Judgment:
B.N. Kirpal, J.
1. In respect of the assessment year 1977-78, the Income-tax Appellate Tribunal has referred the following question to this court :
'Whether, on the facts and circumstances of the case, the interest paid to the three minors who were admitted to the benefits of partnership in the firms, the Associated Sales Company and the Vikas Textile Agency was includible in the income of the assessed under section 64 of the Income-tax Act, 1961 ?'
2. Briefly stated, the facts are that three minor children of the assessed, viz., Ramesh Kumar Dalmia, Harsh Kumar Dalmia and Swarna Lata Dalmia were admitted to the benefits of two partnership firms, viz., Vikas Textile Agency and Associated Sales Company. While the assessed was a partner in Vikas Textile Agency, in the other firm, he was not a partner.
3. These minors were not only paid the share of profits but they also received interest from the firm on the accumulated profits and it is this interest which was assessed in the hands of the assessed by the Income-tax Officer by invoking the provisions of section 64.
4. The assessed filed an appeal before the Appellate Assistant Commissioner but he came to the conclusion that the interest received by the minors was assessable in the hands of the assessed.
5. A second appeal was filed to the Income-tax Tribunal who examined the clauses of the partnership deed. The Tribunal held that, in respect of Vikas Textile Agency, the partnership deed was executed on July 1, 1974, and on March 12, 1975, the following resolution was passed by the partners :
'All partners feel that the capital contributed by the partners may not be sufficient and thereforee, decide that deposits should be accepted from minors and loans may be raised from other outsiders. Such deposits and loans shall carry interest at 12% per annum.'
6. In respect of the other partnership firm, viz., Associated Sales Company, a similar resolution was passed on July 15, 1975, by the partners of that firm which was in the following terms :
'After computing the accounts for the accounting year ending 31st March, 1975, a sum of Rs. 7,887.49 in the name of Master Hares Kumar Dalmia, a sum of Rs. 7887.48 in the name of Master Ramesh Kumar Dalmia and a sum of Rs. 7,013.82 in the name of Kumari Swarna Lata Dalmia, has been brought forward as on April 1, 1975, as deposits. The part have accepted and agreed to these deposits bearing interest at not more than 15% per annum. Partners have also agreed that other deposits from minors will be accepted as and when made.'
7. The tribunal referred to the decision of the Supreme Court in the case of S. Srinivasan v. CIT : [1967]63ITR273(SC) and also to the other decisions of the High Courts which had followed and applied the principles laid down by the Supreme Court in Srinivasan's case : [1967]63ITR273(SC) and the Tribunal came to the conclusion that the decision of the Supreme Court in S. Srinivasan's case : [1967]63ITR273(SC) directly covered the question in issue and that the interest income was assessable in the hands of the assessed. Thereafter, the aforesaid question was referred to this court by the Tribunal under section 256 of the Income-tax Act.
8. On behalf on the assessed, it has been vehemently contended that the interest income arose and accrued to the minors and this did not arise by reason of the fact that the minors had been admitted to the benefits of the partnerships. While strongly relying on the decisions some of the High Court, in particular of the Bombay High Court in the case of CIT v. Chandanmal Kasturchand : [1978]112ITR296(Bom) , it has been contended by Shri Bishamber Lal that the interest income did not arise because of any partnership deed and that it was an independent contract because of which the interest was paid. Elaborating the contention further, it was submitted by learned counsel that the partners of the firm had passed a resolution, in regard to Vikas Textile Agency, that deposits may be accepted from minors and that such deposits and loans should carry interest at 12%. With regard to the Associated Sales Company also, the amount which was standing to the credit of the minors was to be regarded as deposits and loans. While strongly relying upon the aforesaid judgment of the Bombay High Court, it was submitted by learned counsel for the petitioner that deposits and loans are independent contracts and any interest which arise thereon would be the interest belonging to the minors exclusively and the provisions of section 64(1)(iii) would not be applicable.
9. On behalf of the Department, Shri Rajendra has vehemently contended that, in the instant case, the Tribunal has rightly applied the ratio of the decision of the Supreme Court in Srinivasan's case : [1967]63ITR273(SC) and that the facts in the present case are in pari materia with that decision. According to learned counsel, it is by reason of the minors being admitted to the benefits of the partnership that the interest was paid and, thereforee, the provisions of section 64 were attracted.
