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P.A.P. Chidambara Nadar Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 121 of 1966 (Reference No. 41 of 1966)
Judge
Reported in[1970]77ITR84(Mad)
ActsIncome Tax Act, 1922 - Sections 16(3)
AppellantP.A.P. Chidambara Nadar
RespondentCommissioner of Income-tax
Appellant AdvocateV. Ramachandran, Adv.
Respondent AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Cases ReferredS. Srinivasan v. Commissioner of Income
Excerpt:
.....interest both on capital and loan amount to minor sons and share income of minor sons included in income of assessee - whether interest paid on additional amounts contributed by minors includible in income of assessee - income by way of aforesaid interest can be included in income of assessee if there was some connection between accrual of interest and their interest in partnership - amount deposited by minors in excess of share capital to be treated as loan and interest on such loans cannot be included in income of assessee under section 16 (3) (a) (i) or (ii) if deposits of minor had been made independent of their interest in partnership - held, it cannot be included in total income of assessee as amount were deposits of loans made by minor to partnership. - - any amount paid by..........preferred an appeal to the appellate assistant commissioner so far as the addition related to the minors' income by way of interest on their deposits in excess of their capital in the partnership. the appellate assistant commissioner accepted the contention of the assessee with regard to the interest paid on the loans of rs. 4,241 holding that, as there was no obligation on the part of the minors to deposit any amount in excess of the capital, the interest paid on the amounts so deposited in excess of the required capital of rs. 25,000 was not includible in the income of the assessee under section 16(3)(a)(ii) of the act following the decision of the bombay high court in bhogilal laherchand v. commissioner of income-tax, : [1954]25itr523(bom) and of the assam high court in choulhmal.....
Judgment:

Ramanujam, J.

1. At the instance of the assessse the Income-tax Appellate Tribunal has referred to this court the following question as arising out of its order in I.T.A. No. 8231 of 1963-64 dated June 24, 1965 :

'' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the interest paid on the additional amounts contributed by the minors is properly includible in the income of the assessee under Section 16(3),a)(ii) of the Income-tax Act ?'

2. The assessee is a partner in a registered firm of Messrs. P.A.P. Chidambara Nadar, Virudhunagar in which the assessee's two minor sons had been admitted to the benefits of the partnership. Clause 5 of the terms and conditions of the partnership deed is as follows :

'The capital of the partnership shall be Rs. 25,000 each. Any amount paid by the partners for the business in excess of the capital, as well as the capital, will bear interest at 12% per annum subject to modification in the rate of interest by mutual agreement of partners and the same shall be treated as expenses of the business.'

3. Both the minors had contributed the required capital of Rs. 25,000 each in the said firm. In addition to the said capital of Rs. 25,000 each, the minors had also deposited some further sums which were treated by the firm as loans. Under Clause 5 of the terms and conditions of the partnership deed, interest was payable at 12% per annum not only on the said capital of Rs. 25,000 but also on the additional amounts contributed or deposited by the partners subject to the modification in the rate of interest by mutual agreement. For the assessment year 1961-62 the following amounts were found credited in the accounts of the two minors :

Minor C. JehandranInterest on capital Rs. 3,000 Interest on loanRs. 2,121

TotalRs. 5,121

Minor JayakarInterest on capitalRs. 3,000 Interest on loan Rs. 2,120

TotalRs. 5,120

4. The Income-tax Officer added the total amount of Rs. 10,241 being the interest paid both on capital and on loan amounts to the minor sons to the income of the assessee under Section 16(3)(a)(ii) of the Income-tax Act, 1922, besides a sum of Rs. 248, which was added as the share income of the minors from the firm. The assessee preferred an appeal to the Appellate Assistant Commissioner so far as the addition related to the minors' income by way of interest on their deposits in excess of their capital in the partnership. The Appellate Assistant Commissioner accepted the contention of the assessee with regard to the interest paid on the loans of Rs. 4,241 holding that, as there was no obligation on the part of the minors to deposit any amount in excess of the capital, the interest paid on the amounts so deposited in excess of the required capital of Rs. 25,000 was not includible in the income of the assessee under Section 16(3)(a)(ii) of the Act following the decision of the Bombay High Court in Bhogilal Laherchand v. Commissioner of Income-tax, : [1954]25ITR523(Bom) and of the Assam High Court in Choulhmal Kejriwal v. Commissioner of Income-tax, . He therefore deleted the inclusion of Rs. 4,241 from the assessee's income.

