1. As the assessee is one and the same and as common points are involved in these two appeals they can be taken up together for disposal.
2. We are concerned with the assessment years 1977-78 and 1978-79 for which the previous years ended by 23-10-1976 and 11-11-1977. The assessee is an individual. He has got three minor sons, viz., Mast.
Shyamlal, Vijay Kumar and Vinod Kumar. The minor sons of the assessee were partners in a partnership firm called Jagdishrai Nareshkumar, Maharajgunj, Hyderabad. We are concerned with the inclusion of Rs. 5,168, which is the interest derived by each of the three minor sons of the assessee from Jagdishrai Nareshkumar in the hands of the assessee for the assessment year 1977-78. As far as the assessment year 1978-79 is concerned Vijay Kumar and Vinod Kumar said to have derived income of Rs. 5,977 each from Jagdishrai Nareshkumar. The ITO clubbed these interest amounts in the hands of the assessee invoking the provisions of Section 64 of the Income-tax Act, 1961 ('the Act'). During the course of enquiry conducted by the ITO for the assessment year 1978-79 it was claimed that the interest income cannot be said to have been derived by the minors by virtue of admission to the benefits of partnership. However, the ITO rejected the argument by clearly finding that the payment of interest by the firm is a direct consequence of the admission of the minors to the benefits of the partnership and it is traceable to partition agreement. Therefore, he added the interest income to the incomes earned by the assessee-father of the minors and completed the assessment for 1977-78 by his assessment order dated 12-2-1980 and for the assessment year 1978-79 by his assessment order dated 11-3-1981.
3. Aggrieved the assessee went in appeal against each of the orders before the AAC. It is contended before the AAC that the profits earned by the minors are includible in the hands of the assessee under Section 64 but the case is different with respect to the interest allowed to the minors. It is further contended that as per the terms of the partnership deed the minors are not supposed to contribute capital in the same way as full-fledged partners are supposed to contribute any capital. The AAC found from the copies of the accounts filed before him that interest is computed on the total balance which consisted of accumulated profits of different years together with the initial capital contribution. The only outgoings in the accounts are on account of payment of income-tax. Therefore, the AAC held that the interest was earned on the accumulated profits kept in the firm. Therefore, he concluded that interest arises to the minors on account of profit which arises on account of their admission to the benefits of partnership.
The assessee relied upon the order dated 20-3-1981 passed in IT Appeal No. 107 (Hyd.) of 1980 for the assessment year 1976-77 dated 20-3-1981-Swt. Ajodhyabai v. ITO. The AAC held that the said decision instead of helping the case of the appellant supports the stands taken by the ITO. Ultimately, he confirmed the addition and dismissed the appeal. In the appeal for the assessment year 1978-79 he followed his appellate order for 1977-78 dated 25-11-1981 and dismissed the appeal.
As against the above said two impugned orders passed by the AAC for 1977-78 and 1978-79, the present appeals were brought to this Tribunal and the matters thus stand for our consideration.
4. The only point in dispute is whether the interest income belonging to the minors is includible in the hands of the appellant, the assessee herein, under Section 64(1)(iii).
5. We have heard Shri M.J. Swamy, learned advocate for the assessee and Shri Gopinatha Siddhanthi, learned departmental representative. It is contended by the assessee that the interest income earned by the minors in these assessment years is not includible in the hands of the assessee, who is their father. The ledger extracts of Shyamlal, Vijay Kumar and Vinod Kumar for the period from 31-3-1975 to 31-3-1977 in Jagdishrai Nareshkumar were filed. We do not know whether the credit balances as on 31-3-1975 in their accounts comprises of any investment made by them or the profits accumulated over years. However, from 31-3-1975 the credits in their accounts include the share of profit earned by them for the assessment years 1975-76, 1976-77 and 1977-78.
The copy of the deed of partnership dated 10-1-1976 was filed before us. According to the said deed, there are three major partners and six minor partners. Out of them the three minors whose interest is the subject-matter of these appeals are same. The fathers of six minors admitted to the benefits of partnership are also the signatories to the deed. The minors were each stated to be having 10 per cent interest in the profits earned by the firm. The minors are not to share losses and the whole of the losses incurred should be borne by three major partners in different proportions. A reading of the partnership deed discloses that clear distinction is maintained between 'parties' and 'partners'. The word 'parties' used in the partnership deed denotes both the major and minor partners. The word 'partners' used in the deed denotes only the major partners and not minor partners. For instance, the distinction is found when we compare Clauses 5 and 7 which are as follows: 5. Capital as and when needed may either be supplied by the parties or it may be borrowed from outside either from banks or other private parties. Interest at the rate of 12 per cent per annum shall be allowed to the parties on their capital.
7. Banking account or accounts shall be opened and maintained in bank or banks approved by the partners and such banking account or accounts shall be operated by either of the partners and/or by any other person or persons so appointed by the partners.