10. In order to appreciate the contention, it is necessary to set out the provision of section 64 as it stood at the relevant time :
'64.(1) In computing the total income of any individual, there indirectly - ...
(iii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm.'
11. A bare reading of the said section shows that any income which arises directly or indirectly to a minor child of an individual from the admission of the minor to the benefits of the partnership is to be taxed in the hands of the individual. We need not go into the question as to what is the meaning of the words 'all such income', as it was sought to be contended on behalf of the Revenue that income of any type which a minor receives from the firm is assessable in the hands of the individual, viz., the father. It may be possible to construe section 64 in the said manner as suggested by learned counsel for the Revenue but even by giving a restricted meaning to section 64 as interpreted by the Bombay High Court, we feel that, in the present case, the Revenue must succeed.
12. This provision came up for consideration, as already noted, before the Supreme Court in Srinivasan's case : [1967]63ITR273(SC) . In that case, two minor sons of the assessed were admitted to the benefits of a partnership in which the assessed and his were partners. One of the clauses of the deed 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 loan, he may advance (such amount) as loan. He may receive interest for such sum at 12 annas per mensem.' In the beginning, interest was not allowed to the wife and the minor sons on the accumulated profits. With effect from the subsequent years the firm decided to allow 9% per annum interest on the accumulated profits and the question arose whether this interest was taxable in the hands of the assessed. While holding that the interest accrued to the wife and minor sons, at least indirectly, because of their capacity, viz., because the wife was a partner and the minor sons were admitted to the benefits of the partnership firm and, thereforee, was assessable in the assessed's hands, the Supreme Court observed as follows (at pages 276 and 277) :
'Learned counsel appearing for the appellant mainly argued before us the second question and urged that though the profits earned from the partnership by the wife and the minor sons of the appellant were undoubtedly income arising to them directly from the partnership of the wife in the firm or the admission of the minors to the benefits of the partnership in the firm, the interest accruing on the accumulated profits should not be held to arise either directly or indirectly from the same source. The argument was that the accumulated profits belonging to the wife and the minor sons 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, and interest earned on such deposits or loans can have no relationship with the membership of the firm of the wife or the admission to the benefits of the partnership of the minor sons. 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. Similarly, there was no such contract which could convert those 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(i) and (ii) in the Income-tax Act.'
13. In arriving at the aforesaid conclusion, the Supreme Court referred to the earlier decisions of High Courts in the cases of Bhogilal Laherchand v. CIT : [1954]25ITR523(Bom) , Chouthmal Kejriwal v. CIT , Akula Venkatasubbaiah v. CIT : [1963]47ITR458(AP) and L. Ram Narain Garg v. CIT : [1965]55ITR435(All) .
14. The observations of the Supreme Court in Srinivasan's case : [1967]63ITR273(SC) clearly show that any interest which is received on the accumulated profits would be relatable to the minor's admission to the benefits of the partnership. It is only if, by an independent volition on the part of the minors or their guardians, the accumulated profits are imparted with character of a deposit or a loan and interest is earned thereon, such an income could escape from being assessed in the hands of the father. To put it differently, if any income arises to the minor as a result of or as a consequence of the partnership deed whether it be in the form of share of profit, commission, fee or even interest, the same would be assessable in the hands of the father but if there is an independent contract, de hors the partnership agreement, whereby a loan is advanced by a minor to the partnership firm to which firm he has been admitted to the benefits of the partnership, then that interest may not become liable to tax in the hands of the father.
