Skip to content


Smt. Dhangauri Surajram Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(1985)11ITD644(Ahd.)
AppellantSmt. Dhangauri Surajram
Respondentincome-tax Officer
Excerpt:
1. smt. dhangauri, the assessee, has minor children, who were admitted to the benefits of the three partnership firms--chetan industries, hiralal industries and himson textile engineering. the ito added the incomes of these minors in the income of the assessee under section 64(1) of the income-tax act, 1961 ('the act').2. the commissioner (appeals) has confirmed the order of the ito. he has observed that the major portion (if not the whole) of the profits available in the minors' accounts had come out of the accumulated profits allotted to the shares of the minors from the firms. he negatived the claim of the assessee's advocate that these amounts should be treated as deposits made by the minors in the firms and should be excluded from the operation of the said section 64(1)(iii).he held.....
Judgment:
1. Smt. Dhangauri, the assessee, has minor children, who were admitted to the benefits of the three partnership firms--Chetan Industries, Hiralal Industries and Himson Textile Engineering. The ITO added the incomes of these minors in the income of the assessee under Section 64(1) of the Income-tax Act, 1961 ('the Act').

2. The Commissioner (Appeals) has confirmed the order of the ITO. He has observed that the major portion (if not the whole) of the profits available in the minors' accounts had come out of the accumulated profits allotted to the shares of the minors from the firms. He negatived the claim of the assessee's advocate that these amounts should be treated as deposits made by the minors in the firms and should be excluded from the operation of the said Section 64(1)(III).

He held that the interest credited to the minors on the amounts standing to their credit arose to the minors indirectly from their admission to the benefits of partnership.

3. Before us, the learned counsel for the assessee has produced copies of the partnership deeds. He has contended that there is no clause in the partnership deeds which required the partners to bring in any capital. He has further contended that under the terms of partnership deed, the interest paid to the minors is to be regarded as interest paid to lenders. In support of this contention, he has relied upon the following clause in the partnership deed of Chetan Industries : On the funds invested, in this partnership firm of ours, by us, the partners as well as by the said nine minors, an interest at a rate fixed by us at the relevant time will be paid. The partners are free to take loan from either a shroff or a bank in case of necessity for the development of this business.

So far as other firms, Hiralal Industries and Himson Textile Engineering, are concerned, he has relied on the following clause : But in consideration of benefit of partnership to minors, no capital is required to be brought in. However, any minor can lend money to the partnership firm like any other third party and firm can pay interest thereon. It is, however, clarified that such interest paid to the minor will be paid to him in his capacity as a lender only.

He has relied upon the decision of this Tribunal in IT Appeal No. 2282 (Ahd.) of 1980 in support of his contention that the burden of proving that the income in question arose to the minors on the admission to the benefits of partnership, is on the department. To a query raised from the Bench as to whether the parties had acted upon the agreement to treat the accumulation of profits of the minors as deposits, Shri Patel, the learned counsel for the assessee, replied that, that was not an aspect which was examined either by the ITO or by the Commissioner (Appeals) and there was nothing in their orders on that point. He argued that the firm had paid interest to the minors and that, therefore, the amount standing to their credit should be treated as deposits or loans.

4. On the other hand, the learned departmental representative has argued that the accumulated profits were not agreed to be treated as loans and, therefore, the interest thereon has been rightly added by the ITO to the income of the assessee. He has relied upon the following decisions : S. Srinivasan v. CIT [1967] 63 ITR 273 (SC), CIT v.Chinubhai M. Modi [1968] 69 ITR 76 (Guj.), CIT v. Chandanmal Kasturchand [1978] 112 ITR 296 (Bom.), CIT v. S.V. Nashte [1979] 119 ITR 130 (Bom.) and ITO v. Smt. Amribai Babulal [IT Appeal No. 2181 (Ahd.) of 1979, dated 22-7-1981].

