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Smt. Pushpa Kapoor Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Allahabad
Decided On
Judge
Reported in(1984)10ITD319(All.)
AppellantSmt. Pushpa Kapoor
Respondentincome-tax Officer
Excerpt:
.....account as also withdrawals in different years. in the present appeals, we are concerned with the assessment years 1978-79 to 1980-81. in these years, she was credited with profit as well as interest from kanpur textile agents.3. the ito brought to tax both the share and interest falling to vandana kapoor from the aforesaid firm in the assessments of the assessee of the above assessment years under section 64(1)(iii) of the income-tax act, 1961 ('the act'). this section 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. it was submitted before the ito that the interest falling to the share of.....
Judgment:
1. Since the above appeals relate to the same assessee and also involve a common contention, they are disposed of by this consolidated order for the sake of convenience.

2. The assessee is assessed as an individual on her share from various firms and interest, etc. Her minor daughter, Km. Vandana Kapoor, was admitted to the benefits of partnership, in the firm of Kanpur Textile Agents with effect from 22-6-1974 under a deed of partnership dated 31-7-1974. She had deposited a sum of Rs. 101 on 22-6-1974.

Subsequently she made another deposit of Rs. 3,500 on 14-3-1975. There were various other deposits in her account as also withdrawals in different years. In the present appeals, we are concerned with the assessment years 1978-79 to 1980-81. In these years, she was credited with profit as well as interest from Kanpur Textile Agents.

3. The ITO brought to tax both the share and interest falling to Vandana Kapoor from the aforesaid firm in the assessments of the assessee of the above assessment years under Section 64(1)(iii) of the Income-tax Act, 1961 ('the Act'). This section 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. It was submitted before the ITO that the interest falling to the share of Vandana Kapoor could not be assessed under the above section and that it was only her share from Kanpur Textile Agents which could be so assessed. The ITO rejected this contention in all the years observing that the share of a partner included interest, salary and other remuneration, etc.

4. The assessee appealed to the AAC. The latter passed a consolidated order on 15-12-1982. He dismissed the assessee's appeals with the following observations: 4. I have considered the facts and I find that the matter regarding clubbing of interest earned by minor has been decided by different High Courts in different ways. However, there is no direct Judgment of the Allahabad High Court and I am of the opinion that the minor once admitted to the benefits of the partnership has all the rights and liabilities except for sharing the losses. The share of the minor is to be taken as share of a major partner and the share will include the interest, salary, bonus, etc., earned by him. In view of specific provisions of Section 67 of Income-tax Act, the Income-tax Officer was justified in clubbing the interest earned by the minor on the deposits and the orders of the Income-tax Officer for all the three years are confirmed. The appeals are dismissed.

5. The assessee subsequently moved an application under Section 154 of the Act with the AAC contending that he had failed to notice the decision of the Allahabad High Court in the case of CIT v. Smt. Triveni Devi [1971] 81 ITR 511, which constituted a mistake apparent from record requiring rectification.

6. The AAC passed an order under Section 154 on 14-3-1983. Following another order of the Allahabad High Court itself in the case of Kaladhar Prasad Chaturvedi v.CIT [1971] 82 ITR 713, he held that the interest earned by Vandana Kapoor from the firm of Kanpur Textile Agents could not be assessed in the assessments of the assessee for the assessment years 1979-80 and 1980-81. He, accordingly, allowed the assessee's appeals for these years. He, however, held that similar benefit could not be allowed to the assessee in the assessment year 1978-79 for which her appeal was dismissed.

7. Against the above order of the AAC passed on 14-3-1983, the department has filed appeals for the assessment years 1979-80 and 1980-81. On the other hand, the assessee has filed appeals for all the above three years against the original order of the AAC dated 15-12-1982.

8. Since the issue involved is common and is one of law, we will deal with it in a consolidated form. The question for consideration is whether on the facts and in the circumstances of the present case, the interest earned by Vandana Kapoor from the firm of Kanpur Textile Agents could be said to be income arising directly or indirectly to her from her admission to the benefits of partnership in the firm of Kanpur Textile Agents. As already stated above, the above firm constituted under a deed of partnership dated 31-7-1974. In this deed, there was no stipulation regarding contribution of capital by the partners.

Subsequently, however, agreements were entered into between the above firm and the guardian of Vandana Kapoor to the effect that any amount brought in by the girl would be treated as her deposit with the firm which shall bear interest at the rate of 15 per cent per annum. It was further agreed that the profit credited to the account of Vandana Kapoor shall also be treated as her deposit and shall bear interest at the rate of 15 per cent per annum. We will, in particular, refer to the agreement dated 28-12-1976, which according to the learned counsel for the assessee, was applicable to the assessment year 1978-79.