15. It will be appropriate, at this stage, to refer to some of the decisions of the High Courts and to see how they have applied and followed the decision of the Supreme Court in Srinivasan's case : [1967]63ITR273(SC) . In Smt. Nripendrakumari Bhandari v. CIT : [1976]105ITR158(Mad) , the minors had been admitted to the benefits of the partnership and interest was paid to them in terms of clause 4 of the partnership deed which provided that whatever excess remained over the capital should be treated as a loan to the firm and that interest is payable on such accumulations which are treated as loans. The Division Bench of the Madras High Court came to the conclusion that the ratio of the decision of the Supreme Court in Srinivasan's case : [1967]63ITR273(SC) was clearly applicable. After referring to the decision of the Madras High Court in P. A. P. Chidambara Nadar v. CIT : [1970]77ITR84(Mad) and Kaladhar Prasad Chaturvedi v. CIT : [1971]82ITR713(All) , the court, in Bhandari's case : [1976]105ITR158(Mad) , observed as follows (at page 168) :
'On a due consideration of the various principles laid down in the above decision the true legal position appears to us to be this : Wherever there is a connection between the admission of the minor to the benefits of the partnership and the realisation of income by him by way of interest, the same can be included in the income of the parent, whether the said connection is direct or indirect. The fact that payment of interest has been provided under the terms of the partnership deed does not ipso facto establish such a connection if the payment could be enforced otherwise under the general law applicable to a debtor and creditor. If under the terms of the partnership deed the minor is bound to make a deposit and the firm is not free to receive deposits from others, the interest paid on such deposits to a minor will be taken to have a connection with his admission to the benefits of the partnership, but in a case where the firm is free to receive deposits from anyone and the minor makes a deposit though not obliged to make such deposits, the interest on such a deposit will have no connection with his admission to the benefits of the partnership. The interest paid on accumulations of the minor's share of profits arises only out of his having been admitted to the benefits of the partnership. If under the terms of the partnership deed the firm is under an obligation to accept deposits from the minor admitted to the benefits of the partnership and pay interest thereon, the interest can be taken to have arisen as a result of such admission. But where the minor is not obliged to deposit or the firm is not obliged to receive and keep the deposit on condition of its paying interest thereon, then any interest paid on deposits made by a minor cannot be taken to have a direct or indirect connection with his being admitted to the benefits of the partnership.'
16. Applying the aforesaid principles, the Madras High Court came to the conclusion that interest was paid to the two minors on the basis of clause 4 of the partnership deed on the amount standing to their credit in excess of the capital contributed or on profits accumulation. The said clause made it obligatory for the retention of the money and payment of interest and, as such, it was by reason of the admission to the benefits of the partnership that the interest was paid and, thereforee, the same was rightly included in the assessment of the father's income. A somewhat contrary note was struck by the Bombay High Court in the case off Chandanmal Kasturchand : [1978]112ITR296(Bom) . In that case, interest was paid on two amounts, viz., on the capital which had been credited to the minors' accounts. The Bombay High Court applied the principles laid down in Srivasan's case : [1967]63ITR273(SC) and came to the conclusion that the interest which was paid on the capital which had been contributed was clearly assessable in the hands of their father. With regard to the interest paid on the accumulated profits, the court took notice of the fact that the partnership deed itself provided that any money belonging to the minor admitted to the benefits of the partnership if brought into the partnership or retained in the partnership shall be treated as a deposit and interest shall be paid thereon. It was held by the Bombay High Court that this would amount to a contract to convert the accumulated profits into loans and would fall in the exception enumerated by the Supreme Court in Srinivasan's case : [1967]63ITR273(SC) . We, however, note that the decision of the Madras High Court in Smt. Nripendrakumari Bhandari's case : [1976]105ITR158(Mad) there was a term like clause 4 which required payment of interest on capital contribution or on profit accumulation and it was still held that the interest paid in respect thereto attracted the provisions of section 64; in Chandanmal Kasturchand's case : [1978]112ITR296(Bom) , the Bombay High Court took a different view. A clause in the partnership deed did contemplate the accumulated profits to be treated as deposits on which interest was payable. If the principle laid down by the Madras High Court in Bhandari's case : [1976]105ITR158(Mad) had been applied, then possibly, notwithstanding the clause as it existed, in Chandanmal Kasturchand's case : [1978]112ITR296(Bom) also, the conclusion may have been that interest would be taxable under section 64. Be that as it may Chandanmal Kasturchand's case : [1978]112ITR296(Bom) is of little assistance to learned counsel for the assessed for the reason that there is no clause in the agreement of partnership by which the accumulated profits are to be treated as deposits. Had there been such a clause, we may perhaps still have been persuaded to agree with the ratio of the decision in Nripendrakumari Bhandari's case : [1976]105ITR158(Mad) and hold that wherever the partnership deed itself contemplates payment being made to the minors, under wherever circumstances, the provisions of section 64 are attracted. In the present case, as we shall presently see, the finding of the Tribunal is that the accumulated profits were in fact never converted into a deposits or a loan and, thereforee, the ratio of the decision in Chandanmal Kasturchand's case : [1978]112ITR296(Bom) would not apply.