5. In this case, there is no clause in any of the partnership deeds that the minors were required to contribute any capital. Therefore, there can be no question of adding the income of the minors to the income of the assessee on that account. The only question is whether income, which arose to the minors from the accumulation of profits in the firms, falls under a broad category of income arising directly or indirectly from the admission of the minors to the benefits of partnership.

6. In S. Srinivasan's case (supra), the Supreme Court observed that the accumulated profits remaining in the hands of the firm cannot, on any principle, be equated with deposits made or loans advanced unless there was an agreement with the firm to keep the accumulated profits as deposits. In that case the interest was paid on the accumulated profits but the Supreme Court did not regard the accumulated profits as deposits. This answers the argument of the assessee's advocate that interest had been paid and, therefore, the accumulated profits should be regarded as deposits.

7. In Chandanmal Kasturchand's case (supra), the Bombay High Court, relying upon the aforesaid Supreme Court decision, held that the interest on the accumulated profits of the minors could not be added to the assessee's income because in that case, there was a clear provision in the partnership deed as follows : . . . It is expressly agreed that if any money belonging to a minor admitted to the benefits of the partnership are brought into partnership or retained in the partnership, the same shall be treated as a deposit and interest shall be paid on it. . .

8. In Smt. Amribai Babulal's case (supra), relied upon by the assessee, the Tribunal observed : But if the minor makes a deposit on its own volition without any obligation, then the interest earned by him on the deposits would not be liable for inclusion under the said section.

This decision does not help the assessee because, as stated above, the question is, whether the amounts allowed by the minors to remain with the firm were deposits or not.

9. We have, therefore, to consider the clauses of the partnership deeds, which have been pointed out by the assessee's counsel, in order to rind out whether the accumulated profits could be regarded as deposits. It is clear that there is not even a suggestion in Clause 5 of the partnership deed of Chetan Industries, quoted above, that the accumulation of profits should be treated as deposits.

We now come to Clause 5 of the partnership deed in Hiralal Industries and Himson Textile Engineering, on which heavy reliance has been placed by the assessee's counsel. The first part thereof provides that no capital is required to be brought in by the minors. This aspect has already been dealt with above.

10. The second part of the quotations, however, remains to be considered. In our view, it only enables the minors to lend money to the firm if they choose to do so. From this, an interference that any amount allowed by the minor to remain with the firm would become a deposit, is a far cry. All that the clause means is that a minor can lend money to the firm if he chooses to do so but that does not mean that any money left by a minor with the firm would become a deposit.

The interpretation sought to be put on this clause by the assessee's counsel is far-fetched. Of course, the last part of clause clarifies that such interest paid to the minors will be paid to him in his capacity as lender only but that does not mean that the minor is a lender of any money that he has allowed to remain with the firm. In Chandanmal Kasturchand's case (supra) there was a clause, as quoted above, which specifically used the word 'retained', as it is on that clear language that a High Court decision is based. The learned departmental representative quite rightly asked the question when discussing this clause--to what amount did the payment of interest relate He further urged that the said clause contemplated only money brought from outside. This was countered by the assessee's advocate by saying that it would be absurd to suggest that that clause would not apply to the money allowed to remain with the firm but would apply to a money taken out first and then again put in. To our mind, the crucial question is whether there has been an agreement to treat the accumulated profits as deposits or not.

The assessee's counsel has tried to distinguish S. Srinivasan's case (supra) from this case. According to him in S. Srinivasan's case (supra), the profits were allowed to be accumulated for a number of years and it was only later on that the firm decided to allow the interest on those accumulated profits whereas in this case, there was an agreement right from the beginning in the partnership deed itself that the interest can be paid on money lent by the minor. Therefore, according to him, since the interest had been paid, the amount on which interest had been paid should be regarded as deposits. We are unable to agree with this. The difficulty remains the same. By the relevant clause, the firm is only enabled to pay the interest. It is not bound to do so. Secondly, by any clause, the firm is not disabled from paying the interest on accumulated profits. Therefore, it does not necessarily follow that the interest that has been paid is paid only on money lent.

