Decided on November 26,1982



- (1.) PER Shri S.Rajaratnam, Accountant Member - These two appeals have been filed by Shri Salaba Beig of Ponnur against the common order of the AAC, Vijayawada, for the assessment years 1978-79 and 1979-80.
(2.) The assessee is an individual and his wife was a partner in a firm in which the assessee was a partner, namely, Salaba Beig Finance Corporation, Ponnur, for the assessment year 1978-79 and in Salaba Beig Finance Corporation, Ponnuru and Nidubrole, for the assessment year 1979-80. As for share income, there is no dispute that the income of the wife has to be aggregated under section 64 of the Income-tax Act, 1961 (the Act). It is, however, the assessees case that interest element should be segregated on the ground that there was no stipulation for investment of any amount of capital before she was taken as a partner. Neither the ITO nor the first appellate authority agreed with the assessees claim. It was found that there was only one capital account and that there was nothing in the partnership deed to suggest that it was not necessary for the lady to have contributed any capital. It was claimed that the decisions of S. Srinivasan v. CIT [1967] 63 ITR 273 (SC) and Smt. Nripendrakumari Bhandari v. CIT [1976] 105 ITR 158 (Mad.) justified exclusion of interest under such circumstances. The first appellate authority did not find these decisions applicable to the facts of the assessees case. The assessee in the second appeal repeats his stand that was taken before the authorities below. The learned counsel for the assessee submitted that the decisions of the Madras High Court supported the assessees case. Apart from the decision of the Madras High Court, the decision of this Tribunal in IT Appeal Nos. 107 (Hyd.) of 1980, dated 20-3-1981 (to which one of us, Judicial Member was a party), was also relied upon. The learned departmental representative, on the other hand, claimed that the partnership deed actually supported the revenues case. There was a reference to the contribution of capital without limit by the partners. There was only one capital account. For the business of finance, capital was quite necessary. He sought to distinguish the decisions of the Madras High Court and the Tribunal, relied on by the assessee, on facts. He also relied on the decision of the Delhi Bench of this tribunal in ITO v. Smt. Shushila Devi [1982] 1 ITD 778, wherein it was held that the mere omission to refer the contribution of capital in the partnership deed did not justify the exclusion of interest from the scope of section 64. We have carefully considered the records as well as the arguments. There is one view though a narrower one which holds that the interest payable to a partner (whether wife or minor son) is not different from the profits and that it will have to be automatically aggregated if the profits themselves can be aggregated. We would, however, take the view in this case that it cannot be so automatically aggregated. There is authority for this broader view in the decision of the Madras High Court in Smt. Nripendrakumari Bhandaris case (supra) where interest on moneys paid to the credit of partner was held to be not capable of partnership was not so admitted for his deposits in the firm. Even the fact of a reference to the interest on such accounts in the partnership deed, it was held, did not justify the aggregation. Though we would follow this broader view, we are not in a position to concede the assessees claim in the facts and circumstances of the present case. The assessee is a financing firm. It is needless to point out that finance is the first and the sole requisite for money-leading business. It is true that the partnership deed does not stipulate that a minimum capital should be subscribed by each partner. But the other circumstances would indicate that she could not have admitted for reasons any other than her capital. It is not shown that she has either the requisite experience or that she is a working partner. She had contributed about Rs. 45,000 when she became a partner in Nidubrole firm. The position with the other firm is not much different. Actually, the return from partnership is more by way of interest than share of profit which has been nominal. Clause 4 of the partnership deed in the case of the latter firm specifically say that "there will be no limit to the capital to be contributed by the partners and they can invest amounts according to their financial convenience". Clause 4 of the first partnership deed says that "interest at the rate of 15 per cent will be charged on both investments and withdrawals of partners". There are no two accounts-one for capital and the other for investment. The amount is credited to what is styled as capital account. Both interest and share of profit/loss have to be accounted for in the self-same capital account. Hence, in the facts and circumstances of the assessees case, we are not in a position to say that the interest has a separate identity from the share of profit. In the case of Smt. Nripendrakumari Bhandari (supra), it was a case of admission of a minor to the benefits of partnership. It is not a matter of contractual relationship as between adults. There were two accounts for partners-one as fixed capital account on which no interest was paid and the other towards loan on which interest at 7.5 per cent was found payable. It was in this context that the interest 7.5 per cent on loan amount was considered to be outside the scope of section 64. The facts in the assessees case are totally different. There is very circumstance to indicate that she became a partner by virtue of her capital contribution. Hence, the interest credited to her capital account does not have the character different from that of profits. The decision of this Tribunal in IT Appeal No. 107 (Hyd.) of 1980 also related to the interest to a minors account who was admitted to the benefits or partnership. The other facts are also similarly distinguishable. The decision of this Tribunal relied on by the learned departmental representative in the case of Smt. Shushila Devi (supra) dealt with a case of interest credited to a minor on initial investment made on his behalf. In this case, interest was held to be aggregable notwithstanding absence of any specific stipulation for capital on behalf of the minor. The facts in the assessees case are much stronger. It is a case of an adult partner entering into a contract of partnership by contribution of an amount which was necessary for the firms business in money-leading. We are not persuaded to accept the learned courses plea that it is a case where she was taken as partner for mere agreement to share loss and that the contribution made to her capital account is only in the nature of investment notwithstanding the description of the same as capital account in firms books.
(3.) IN the result, the appeals are dismissed.;

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