M.C. Agarwal, J. - (1.) THE Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, has referred the following questions for the opinion of this court : "1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the interest derived by the minors on the investments made with the firm was not as a result of their admission to the benefits of the partnership and that it could not be included in the assessee's income under Section 64(1)(iii) of the Income-tax Act, 1961 ? 2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in confirming the Appellate Assistant Commissioner's action in holding that the interest earned by the minors be bifurcated in two parts, (i) on initial deposits, and (ii) on accumulated profits and that the interest falling in the first category was to be excluded from the income of the father whereas the income falling in the second category was to be included in the income of the father ? 3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in deleting the following interest from the hands of the minors :
(2.) THE first question arises out of the Tribunal's order in Income-tax Appeal No. 748 of 1978 and cross-objection No. 31 of 1977-78. This was an appeal by the Revenue and the cross-objection was filed by the assessee, Ram Ratan. Questions Nos. 2 and 3 arise out of the Tribunal's order in Departmental Appeals Nos. 749, 750 and 751 in the cases of Jitendra Kumar, Anil Kumar and Pradeep Kumar who were the minor sons of the aforesaid Ram Ratan. THE aforesaid appeals and the cross-objection related to the assessment year 1976-77 and were disposed of by the Income-tax Appellate Tribunal by a common order. We have heard Sri Rakesh Rajjan Agarwal, learned counsel for the Revenue and Sri Shakeel Ahmad, learned counsel for the assessee-respon-dent. Sarvarsri Anil Kumar, Jitendra Kumar and Pradeep Kumar are the minor sons of Ram Ratan. These three minors were admitted to the benefits of a partnership, Ratan Cold Storage, Farrukhabad, that was constituted by Sarvasri Subhash Chandra and Jageshwar Dayal. The profits of the partnership firm were to be distributed amongst the aforesaid two partners in the ratio of 24 paise and 4 paise in a rupee, respectively, while the losses were to be shared in the ratio of 80 paise and 20 paise in a rupee, respectively. The aforesaid minors, admitted to the benefits of the partnership, were also to receive 24 paise each per rupee from the partnership profits. They were not responsible for the losses. Clause 14 of the partnership deed provided that the partners shall be allowed an interest of 12 per cent. per annum on their investment with the firm.
(3.) THE firm as aforesaid was constituted with effect from January 1, 1967. THE minors invested certain amounts in the firm at the time of the constitution of the firm. THEy also invested certain amounts later. All such amounts were credited to the accounts of the minors with the said firm. Interest allowed on the investments and the profits accrued to the minors in terms of the partnership agreement were also credited to those accounts. In the assessment of their father, Shri Ram Ratan, for the year 1976-77, the Income-tax Officer included the amounts of interest allowed to the minors on the said balances in terms of Section 64(1)(iii) of the Income-tax Act. THE said amounts were also included in the income of the respective minors on protective basis as it was contended in the case of their father that such amounts are not of the nature of benefit arising to the minors from their admission to the benefits of the aforesaid partnership firm. THE assessee, Ram Ratan, appealed to the Appellate Assistant Commissioner who took the view that only interest relating to the initial deposit made by the minors was includible in the income of their father under Section 64(1)(iii) and that the interest relating to the rest of the amounts could not be treated as income arising directly or indirectly to the minors from their admission to the benefits of a partnership-firm. THE Revenue appealed to the Income-tax Appellate Tribunal which upheld the view taken by the Appellate Assistant Commissioner and dismissed all the aforesaid Departmental appeals. The Income-tax Appellate Tribunal observed as below : "In our opinion, there is enough justification for the conclusion reached by the learned Appellate Assistant Commissioner. There is nothing in the partnership deed to show that the minors were, in any way, under the obligation to contribute capital. That despite this lack of obligation, the minors made investments with the firm, would only go to show that the minors found profitable to make investments for earning interest and as many other persons were giving loans to the firm to the benefits of which they were admitted, they also gave loans. That these were contributions of capital and that they were not by way of deposits simpliciter as affirmed by them has to be proved by the Department. The Department has tried to discharge this onus by pointing out that profits accruing and arising to the minors from the business of the firm have been credited to these accounts. This fact alone, in our opinion, is not enough to convert the deposits into capital. May be that the firm should have kept two accounts separate but simply because the two have not been kept separate, it cannot be said that the fact of credit of the profit in this account turned what was originally a deposit account into a capital account. The Revenue's appeal on this account, in our opinion, has no merit and is, therefore, hereby dismissed." ;