In view of the clear decision in S. Srlnivasan's case (supra), some positive evidence is necessary to prove that the accumulated profits were to be treated as deposits or money lent on behalf of the minors.

In the absence of that, we must hold that the interest was not paid on any money lent by the minors but was simply the interest on accumulated share of the minors in the profits. A copy of the recent decision of the Gujarat High Court in the case of CIT v. Smt. Shardaben Kishorebhai [IT Application No. 15 of 1983] is available to us. In that case, the Court held that the interest paid to the minors from certain partnership firm could not be clubbed with the income of the assessee who was their mother. The Court took into consideration the source of moneys deposited by the minors with the old firm before their admission to its benefits and also to the absence of any obligation in respect of the partnership deed to bring capital. Therefore, it does not follow from this decision that the mere absence of minors to contribute capital by the minors is sufficient to prevent clubbing of the income.

Accordingly, the order of the Commissioner (Appeals) is confirmed and this appeal is rejected.

1. I have carefully gone through the order made by my learned brother.

With utmost respect, I am unable to agree fully with the conclusion reached by him that the interest paid to the minors from three firms, the details of which are set out hereinafter, is includible in the hands of the assessee under the provisions of Section 64(1)(iii).

2. Minor children, viz., Sangita Surajram, Daxa Surajram, Rakesh Surajram, Jayant Surajram and Nimesh Surajram, were admitted to the benefits of the three partnership firms, the details of which are set out here-under:Name of the firm Name of the minors Amount of interest admitted to the Rs.1. Chetan Industries Sangita Surajram 3,089 Daxa Surajram 3,0013. Himson Textile Jayant Surajram 246 Engineering Nimesh Surajram 490 3. The ITO took the view that the payments of interest to the minors from the above firms were hit by provisions of Section 64(1)(iii) and, as such, the said income from interest was includible in the hands of the assessee, mother of the minors.

4. The matter was carried in appeal before the Commissioner (Appeals), who confirmed the order of the ITO after rejecting the claim of the learned representative of the assessee that the amounts on which the interest was paid should be treated as deposits made by the minors in the said firms. The Commissioner (Appeals) was of the view that the interest credited to the minors on the amounts standing to their credit arose to the minors indirectly from their admission to the benefits of the partnership, inasmuch as the amounts so standing to their credit were out of accumulated profits.

5. Being aggrieved, the assessee came in appeal before us. The reliance was placed on Clause 5 of the deed of partnership in case of the said firms which has been set out in the order of my learned brother. So far as the interest payment made to the minors by the firm, Chetan Industries, is concerned, I agree with the view taken by my learned brother that the amount of interest paid to the minors is hit by Section 64(1)(iii).

6. So far as the other two partnership firms, viz., Hiralal Industries and Himson Textile Engineering are concerned, with respect, I am unable to endorse the view taken by my learned brother. For the sake of convenience, I shall reproduce the said Clause 5 which is common to both the firms.

But in consideration of benefit of partnership to minors, no capital is required to be brought in. However, any minor can lend money to the partnership firm like any other third party and the firm can pay interest thereon. It is, however, clarified that such interest paid to the minor will be paid to him in his capacity as a lender only.

The contention raised on bshalf of the assesses before us was that in view of the specific clause set out in the partnership deed of the said two firms, the interest paid on accumulated profits is not eligible to inclusion in the hands of the assessee. It was contended that the minors were not required to contribute any capital. Secondly, it was open to the minors to lend money to the partnership firm like any other third party. Thirdly, it was open to the firm to pay interest on money so lent and, lastly, the interest paid to the minors will be paid to them in their capacity as lenders only. It was, therefore, submitted that the interest paid to minors was so payable in the capacity of lender only. The interest paid on accumulated profits has to be treated as the amount lent by the minors in the capacity of loan creditors.

