SUHASH CHANDRA SEN, J. - (1.) THE Tribunal has referred the following question of law to this Court under s. 256(1) of the IT Act, 1961 : "Whether, on the facts and in the circumstances of the case, and on a correct interpretation of s. 64(1)(iii), the interest credited to the account of the minor children, Master Anshuman and Miss Divita in the books of the firm, M/s. Balaji Enterprises, in which the said minors are admitted to the benefits of partnership, are includible in the hands of the assessee ?"
(2.) THE facts as narrated by the Tribunal in the statement of case are as under : "THE assessee is an individual and the assessment years in question are 1976-77 and 1977-78 THE assessee follows the financial year as the accounting year. THEre is a partnership firm by name Balaji Enterprises. THE assessee's minor children are admitted to the benefits of partnership in that firm. THE profits were being credited every year in the accounts of the minor and interest on the amount outstanding is being credited in accordance with cl. 7 of the partnership deed dt. 1st April, 1972, and in accordance with cl. 7 of the subsequent deed dt. 17th July, 1975. THE interest credited to the minors' accounts was not included in the assessee's hands up to and including the asst. yr. 1975-76. But, for the first time in the asst. yr. 1976-77, the interest credited to the accounts of the minors has been clubbed in the hands of the assessee by relying on s. 64(1)(iii). Evidently, this has been done because of the amendment to the law brought about w.e.f. 1st Jan., 1976. THE AAC agreed with the ITO. Counsel for the assessee contended that, in view of the fact that there was no condition to contribute capital for being admitted to the benefits of the partnership, the amounts standing in the accounts of the minors must be treated as loan or deposit on which interest was being credited every year in accordance with cl. 7. It was, therefore, contended that the minors derived interest not on account of their being admitted to the benefits of partnership but because of their independent right of investing their amounts in the firm. Accordingly, learned counsel contended that s. 64(1)(iii) had no application. THE learned Departmental Representative, on the other hand, strongly relying on the order of the AAC contended that the decision of the Supreme Court in the case of S. Srinivasan vs. CIT (1967) 63 ITR 273 (SC) : TC42R.317 squarely applies to the facts of the case. In reply, learned counsel for the assessee stated that the principle laid down in Srinivasan's case had no application to the facts of the case on hand and the case was fully covered by the decision of the Jaipur Bench of the Tribunal in IT Appeal No. 820/Jp of 1978-79, dt. 14th Aug., 1980. Before looking to the decision of the Supreme Court, it would be useful to recapitulate the factual position. THE assessee was not a partner in the firm. THE minors were admitted to the benefits of the partnership. THEy had not contributed any capital nor was there any stipulation for contribution of capital. No doubt there was only one account in each of their names and it was not indicated as to whether it was capital account or not. THEir share of profit was being credited to that particular capital account year after year. Right from the beginning, interest was credited to that account, obviously on the basis of cl. 7 of the partnership deeds referred to above. Even in respect of other partners, interest was being credited in a similar fashion. It was, therefore, clear that the accumulated profits were treated as advance or deposit to the firm and, therefore, interest was credited. THE Tribunal considered the decision of the Supreme Court in Srinivasan's case (supra). THEre, the profits were being accumulated for several years. No interest might be credited to those accounts of the minors. It was held by their Lordships that, in the absence of any indication to convert the accumulated profits to deposit or loans, interest earned on the accumulated profits must be held to have arisen directly or indirectly on account of the minors being admitted to the benefits of partnership. THE position before the Tribunal was different as already indicated. THE minors were given the interest not by virtue of their being admitted to the benefit of partnership but because of their advances. THEre was, therefore, no nexus between payment of interest and their admission to the benefits of partnership. In the opinion of the Tribunal, therefore, s. 64(1)(iii) in such circumstances had no application. It may be mentioned that the decision of the Supreme Court came up for consideration before the Madras High Court in the case of Addl. CIT vs. Misrimul Sowcar (1979) 13 CTR (Mad) 308 : (1979) 119 ITR 123 (Mad) : TC42R.506 as well as by the Bombay High Court in the case of CIT vs. Chandanmal Kasturchand 1977 CTR (Bom) 717 : (1978) 112 ITR 296 (Bom) : TC42R.520. THE Jaipur Bench of the Tribunal also supported the view taken by the Tribunal. THE clubbing of interest in respect of minors' account in the hands of the assessee was, therefore, vacated." The argument advanced on behalf of the assessee is that the income that the minors derived in the case on account of interest being credited in the books of the firm in the names of the minors could not be treated as income arising directly or indirectly "from the admission of the minors to the benefits of partnership in the firm". It has been argued that any person can deposit any money and earn interest on such deposit. If a minor allows his share of profits in firm to remain in the firm and earn interest thereby then the interest paid by the firm cannot be treated as income arising from the admission of the minor to the benefits of a partnership firm. The earning of interest is an incident of lending of money by the minors to the firm. This may be done even by a partner of a firm. But that is an act independent of admission to the firm. It has been emphasised that there was no requirement of contribution of capital for being admitted as a member of the firm. The advocate appearing on behalf of the assessee placed reliance on the copy of the partnership deeds and contended that there is nothing in the partnership deeds which made it obligatory on a minor to make any contribution towards the capital of the firm. There is a partnership deed dt. 1st April, 1972, entered into by Santosh Kumar Kanoria and Moti Sagar Khanna. In this partnership deed, Santosh Kumar Kanoria joined as Karta of his HUF known as Santosh Kumar Anshuman which consisted of himself, his wife and his children. In this partnership deed, it was recited as under : "6. (i) That the profits of the firm shall be divided between the parties and the said minors in the following manner : The party of the first part 40% The party of the second part 20% Master Anshuman Kanoria, minor, admitted to benefits 25% 7. That the partners and the minors admitted to benefit shall be allowed interest at 12% per annum or at such other rate or rates that may be agreed upon by the partners on their accounts and it shall be after deduction to such interest that profits or losses shall be determined for the year for distribution among the partners and/or minors admitted for benefits." By a deed of retirement dt. 17th July, 1975, Moti Sagar Khanna retired from the partnership w.e.f. 17th July, 1975, and a second deed of partnership dt. 17th July, 1975, was executed by Santosh Kumar Kanoria and Sri. Amitabh Khemka. Santosh Kumar Kanoria, as stated before, joined the partnership as Karta of an HUF known as Santosh Kumar Anshuman which consisted of himself, his wife and his children. It has been recited in the deed of partnership as follows : "1. That the business of partnership (hereinafter also referred to as "the firm") shall be continued to be carried on under the name and style of 'Balaji Enterprises' and/or such other name or names as the partners may from time to time agree upon. 2. That, after formation of the partnership, the partners have agreed to admit Master Anshuman Kanoria and Miss Divita Kanoria to the benefits of partnership with no obligation on the minors to suffer the losses of the firm. Sri. Santosh Kumar Kanoria, father and natural guardian of the minors, has given his consent and approval to the admission of the minors to the benefits of partnership. 3. That the partnership has commenced on and from the 17th day of July, one thousand nine hundred and seventy-five and shall continue until determined by the partners by mutual consent.... 6(i) That the profits of the firm shall be divided between the parties and the said minors in the following manner : 7. That the partners and the minors admitted to benefits shall be allowed interest at 15% per annum or at such other rate or rates that may be agreed upon by the partners on their accounts and it shall be after deduction of such interest that profits or losses shall be determined for the year for distribution among the partners and/or minors admitted for benefits."
(3.) IT would appear from the two partnership deeds, the relevant clauses whereof have been set out Miss Divita Kanoria, minor, admitted to benefits 15% 6(ii) That the losses of the firms shall be borne by the parties in the following shares, namely : The party of the first part 67% The party of the second part 33% The party of the first part 40% The party of the second part 20% Master Anshuman Kanoria, minor, admitted to benefits of the partnership 25% Miss Divita Kanoria, minor, admitted to benefits of the partnership 15% 6(ii) That the losses of the firm shall be borne by the parties in the following shares, namely : The party of the first part 67% The party of the second part 33% hereinabove, that the deeds provided that the minors would not only be admitted to the benefits of the partnership but will also be allowed interest on their accounts at the rate of 15% per annum or such other sum as may be agreed upon by the partners. IT was further agreed that after deductionof such interest the profits or losses shall be determined for the year for distribution among the partners and/or minors admitted to the benefits of the partnership. Therefore, the right to obtain interest on the outstanding amount standing in their accounts arose to the minors from the partnership deed itself. IT is a right directly arising out of admission of the minors to the benefits of the partnership. It is also to be noted that the minors in this case not only allowed their moneys to remain in the partnership but the amount of interest on these accounts paid to the minors and other partners were to be allowed as deduction from the partnership profits. The interest paid by a firm would normally be deductible from its income. By this process, the firm also benefited and its tax burden was lightened. The minors also benefited in that they got 15% interest on the deposits under cl. 7 of the partnership deed. This right to get interest at the rate of 15% on the amount lying deposited in the firm was conferred upon the minors by the partnership deed itself. Therefore, in my judgment, the provisions of s. 64(1)(iii) of the Act are clearly attracted to the facts of this case. Sec. 64(1)(iii) provides as under : "64. Income of individual to include income of spouse, minor child, etc.--(1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly--.... (iii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm." "The benefits of partnership in a firm" will not only be the right to get the share of the profits of the firm but will also include other benefits which a minor may enjoy from his being admitted to the firm. The income by way of interest received by the minor was by virtue of a specific clause in the partnership. The minor as well as other partners were entitled to get interest on their accounts in the firm. This is a specific provision in the partnership deed and because the minors were admitted to the benefits of the partnership firm they were given this interest on their accounts. ;