Smt. Nisha Rani Agarwal Vs. the Commissioner of Income Tax - Court Judgment

SooperKanoon Citationsooperkanoon.com/475950
SubjectDirect Taxation
CourtAllahabad High Court
Decided OnMay-01-2007
JudgeSushil Harkauli and Ajai Kumar Singh, JJ.
Reported in[2007]294ITR46(All)
AppellantSmt. Nisha Rani Agarwal
RespondentThe Commissioner of Income Tax
Cases ReferredC.I.T. v. Chandumal Kasturl Chandra
Excerpt:
- - 13. when a minor is said to be admitted to the benefits of partnership to the extent of a particular share, like in the present case, it means that if the partnership firm earns profits, the agreed share of those profits will go to the beneficiary.1. the following two questions have been referred under section 256(2) of the income tax act:1. whether on the facts and in the circumstances of the case there was any material before the tribunal to hold the initiation of proceedings under section 147(a) in reassessment proceedings as valid?2. whether on the facts and in the circumstances of the case interest on capital and accumulated profits, paid to minors is covered under section 64(a)(iii) and 64(1)(iii) in the proceedings in response to notice under section 148 of the i.t. act, 1961?2. apparently, the second question contains a clerical mistake and the words 'section 64(a)(iii)' need to be omitted.3. smt. nisha rani agrawal (herein after called the assessee) is the assessee in her individual capacity. she had two sons who, during the irrelevant period, were minors. their names are rohit and rajiv.4. rohit was admitted to the benefit of partnership in the following firms to the extent of a share indicated against the name of each firm;name of the firms share of profits1. m/s general finance co. 10%2. m/s sheetalaya 12.5%3. m/s ram narain beni prasad 1/8th5. rajiv was admitted to the benefit of partnership in the following firms to the extent of the share of profit indicated against the names of each firm below;name of the firms share of profits1. general finance co. 10%2. m/s sheetalaya 12.5%3. m/s tara finance no. 20%6. apparently, these minors were admitted to the benefits of the partnership without any contribution to the capital of the firm, as these partnerships were family enterprises.7. during the course of time, profits accrued to the firm. out of those profits, the benefits or shares, which accrued to the minors and which were not withdrawn by the minors were deemed to be capital of the minors invested in the partnership and there was a condition that the minors would also be entitled to interest on such deemed invested capital.8. the regular assessment of the assessee for the relevant assessment years was completed. the assessment years involved are 1976-77 to 1979-80. the assessments were sought to be reopened under section 147(a), as that provision stood at the relevant time, on the ground (i) that the interest income of the minors had not been disclosed in the returns of the assessee and (ii) that such income was liable to be included in the income of the assessee under section 64(1)(iii). thus, the assessing officer claimed to have reason to believe that the interest income had escaped assessment due to omission on the part of the assessee to disclose that income. accordingly, section 147(a) was applied, which provision permits reopening of the assessment where income has escaped assessment due to omission of the assessee to make full disclosure.9. the tribunal held that the initiation of re-assessment under section 147(a) was valid and the income by way of interest, paid to the minors on capital and accumulated profits of the partnership, was covered by section 64(1)(iii).10. the bombay high court has, in the case of c.i.t. v. chandumal kasturl chandra : [1978]112itr296(bom) , held that the interest paid on acpumulated profits which remained with the firm could not be included in the total income of the assessee in the context of section 64.11. the aforesaid decision of the bombay high court was considered and distinguished by the tribunal saying that the decision turned upon the terms of the agreement, which were involved in that case before the bombay high court.12. we have considered the said aspect of the matter. our opinion is as follows:13. when a minor is said to be admitted to the benefits of partnership to the extent of a particular share, like in the present case, it means that if the partnership firm earns profits, the agreed share of those profits will go to the beneficiary. however, if profits do not accrue to the firm, the beneficiary does not get any share. in a nutshell 'benefits of partnership' means a share in the profits, if earned.14. on the other hand, interest on invested capital or accumulated capital, whether that accumulation is of profits or otherwise, is an obligation upon the firm, which is independent of whether the firm earns pro lit in the subsequent years or not.15. thus, the interest accrued or paid on invested or accumulated capital, being independent of the earning of profits by the firm, cannot be said to be a 'benefit of partnership'.16. section 64(1)(iii) permits adding or clubbing to the income of the assessee, only that income of minor child of the assessee which arises from the 'benefits of partnership'. interest income, not being benefits of partnership, can not be so clubbed under section 64(1)(iii).17. we have not been shown any other provision in the income tax act under which such interest income could have been clubbed with the income of the mother of the minor children, i.e. the present assessee. if the interest shad been earned on account of assets transferred to the minor child by the assessee mother, which the minor child had invested or loaned to the firm, the case may have fallen under section 64(1)(v). the department has not set up any such case.18. the admission of the minor child to the benefits of the partnership in the family business being without any consideration and without any contribution by the minor to the partnership firm, could in a way be said to be a transfer of assets (share) of the firm to the minor. but such a transfer would be a transfer by the other partners of the firm and not by the assesses mother.19. in the circumstances, our answer to the questions referred is as follows:1. the tribunal was not justified in law in upholding the validity of initiation of proceedings under section 147(a) for reassessment.2. on the facts and in the circumstances of the case, interest on capital and accumulated profits paid to the minors is not covered under section 64(a)(iii).20. the reference is answered above.
Judgment:

1. The following two questions have been referred under Section 256(2) of the Income Tax Act:

1. Whether on the facts and in the circumstances of the case there was any material before the Tribunal to hold the initiation of proceedings under Section 147(a) in reassessment proceedings as valid?