Thus, the interest on the accumulated profits cannot be said to arise indirectly, as a result of admission of the minors to the benefits of the partnership.

7. The learned departmental representative, on the other hand, contended that interest on accumulated profits has to be treated as income arising indirectly as a result of admission of the minors to the benefits of the partnership. The legal position in this regard was well settled by the decision of the Supreme Court in the case of S.Srinivasan (supra) as also the other decisions as set out in para 4 of the order of my learned brother.

8. The short point, therefore, which arises for consideration, is whether in the light of the said Clause 5 of the deed of partnership in the said two firms, the accumulated balance profits could be equated with the moneys lent by the minors. There can be no dispute that accumulated profits, without more, cannot be equated with deposit made or loan advanced by the minors and in the absence of any other clause or arrangement or understanding, interest payable on accumulated profits is liable to be included in the hands of the parent by virtue of section 64(1)(III) by treating the same as an indirect transfer.

9. So far as the legal position in this regard is concerned, the matter is no longer res Integra. The position, however, as pointed out earlier, is whether the said Clause 5 would make any difference. The analysis of the said Clause 5 in case of the said two firms, as set out earlier, would go to show that the minors were not required to contribute any capital and that minors were not precluded from lending any money to the partnership firm like a third party. Clause 5 specifically lays down that interest paid to minors, in case they lent money, will be paid to such minors in their capacity as lenders only.

The character of the minor and the deposits, which are made by him would be that of a loan creditor ; there would be no difficulty in excluding the amount of interest, if that amount was brought by the minors as a loan inasmuch as the interest paid on such loan would be outside the pale of Section 64(1)07/). However, the character of accumulated profits, on which the interest is paid, has to be considered in the light of the specific provision made in the said Clause 5. In S. Srinivasan's case (supra), it is stated that the accumulated profits remaining in the hands of the firm cannot, on any principle, be equated with the deposits made or loans advanced but it is also stated, further, thus : . . . 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 those accumulations into loans advanced to the firm by these persons. . . .

Thus, the above extract from the judgment in S. Srinivasan's case (supra) carves out an exception where an arrangement with the firm to keep these accumulated profits as deposits would be made on behalf of the minors, and that, if such an arrangement can be said to have been made, the ratio of the decision would not apply. In taking this view, I am fortified by the view taken in the case of Chandanmal Kasturchand (supra). Thus, it cannot be said that in every case, interest on accumulated profits cannot be treated as deposits and that the interest paid thereon is always includi-ble by virtue of Section 64(1)(iii). The broad proposition laid down by their Lordships of the Supreme Court in S. Srinivasan's case (supra) is subject to the exceptions, as pointed out earlier, and is essentially a subject-matter of contract between the partners. Now in the case of CIT v. Shah Jethaji Phulchand [1965] 57 ITR 588, their Lordships of the Supreme Court reiterated the principle laid down by them in the case of CIT v. Shah Mohandas Sadhuram [1965] 57 ITR 415 namely, that 'A partnership deed must be construed reasonably'. Further, in the case of Kylasa Sarabhaiah v. CIT [1965] 56 ITR 219 (SC), apart from stating the above view that the partnership deed has to be reasonably construed, it is further stated that, however, the substance of the agreement could not be permitted to be overshadowed merely by the use of collecting description of some of the persons who agreed to be partners. Thus, in effect, the principle, which is laid down in the said decisions, is clear that the agreement or arrangement between the partners inter se has to be construed reasonably and must, therefore, receive a broad interpretation. Thus, the purport of Clause 5 has to be understood in the manner in which the partners have reached the arrangement inter se. Therefore, on a reasonable construction of the said Clause 5, I am of the opinion, that the minors were placed at par with third party or that they were to be treated as lenders or loan creditors.