17. In CIT v. S. V. Nashte : [1979]119ITR130(Bom) , it was held by the Bombay High Court that, in order to attract the provisions of section 64, it was necessary that there should be a nexus between the income of the minor and his admission to the benefits of partnership. In that case, moneys were originally contributed as capital in the firm to which the minors had been admitted to the benefits of partnership but, thereafter, by a positive act, the guardian of the minors directed that a part of the capital should be withdrawn and be treated as a loan. In those circumstances, the Bombay High Court came to the conclusion that the nature of the amounts immediately underwent a change and thereafter, the said amount, which was originally capital, stood transformed to that of a loan and that interest which was received on the loan belonged exclusively to the minor and could not be clubbed in the hands of the father. In arriving at this decision, the Bombay High Court followed its earlier decision in Chandanmal Kasturchand's case : [1978]112ITR296(Bom) . As we shall presently see, there was no such overt act in the present case whereby the accumulated profits were impressed with the character of a loan or deposit.
18. The Calcutta High Court has also had occasion to consider the provisions of section 64 in the case of CIT v. Ramesh Chandra Sogani : [1990]183ITR312(Cal) , where a similar question came up for consideration. The headnote of the report clearly brings out the facts and the ratio of the decision and the same is as follows (headnote of 52 Taxman) :
'Facts.-The assessed's minor son was admitted to the benefits of a partnership. The partnership deed provided, inter alia, that (i) the amounts standing to the credit of the partners would be regarded as their capital (ii) all further contributions made for the purpose of the firm's business by the partners, including the minor admitted to the benefits of partnership, would be deemed as loans to the firm, (iii) the undrawn share of profit and interest lying credited in the partners' accounts including the minor's share shall also be considered as loan, which would carry interest. The Income-tax Officer included in the total income of the assessed the minor's share in the profits of the firm and interest payable to him on accumulation of profit under section 64. On appeal, the Appellate Assistant Commissioner excluded the interest income. The Tribunal upheld the order of the Appellate Assistant Commissioner on the ground that interest payable by the firm on independent loans made by the minor to the firm or on the credit balance in the current account in the name of the minor was not includible in the income of the parent.
Held, that interest allowed to a minor admitted to the benefits of the partnership, by a firm on the capital supplied on behalf of the minor is liable to be included in the hands of the parent as income arising from the benefits of the partnership. Similarly, interest allowed by the firm on the accumulated share of profits of the minor is includible in the income of the parent. But interest on independent loans made to the firm is not includible, since the income is not related to the admission to the benefits of partnership. The accumulation of profit and all accretions thereto will be referable to the admission to the benefits of partnership unless there is an agreement subsequent to the crediting of the share of profit to the minor's account for converting such amount into a loan or deposit. A mere provision in the partnership deed for treating accumulated profits as a loan or deposit is not effective to convert such accumulated profits into loan or a deposit.
In the instant case, there was no separate arrangement or between the guardian of the minor and the firm so as to pay interest by conversion of the amount into a deposit or loan. The treatment of accumulated profit as loan had been made in the partnership deed itself. The interest payable to the minor by the firm on such accumulation was thereforee, liable to be included in the income of the assessed.'
19. We may, however, note that the attention of the Hon'ble Judges of the Calcutta High Court was apparently not drawn to the two decisions of the Bombay High Court in Chandanmal Kastruchand's case : [1978]112ITR296(Bom) and S. V. Nashte's case : [1979]119ITR130(Bom) .