5. The revenue thereupon filed an appeal against that order to the Income-tax Appellate Tribunal. The Tribunal took the view that since interest was paid to the minors on the excess amounts deposited by them in the partnership under Clause 5 of the terms and conditions of the partnership deed, it is a benefit arising out of the minors having been admitted to the benefits of the partnership. It proceeded on the basis that the amounts deposited by the minors in excess of the required capital of Rs. 25,000 was additional capital and that the right to get interest for this additional capital was referable to the terms of the partnership and not to any independent agreement between the parties. In its view, the facts of the present case came within the scope of the decision of the Madras High Court in S. Srinivasan v. Commissioner of Income-tax, : [1963]50ITR160(Mad) and the decision in that case was against the assessee's contention. It has also expressed the view that the decision of the Bombay High Court in Bhogilal Laherchand v. Commissioner of Income-tax has been disapproved by the Supreme Court in Philip John Plasket Thomas v. Commissioner of Income-tax, [1963] 49 I.T.R, (S.C.) 97, The Tribunal allowed the appeal of the revenue holding that there was no justification for making a distinction between the interest paid on the 'fixed' capital and the interest paid on the 'additional' capital and that the interest was paid to the minors only under the terms of the partnership and not in pursuance of an independent agreement.

6. The learned counsel for the assessee submitted that the entire approach of the Tribunal to the question on hand was erroneous, that the Tribunal was not correct in taking the view that there was no distinction between the interest paid on the capital and the interest paid on other amounts deposited or invested by the minors in the partnership, that the interest paid on the amounts invested was not under the terms of the partnership and that such a benefit accruing to the minors was not vis a result of their having been admitted to the benefits of the partnership. It was further submitted by the assessee's learned counsel that the minors, though entitled to the benefits of the partnership, are not partners as such and that interest payment made to the minors in relation to the amounts invested is outside the partnership deed and not under Clause 5 thereof. The learned counsel submitted that the Tribunal is not justified in thinking that the decision in S. Srinivasan v. Commissioner of Income-tax stood in the way of the assessee's contention while, in fact, the decision supports the assessee's stand. In that case the assessee was a partner in a firm in which his wife was a partner and his two minor sons had been admitted to the benefits of the partnership. Under one of the clauses of the partnership deed, any member or person admitted to the benefits of the partnership was entitled to receive interest at 9% per annum on any sum advanced as loan to the firm for meeting the expenses of the management. Their shares of profits had been credited to their respective accounts and interest was paid at the rate of 9% per annum on these accumulations which stood credited in their respective names. While answering the question whether the interest paid by the firm to the assessee's wife and minor children on their past profit accumulations is includible in the assessment of the assessee under Section 16(3)(a) (i) and (ii) of the Income-tax Act, this court took the view that interest credited to the wife and the minor sons in respect of their profit accumulations which was to their credit in the firm arose directly from the membership of the wife in the firm and the admission of the minor sons to the benefits of the partnership and that, therefore, the interest credited to them had to be included in the total income of the assessee under Section 16(3)(a)(i) and (ii) of the Act. It was urged by the learned counsel that the ratio of the said decision was that the profit accumulations was directly referable to the relationship of the wife and the minors with the partnership and that, in view of the nexus between the accumulations and their relationship with the firm, it was possible to treat the interest paid by the firm on the accumulations as a benefit which would attract Section 16(3)(a)(i) and (ii) of the Act. It was also urged that the view taken by the Madras High Court in the above decision does not run counter to the view taken in Bhogilal Laherchand v. Commissioner of Income-tax and Chouthmal Kejriwal v. Commissioner of Income-tax.

7. Reference was made to a decision of the Allahabad High Court in Ram Narain Garg v. Commissioner of Income-tax, : [1965]55ITR435(All) . where, dealing with the scope of Section 16(3)(a)(ii) of the Act, the court expressed :

'In order that the provision may apply to it, the receipt of the income must have some connection, whether direct or indirect, with the fact of his admission. Any income that could have been derived by him without his being admitted to the benefits of the partnership cannot be said to have been derived by him from the admission. Once some connection between the receipt of income and the admission is established, the provision applies, whether the connection is direct or indirect......The income derived by each minor in the instant case was interest on the money paid by him to the partnership. He could pay the money to the partnership either by way of his contribution to the capital required for commencing the partnership business or by way of a loan or deposit to it The money required to carry on a partnership business comes from the capital contributed by the partners and from loans taken from investors. A partner is not forbidden by law from being an investor; merely because he can contribute to the capital, it cannot be said that any money that he pays is by way of contribution to the capital and can never be by way of investment. ... .It cannot be stated as a matter of law that interest paid by a partnership to a minor admitted to its benefits can never be said to be connected even indirectly with the fact of his admission ; it may be or may not be. It is connected with the fact, if the interest paid is on capital investment by the minor or on a loan advanced to the partnership by the minor and the partnership deed forbids the raising of a loan from any person other than a partner or a person admitted to its benefits. It is not connected with the fact if the interest is paid on a deposit made, or loan advanced by the minor, and the partnership was free to accept a deposit or a loan from any person even if not connected with it.'