The accumulated profits, on which the interest is paid, are not exigible to inclusion under Section 64(1)(iii). In other words, the accumulated profits in the light of the exceptions to the general principle laid down in S. Srinivasan's case (supra) has to be treated as part of the amount advanced by the minors. This is further evident from the fact that in the case of Chetan Industries, in the absence of similar clause, it is held that the interest on accumulated profits is clearly hit by Section 64(1)(iii). In the result, I would hold that the interest paid to the minors by the firm Hiralal Industries and Himson Textile Engineering is not includible in the hands of the assessee. In the result, the appeal is partly allowed.

REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 - Difference of opinion has arisen amongst the Members, who constituted the Bench.

The following point of difference is referred to the Hon'ble President of the Tribunal under Section 255(4) of the Act : Whether, on the facts and in the circumstances of the case, the provisions of Section 64(1)(iii) were applicable in regard to the interest paid to the minors by (a) Hiralal Industries, and (b) Himson Textile Industries 1. The two learned Members who heard this appeal having differed, the following point of difference has been referred to me for resolution : Whether, on the facts and in the circumstances of the case, the provisions of Section 64(1)(iii) were applicable in regard to the interest paid to the minors by (a) Hiralal Industries, and (b) Himson Textile Industries 2. The two minor children of the assessee were admitted to the benefits of three partnership firms--Chetan Industries, Hiralal Industries and Himson Textile Engineering Industries. Interest was paid to these minor partners admitted to the benefits of partnership by the respective firms. The ITO treated the income credited to the minors' accounts as part of the share income of the minors and included the interest under Section 64(1) in the assessee's total income. With regard to the interest added as relating to Chetan Industries, both the learned Members who heard the original appeal upheld the addition. There was a difference of opinion as regards the inclusion of the interest credited to the minors' accounts in the last two firms. According to the learned Judicial Member, the amount was clearly includible under Section 64(1).

According to the learned Accountant Member, the minors on a reasonable construction of the partnership deed stood at par with third parties as far as the deposits were concerned and were to be treated as lenders or loan creditors. The interest credited to their account, therefore, was not to be included in the assessee's total income.

3. The learned counsel for the assessee has taken me through the clauses of the partnership deed and especially Clause 5 thereof, under which, according to him, the minor partners were not to bring any capital. On the contrary, they could advance loan to the firms and the firms could pay interest in their capacity as lenders of money. The minor's money was not necessary for the conduct of the business. The minor was only a lender of loans to the firms. He has to be treated like any other creditor. According to the learned counsel, even the decision of the Supreme Court in the case of S. Srinivasan (supra) did not justify the inclusion of this interest in the assessee's total income. The learned counsel has also referred to the copy of accounts of the partners from the very beginning to stress his point that the capital was neither necessary for the firm nor treated as such.

4. For the department, it is pointed out that earlier these minors were not partners in the firm. There were amounts standing to their credit on the day when they were admitted to the partnership. Immediately 'after such admission, these amounts became their capital. The stipulation, therefore, in Clause 5 of the partnership deed that capital is not to be brought by the minor partners, does not have any effect as far as this amount is concerned. On the contrary, neither Clause 5 of the deed nor any other agreement between the partners specifies that the amount lying to the credit of the minors' accounts should be treated as a deposit. Reference is made, in this connection, to the decision in the case of Addl. CIT v. Misrimul Sowcar [1979] 119 ITR 123 (Mad.). There is no contract to retain the amount as capital in the firm or as deposits entitled to only interest.

5. On a consideration of the facts, I hold that in respect of both these firms, the interest paid to the minors is not to be included under Section 64(1) in the total income of the assessee. I agree, therefore, with the order of the learned Accountant Member.