It may be seen that as far as capital needed by the firm is concerned the capital must be supplied by both major and minor partners or in the alternative it may be borrowed from outside either from banks or other private parties. However, bank account or accounts shall be opened and maintained by the major partners only and shall be operated only by major partners or person or persons pointed out by the major partners.
Further at the end of para 9 of the partnership deed after listing out the names of both major and minor partners 4 to 9 in the list who are minors admitted to the benefits of the partnership were described as 'parties'. Hence in view of the above we have no doubt to come to the conclusion that the word 'parties' used in the partnership deed includes the minors admitted to the benefits of partnership. We have already extracted para 5 of the partnership deed above. It clearly disclosed that the capital needed by the firm is to be supplied by the 'parties' to the deed. That means under unequivocal terms of Clause 5 of the partnership deed the capital necessary for the firm is to be supplied by the minors admitted to the benefits of the partnership also. It is neither pleaded nor proved on behalf of the assessee that the amounts found credited in the books of account of the firm under the names of the partners herein are not the amounts required by the partnership firm. It is also clearly stated in Clause 5 of the partnership deed that interest at 12 per cent per annum should be allowed to the minors admitted to the benefits of the partnership who are described as 'parties' in the partnership deed on their capital. In view of Clause 5 of the partnership deed and in view of clear distinction having been drawn between the word 'parties' and 'partners' in the partnership deed, the true connotation of which was explained by us above, we are unable to accept the contention of the assessee that under the partnership deed it is not obligatory on the part of the minors to invest any amounts whatsoever for the running of the business of the firm. The assessee filed copy of the Third Member's order dated 7-4-1982 passed in Bajrangalal v. ITO [IT Appeal No. 1016 (Hyd.) of 1980]. In that case there was Clause 3 of the partnership deed which is as follows: The capital shall be invested by all the partners as and when required which shall carry interest at 7 1/2 per cent.
The question before the Tribunal was what exactly is meant by the word 'partner' and whether that term includes minor partners also. The learned Third Member concluded that. a minor admitted to the benefits of the partnership cannot be a partner in the eye of law. He also found that Clause 3 of the partnership deed which provides for contribution of capital is not made applicable to the minors who are admitted to the benefits of partnership. Therefore, he was of the view that there is no obligation cast on the minors to contribute any capital. However, that is not the case in the present case before us. Clause 5 of the partnership deed contemplates that the capital contribution should be made for the purposes of carrying on the. business of the firm by 'parties' which term includes the minor partners admitted to the benefits of the partnership also. Hence, in our opinion, the decision of this Tribunal in Bajrangalal's case (supra) does not help the assessee. The provisions of Clause 5 of the partnership deed together with the account copies of the minors in Jagdishrai Nareshkumar relating to the assessment years 1975-76 to 1977-78 would lead us to conclude that interest payments were made to the minors on the capital contribution made by them and such interest income arises directly to the minor children of the assessee from the admission of those minor children to the benefits of partnership in the firm. Further we also hold that the credit balances in the accounts of the firm in the names of minors comprises of share of profit earned over years. It is not the case of the assessee at any stage that there was an agreement with the firm to keep these accumulated profits belonging to the minors as deposits with the firm. No contract with the firm which would convert those accumulations into loans advanced to the firm by those minors was either alleged or proved. In those circumstances the decision of the Supreme Court in S. Srinivasan v. CIT  63 ITR 273, where it is held as follows: ...but there is no suggestion at all that, at that stage, either the wife or the minor sons, or anyone on their behalf, purported to enter into an arrangement with the firm to keep these accumulated profits as deposits. Similarly, there was no such contract which could convert these accumulations into loans advanced to the firm by these persons. The facts and circumstances indicate that the wife and the minor sons had earned these profits because of their membership of the firm or because of their admission to the benefits of the firm and having earned these profits in that capacity, they allowed the use of their profits to the firm without any specific arrangement as would naturally have been entered into if these funds had belonged to a stranger. They let the firm use funds of theirs, because they had interest in the profits of the firm. The facts also show that the use of these moneys was allowed to the firm without asking for any interest and it was only at a later stage that the three partners of the firm decided to give interest on these amounts. When the decision was taken to give interest, the nature of the funds did not change. They did not get converted into deposits or loans. They still remained accumulations belonging to a partner or persons admitted to the benefits of the partnership and allowed to be used by the firm. The interest also appears to have been allowed by the firm simply because these funds belonged either to a partner or to the minors who had been admitted to the benefits of the partnership. It is thus clear that the interest at least indirectly arose and accrued to the wife and the minor sons because of their capacity mentioned in Section 16(3)(a)(i) and (if) in the Income-tax Act. (pp. 276-77) From the facts and circumstances of the case we have no hesitation to hold that the minors earned this interest income because of the membership of the firm or because of their admission to the benefits of the firm. We also hold that the minors allowed the use of their profits by the firm without any specific arrangement as would naturally be entered into if the funds have belonged to a stranger. We also hold that the interest is allowed by the firm to the minors in pursuance of Clause 5 of the deed. Therefore, interest is disallowable. We see no merits in these two appeals and they are dismissed.