9. A new deed of partnership was executed on 1-4-1978 regarding the constitution of Kanpur Textile Agents. In this deed, the following two clauses are relevant: 5. That the capital required for the partnership business shall be arranged contributed by the partners in such proportion and in such manner as may be mutually agreed upon between them from time to time.

6. Interest at 15 per cent per annum shall be allowed or charged on the balances in the partners' capital accounts. The amount brought in by the minors and their share of profit credited to their accounts in the firm shall be treated as deposits and carry interest at the above rate.

10. The effect of the above documents is that so far as the assessment year 1978-79 is concerned, the capital and accumulated profit standing in the account of Vandana Kapoor were treated as her deposit, as per the agreement dated 28-12-1976. It may be relevant to mention here that similar agreements were also entered into subsequently on 5-11-1977 and 20-11-1978 which, in case of any doubt, will certainly cover the assessment year 1978-79. So far as the other two years are concerned, the position is covered by the partnership deed dated 1-4-1978 referred to above.

11. The question now for our consideration is whether, on the facts and in the circumstances stated above, the interest income falling to Vandana Kapoor either on her deposits or on accumulated profits in Kanpur Textile Agents could be treated as income arising directly or indirectly from her admission to the benefits of partnership in the aforesaid firm. To find an answer to this question, we will have to refer to certain authorities. The issue had first come up for the consideration of the Supreme Court in the case of S. Srinivasan v. CIT [1967] 63 ITR 273. In this case the appellant was the senior partner in a firm in which his wife and a stranger were partners and his two minor sons were admitted to the benefits of the partnership. One of the clauses of the deed of partnership provided that 'if the firm requires any sum for meeting the expenses for its management and if any of the partners has and is willing to give such amount, he may advance (such amount) as loan. He may receive interest for such sum at the rate of 12 per cent per annum.' For a number of years up to the previous year relevant to the assessment year 1957-58, the shares of profits of the wife and the minor sons were allowed to accumulate without interest.

With effect from that previous year the firm decided to allow 9 per cent interest per annum on these accumulated profits. The question was whether the interest so allowed was assessable in the hands of the appellant under Section 16(3)(a)(i)and (ii) of the Indian Income-tax Act, 1922. It was held that the interest accrued to the wife and the minor sons at least indirectly because of their capacity mentioned in Section I6(3)(a)(i) and (ii) and was, therefore, assessable in the appellant's hands.

12. The Supreme Court also observed that the cases where interest was earned on a deposit or loan differed from cases where interest was earned on the accumulated profits arising from the firm itself. In this connection, it will be relevant to refer to the observations of the Supreme Court as appearing in S. Srinivasan's case (supra) as under: ...It appears to us that these accumulated profits remaining in the hands of the firm cannot, on any principle, be equated with deposits made or loans advanced. The profits accumulated to the credit of the wife and the minor sons, because they did not draw their share of profits when distribution of profits took place and allowed those profits to remain with the firm; 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 .... (p. 276) 13. In other words, the Court held that if an agreement would have been entered into with the firm to keep the accumulated profits as deposits, the situation would have been different. This was an exception provided by the Hon'ble Court, The assessee's case for the assessment year 1978-79 falls within this exception. We have already stated above that there was an agreement between Kanpur Textile Agents and the guardian of the assessee to keep her accumulated profits in the firm as her deposits. This principle was also accepted by the Allahabad High Court in the case of Kalaclhar Prasad Chaturvedi (supra). The Court observed at page 716 of the report that the decision in the case of S.Srinivasan (supra) implied that in case the circumstances of a case justified the conclusion that the interest was earned by a minor on the deposit made by him, the same could not be included in the income of the father under Section 64. The Court further observed that the observations made in the above case showed that it was open to the parties to agree to treat the accumulated profits as loan. We, therefore, hold that the interest earned by Vandana Kapoor could not be included in the assessment of the assessee under Section 64(1)(iii) in the assessment year 1978-79.

14. The issue in the subsequent two years is directly governed by the decision of the Allahabad High Court in Kaladhar Prasad Chaturvedi's case (supra). As already stated above, the Court held following S.Srinivasan's case (supra) that that decision implied that in case the circumstances of a case justified the conclusion that the interest was earned by a minor on the deposit made by him, the same could not be included in the income of the father under Section 64. In the present case, the partnership deed dated 1-4-1978 clearly stated that the amount brought in by the minors including Vandana Kapoor and their share of profit credited to their accounts in the firm were to be treated as deposits. Such interest could not, therefore, be included in the assessment of the assessee under Section 64(1)(iii). The above findings are also supported by the decision of the Allahabad High Court in the case of Smt. Triveni Devi (supra).

15. In the result, while the assessee's appeal for the assessment year 1978-79 is allowed, those by the department for the assessment years 1979-80 and 1980-81 are dismissed. The assessee's appeals for the assessment years 1979-80 and 1980-81 having been infructuous in view of the order of the AAC passed under Section 154 on 14-3-1983 are also dismissed.


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