessee applies and there is no warrant for including the interest amounts in the current account and loan account, that is, Rs. 1,331, in each cese in the current account (except in the case of Miss Reena John where it is Rs. 1,332) and Rs. 720 in each case in the loan account, in the hands of the appellant under the provisions of Section 64(1)07/).

7. Before parting with the appeal, we would mention one more contention which has been raised by the learned departmental representative. The contention was that having regard to the ratio of the decision of the Supreme Court in CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292, it should be considered that interest paid by a firm to the partners or minors really partake the character of income of the firm and, hence, the interest whether given in a current account or loan account had to be considered as arising on the admission of the minors to the benefits of partnership. The provisions of Section 64(1)(iii) read as under : 64. (1) In computing the total income of any individual, there shall be included all such income as arise directly or indirectly (iii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm ; The prerequisite for aggregation under Section 64(1)(iii) is that the income should have arisen consequent on the admission of the minor to the benefits of partnership in the firm. Interest received on loans given by a minor as contra distinct from capital contributed in terms of the deed itself cannot be considered as arising directly or indirectly from the admission of the minors to the benefits of partnership unlike capital supply. We are, therefore, of the view that the judgment relied on by the learned departmental representative in the case of R.M. Chidambaram Pillai (supra) would not support the stand of the revenue.


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