8. Reference was also made to a decision of the Supreme Court in S. Srinivasan v. Commissioner of Income-tax, : [1967]63ITR273(SC) , which was rendered on appeal from the decision in S. Srinivasan v. Commissioner of Income-tax. Though the Supreme Court affirmed the decision of the Madras High Court on the facts of that case, where interest was paid on the accumulated profits as per the terms of the partnership deed, which was treated as an indirect accrual of the benefits coming under Section 16(3)(a)(i) and (ii), it, however, pointed out that a distinction should be made between cases where interest is earned on a deposit or loan and cases where interest is earned on the accumulated profits arising from the firm itself. In the latter case payment of interest was connected with their interest with the partnership while in the former the payment of interest was not connected with their interest with the partnership. The Supreme Court distinguished the case in Bhogilal Laherchand v. Commissioner of Income-tax, on the ground that it related to a case of interest paid on the deposits made by the minors to the partnership without doubting the correctness of that decision. The Supreme Court also referred to the decision in Chouthmal Kejriwal v. Commissioner of Income-tax, and L. Ram Narain Garg v. Commissioner of Income-tax8, and distinguished those cases as cases establishing a direct connection between the minors' interest in the partnership and the interest they have earned on their capital investment as such. The view taken in S. Srinivasan v. Commissioner of Income-tax, was followed in Commissioner of Income-tax v. Badrilal Bholaram, : [1968]70ITR831(MP) .

9. We are inclined to accept the contention of the learned counsel for the assessee that the Tribunal erred in not making a distinction between the minors' capital investment as such, and the other amounts deposited in excess of the capital amount and that the Tribunal is not justified in treating this excess amount deposited as additional capital without any basis whatever. There is obvious distinction between capital investment and other investments made by the minors. If it is a capital investment, it cannot be withdrawn except by the minors severing their connection with the firm. If it is not a capital investment it can be withdrawn at any time or it can be attached by creditors also. Further, interest on capital will be paid only on profit, while the interest on loan or deposit has to be paid whether the firm earns profit or not. The terms of the partnership required every one of the partners to contribute only Rs. 25,000 each as capital and they are not under an obligation to pay any additional capital. The revenue has not attempted to establish that any of the partners paid any additional capital and that the minors were also required to pay such additional capital as was done by the other partners, or that the excess amounts to the credit of the minors represents the accumulation of their share of profits. Where the revenue wants to treat such income of the minors as the income of the assessee under Section 16(3)(a)(i) and (ii), it is for the revenue to establish that there was some connection, direct or indirect, between the accrual of interest and their interest in the partnership. If the deposits of the minors had been made independent of their interest in the partnership then as per the decision of the Supreme Court in S. Srinivasan v. Commissioner of Income-tax, any amount so deposited by the minors has to be treated as a loan or deposit and the interest paid on such deposits or loans cannot be included in the income of the assessee under Section 16(3)(a)(i) or (ii) of the Act. The amounts for which interest was paid by the firm were treated as loan in the assessee's accounts and the revenue also treated it as interest on loan and made a distinction of this amount from the interest paid on capital. The Appellate Assistant Commissioner also kept up that distinction and it is not possible for us to say that the amounts deposited by the minors represented the additional capital as has been casually mentioned in the order of the Appellate Tribunal. As a matter of fact the Tribunal also does not give a finding as to the nature of these amounts though it has taken for granted that the amounts represented additional capital and we find that there is no justification for such an assumption. Even the Tribunal in the penultimate paragraph of its order treats the additional amounts as investment made by the minors. Having regard to the fact that the revenue has not established that these additional amounts represented accumulation of profits, we have to hold that the amounts were deposits or loans made by the minors to the partnership and that, following the ratio of the decision in S. Srinivasan v. Commissioner of Income-tax, the interest paid on the amounts deposited by the minors cannot properly be included in the income of the assessee under Section 16(3)(a)(ii) of the Income-tax Act, 1922.

10. We, therefore, answer the reference in favour of the assessee and against the revenue. The assessee will be entitled to his costs. Counsel's fee, Rs. 250.


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