2. Whether on the facts and in the circumstances of the case interest on capital and accumulated profits, paid to minors is covered under Section 64(a)(iii) and 64(1)(iii) in the proceedings in response to notice under Section 148 of the I.T. Act, 1961?

2. Apparently, the second question contains a clerical mistake and the words 'Section 64(a)(iii)' need to be omitted.

3. Smt. Nisha Rani Agrawal (herein after called the assessee) is the assessee in her individual capacity. She had two sons who, during the irrelevant period, were minors. Their names are Rohit and Rajiv.

4. Rohit was admitted to the benefit of partnership in the following firms to the extent of a share indicated against the name of each firm;

Name of the Firms Share of Profits1. M/S General Finance Co. 10%2. M/S Sheetalaya 12.5%3. M/S Ram Narain Beni Prasad 1/8th

5. Rajiv was admitted to the benefit of partnership in the following firms to the extent of the share of profit indicated against the names of each firm below;

Name of the Firms Share of Profits1. General Finance Co. 10%2. M/S Sheetalaya 12.5%3. M/S Tara Finance No. 20%

6. Apparently, these minors were admitted to the benefits of the partnership without any contribution to the capital of the firm, as these partnerships were family enterprises.

7. During the course of time, profits accrued to the firm. Out of those profits, the benefits or shares, which accrued to the minors and which were not withdrawn by the minors were deemed to be capital of the minors invested in the partnership and there was a condition that the minors would also be entitled to interest on such deemed invested capital.

8. The regular assessment of the assessee for the relevant assessment years was completed. The assessment years involved are 1976-77 to 1979-80. The assessments were sought to be reopened under Section 147(a), as that provision stood at the relevant time, on the ground (i) that the interest income of the minors had not been disclosed in the returns of the assessee and (ii) that such income was liable to be included in the income of the assessee under Section 64(1)(iii). Thus, the Assessing Officer claimed to have reason to believe that the interest income had escaped assessment due to omission on the part of the assessee to disclose that income. Accordingly, Section 147(a) was applied, which provision permits reopening of the assessment where income has escaped assessment due to omission of the assessee to make full disclosure.

9. The Tribunal held that the initiation of re-assessment under Section 147(a) was valid and the income by way of interest, paid to the minors on capital and accumulated profits of the partnership, was covered by Section 64(1)(iii).

10. The Bombay High Court has, in the case of C.I.T. v. Chandumal Kasturl Chandra : [1978]112ITR296(Bom) , held that the interest paid on acpumulated profits which remained with the firm could not be included in the total income of the assessee in the context of Section 64.

11. The aforesaid decision of the Bombay High Court was considered and distinguished by the Tribunal saying that the decision turned upon the terms of the agreement, which were involved in that case before the Bombay High Court.

12. We have considered the said aspect of the matter. Our opinion is as follows:

13. When a minor is said to be admitted to the benefits of partnership to the extent of a particular share, like in the present case, it means that if the partnership firm earns profits, the agreed share of those profits will go to the beneficiary. However, if profits do not accrue to the firm, the beneficiary does not get any share. In a nutshell 'benefits of partnership' means a share in the profits, if earned.

14. On the other hand, interest on invested capital or accumulated capital, whether that accumulation is of profits or otherwise, is an obligation upon the firm, which is independent of whether the firm earns pro lit in the subsequent years or not.

15. Thus, the interest accrued or paid on invested or accumulated capital, being independent of the earning of profits by the firm, cannot be said to be a 'benefit of partnership'.

16. Section 64(1)(iii) permits adding or clubbing to the income of the assessee, only that income of minor child of the assessee which arises from the 'benefits of partnership'. Interest income, not being benefits of partnership, can not be so clubbed under Section 64(1)(iii).

17. We have not been shown any other provision in the Income Tax Act under which such interest income could have been clubbed with the income of the mother of the minor children, i.e. the present assessee. If the interest Shad been earned on account of assets transferred to the minor child by the assessee mother, which the minor child had invested or loaned to the firm, the case may have fallen under Section 64(1)(v). The department has not set up any such case.

18. The admission of the minor child to the benefits of the partnership in the family business being without any consideration and without any contribution by the minor to the partnership firm, Could in a way be said to be a transfer of assets (share) of the firm to the minor. But such a transfer would be a transfer by the other partners of the firm and not by the assesses mother.

19. In the circumstances, our answer to the questions referred is as follows:

1. The Tribunal was not justified in law in upholding the validity of initiation of proceedings under Section 147(a) for reassessment.

2. On the facts and in the circumstances of the case, interest on capital and accumulated profits paid to the minors is not covered under Section 64(a)(iii).

20. The reference is answered above.