6. The account of minor Nimeshkumar in Himson Textile Engineering Industries starts in the year 1973-74, the first entry being a deposit of Rs. 2,500 on 5-11-1973. At the end of the year, there is a balance of Rs. 3,000. During the year 1974-75 also, there were certain deposits leading to the opening balance of Rs. 5,450 as on 1-4-1975. Up to that date, the minor was not a partner in the firm. During the year 1975-76, a sum of Rs. 490 was paid as interest in addition to the profit credited to his account of Rs. 9,351. Likewise, the other partner, Jayantkumar, had deposit of Rs. 2,500 on 5-11-1973. For the years 1973-74 and 1974-75, he was not a partner in the firm. The balance as on 1-4-1975 was of Rs. 2,725 and he was admitted to the benefits of the partnership during this year. In both these cases, therefore, on the day the minors were admitted to the benefits of partnership, there were certain amounts standing deposited in their names. These amounts should by no stretch of imagination be treated as profit credited to their accounts because they were not partners at all in the firm at that time. The test laid down in S. Srinivasan's case (supra) need not be applied to this amount standing to the credit of minor partners at the beginning of the year. Clause 5 of the deed specifically provides that minors need not bring in any capital. The deed was drawn up at a time when there were amounts standing deposited in the firm in the name of the minors. Viewing the position on the whole, therefore, the original amounts standing to the credit of the minor should clearly be treated as deposits and not capital on which the business is to pay interest.

The fact that these amounts stand credited to the capital account, does not make any difference. The sums of Rs. 490 and Rs. 246 from Himson Textile Engineering Industries are not includible under Section 64(1) in the income of the assessee.

7. As regards minor Jayantkumar's account in the firm of Hiralal Industries, this person has been a partner in the firm at least from the assessment year 1967-68. There was an opening cash balance of Rs. 14,938 as on 1-4-1967. Interest and profit were credited to this account from year to year. The accounts from 1967-68 to-date indicate that the minor has been withdrawing substantial amounts from the account, leaving relatively small balances therein. Thus, the withdrawals during 1967-68 were Rs. 12,291, 1968-69--Rs. 20,904, 1969-70--Rs. 8,570 and 1970-71--Rs. 21,335. The withdrawal in the year 1974-75 also is substantial. During the year of account, an interest of Rs. 1,812 had been credited to this partner's account. Perusing the accounts as a whole from the year 1967-68, I find that the opening balance standing as on 1-4-1967 has been fairly kept up for all these years and the partner has withdrawn most of the interest and profit credited to his account. The interest of Rs. 1,812 now in question would at best relate to the opening balance. It is true that we do not have the copy of accounts prior to the assessment year 1967-68 before us but from the facts, as stated above, it would be clear that the interest in question cannot relate to the profit or other amounts created out of the partnership and credited to the minor's account. In this firm also, there is a specific stipulation in Clause 5 of the deed that the minor is not required to bring in any capital. The learned counsel for the department has interpreted Clause 5 in such a way as to mean that it gives a free hand to the minor to deposit money and does nothing more. I do not think this interpretation is correct. There is a clear statement that the minor is not required to bring in any capital.

The other statement about payment of interest and treatment of the loan as on par with other depositors, even if it is not there, would not have made any difference to the position. On the fact, therefore, even in respect of this firm of Hiralal Industries, the interest of Rs. 1,812 should be regarded as not relating to accumulated profits.

8. In S. Srinivasan's case (supra), the Supreme Court was concerned with an argument that the accumulated profit belonging to the wife and the minor sons of the assessee should be held to be in the nature of deposits made by them with the firm or in the nature of loans advanced by them to the firm. It is in this context that their Lordships held that the accumulated profits in that case need not be equated with deposits made or loans advanced. The position is different in respect of both the firms here. Apparently, the interest is paid on amounts with the firm prior to the accumulation of profits. In that sense, the position is similar to the one covered by the decision of the Gujarat High Court in Smt. Shardaben Kishorebhai case (supra). The decision in Misrimul Sowcar's case (supra) does not advance the case of the department any further. Both on facts and in the light of the decision of the Supreme Court, there is no justification for holding that the interest accruing to the minor partners in the present case is relatable to their admission to the benefits of partnership, thus, attracting the provisions of Section 64.

9. The matter will now go back to the original Bench, which heard the case for proper disposal.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //