Case: S. Srinivasan Vs. Commissioner Of Income-Tax, Madras

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 10 (3) (a) (i) and (ii) of the Income-tax Act.4. In this connection, learned counsel for the appellant relied on a decision of the Bombay High Court in Bhogilal Laherchand v. Commr. of Income-tax, Bombay City, (1954) 25 ITR 523 : (AIR 1955 Bom 16 ). It was held in that case that interest earned by minors on deposits maintained in the firm could not be held to be a benefit which the minors received from their admission to the partnership of the firm. The case is inapplicable, because, as we have indicated above in this case the interest arising to the wife and the minor sons of the appellant was not the result of any deposits made by them with the firm.5. Chouthmal Kairiwal v. Commr. of Income-tax, Assam (1961) 41 ITR 570 (Assam), and Akula Venkatasubbaiah v. Commr. of Income-tax, (1963) 47 ITR 458 (Andh Pra), were cases where interest was paid to the minors on the capital provided by them for the business of the partnership. In those cases, it was held that the interest on the capital contributed by the minor one was benefit arising from the admission of the minors to the benefits of the partnership, and consequently, that interest had to be included in the total income of the father in his assessment. These two cases are of no assistance, because the nature of the amount on which interest has accrued to the wife and the minor sons of the appellant is different and is not on capital advanced by them or on their behalf.6. Reference was also made by learned counsel to a decision of the Allahabad High Court in L. Ram Narain Garg v. Commr. of Income-tax, U. P., (1965) 55 ITR 435 (All), in which case also it was held that interest paid to a minor son admitted to the benefits of a partnership on his capital investment is income derived directly or indirectly by him from the admission and is includible in the income of the father under S. 16 (3) (a) (ii) of the Income-tax Act. It was further held that it cannot be stated as a matter of law that interest paid by a partnership to a minor admitted to its benefits can never be said to be connected even indirectly with the fact of his admission. It is connected with the fact if the interest paid is on capital investment by the minor or on a loan advanced to the partnership by the minor and the partnership deed forbids the raising of a loan from any person other than a partner or a person admitted to its benefits. It is not connected with the fact if the interest is paid on a deposit made, or loan advanced by the minor, and the partnership was free to accept a deposit or a loan from any person even if not connected with it. The principle enunciated by the Allahabad High Court does not envisage all circumstances in which interest may be earned by a minor on his moneys with the firm. The cases when interest is earned on a deposit or a loan differ from a case of the type before us where interest was earned on amounts of which the minors permitted the use by the firm, because they were their accumulated profits, arising from the firm itself and because of their interest in the firm as persons admitted to the benefits of the partnership.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]2. So far as the first question is concerned, learned counsel appearing for the appellant himself did not press it before us in view of the decision of this Court in Balaji v.Officer, Special Investigation Circle, Akola, (1961) 43 ITR 393  : (AIR 1962 SC 123  ).That point was earlier decided by the Madras High Court in B. N. Amina Umma v.ITR 137: (AIR 1954 Mad 1120  ). It has been held by this Court in Balajis case, (1961) 43 ITR 393  : (AIR 1962 SC 123  ) (supra) that the provisions of Section 16 (3) (a) (i) and (ii) did not impose any unreasonable restriction on the fundamental rights of the assessee under Art. 19 (1) (f) and (g) of the Constitution, and were, consequently, valid. The first question has, therefore, been clearly answered correctly by the High Court against theappears 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 10 (3) (a) (i) and (ii) of the