20. The last decision on this point is also of the Calcutta High Court in the case of CIT v. Santosh Kumar Kanoria : [1992]193ITR655(Cal) . In this case, the High Court considered the judgment of the Bombay High Court in Chandanmal Kasturchand's case : [1978]112ITR296(Bom) and applied the ratio of the decision of the Supreme Court in Srinivasan's case : [1967]63ITR273(SC) and came to the conclusion that even where there was a provision in the partnership deed for payment of interest, the interest so paid would be includible in the total income of the assessed under section 64. In Santosh Kumar Kanoria's case : [1992]193ITR655(Cal) the High Court also referred to the decision of the Madras High Court in the case of Addl. CIT v. Misrinul Sowcar : [1979]119ITR123(Mad) , the headnote of which brings out the ratio of the decision which is as follows (headnote of 119 ITR) :
'The deed of partnership of a firm in which the assessed was a partner and in which his minor sons were admitted to the benefits of the partnership, provided, inter alia, that any amount other than the capital standing to the credit of the partners including the share of profit that may be adjusted shall be treated as loan deposits bearing such interest as may be mutually agreed upon having regard to the rate prevailing in the market. The Income-tax Officer included in the income of the assessed the interest credited to the accounts of his minor sons on the deposits in their names by invoking section 64 of the Income-tax Act, 1961. The appellate Assistant Commissioner, however, deleted the inclusion and this was confirmed by the Tribunal. On a reference to the High Court :
Held, that section 64 contemplated assessment in the hands of the parent of all income arising to a minor by way of interest so long as the interest is traceable to the admission of the minor to the benefits of the partnership either under the partnership deed or under a subsequent agreement. Even in the absence of any agreement, interest paid on capital would be traceable to the membership of the firm and so long as the interest is traceable to the admission of the minor to the benefits of the partnership, section 64 will be attracted. On the basis of the decision of the Supreme Court in S. Srinivasan v. CIT : [1967]63ITR273(SC) , interest paid on the accumulated profits of the minors will have to be included in the hands of their father and the exception contemplated by the Supreme Court would not apply to this case because there was no subsequent agreement converting the accumulated profits into loans but such conversion was simultaneous. The tribunal was, thereforee, not correct in holding that the interest credited to the accounts of minor sons was not includible in the hands of their father.'
21. Reverting to the facts of the present case, we find that in Srinivasan's case : [1967]63ITR273(SC) , it had been held that the accumulated profits had been allowed 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. 'In other words, no overt act was done to impart the character of a deposit or loan on the accumulated profits which were there in the books of account of the firm. The Tribunal, in the present case, has found as a fact that there was no exercise of volition by the minors or anyone on their behalf to convert the accumulated profits to a loan or deposit. The resolution of March 12, 1975, in the case of Vikas Textile Agency was prior to the accumulated profits arising. The accounting year in the present case is the year ending June 30, 1976. After June 30, 1976, there was no suggestion either by the father, viz. the assessed or the minor children or anyone else on their behalf that the accumulated profits should be converted into loan. On March 12, 1975, a decision was taken by the partners that, in future, deposits should be accepted from minors and loans be raised from outsiders. There was no decision, thereafter, of the minors or anyone on their behalf, including the assessed, that the accumulated profits existing as on June 30, 1975, and June 30, 1976, should be regarded as deposit or loan to the firm. As regards the Associated Sales company, the resolution of July 15, 1975, does not bear the signature of either the minors or anyone on their behalf. That is also a decision which has been taken unilaterally by the partners of the firm. As already stated, the assessed who was the father of the minor children was not a partner of Associated Sales Company and was not a party to the decision of July 15, 1975. The exception contemplated by the Supreme Court in Srinivasan's case : [1967]63ITR273(SC) , does not arise in the present case.
22. Applying the ratio of the decision in Srinivasan's case : [1967]63ITR273(SC) , the only conclusion which can be possibly arrived at on the facts and circumstances of this case is that the Income-tax Tribunal was right in holding that the provisions of section 64 were attracted and that the interest income was includible in the income of the assessed.
23. For the aforesaid reasons, we answer the question referred in the affirmative and in favor of the Revenue.
24. There will be no order as to costs.
25. Question answered in the affirmative.