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

1. The appellant is a senior partner in A firm in which the two other partners are his wife and a stranger, In addition, two minor sons of the appellant were admitted to the benefits of the partnership. Under the deed of agreement constituting the partnership, the shares in the profits of all the five persons were defined. There was also specification of the shares in which losses were to be shared by the three partners. There was a clause in the deed of partnership that "if the firm requires any sum for meeting the expenses for its management and if any of the partners has and is willing to give such amount, he may advance (such amount) as loan. He may receive interest for such sum at the rate of 12 annas per cent per mensem. The firm earned profits which were distributed in accordance with their shares between the three partners and the two minors who were admitted to the benefits of the partnership. The amounts of profit falling to the share of the wife of the appellant and his two minor sons were allowed to accumulate in the accounts of the partnership for a number of years. Up to the beginning of the previous year relevant to the assessment yearthe profits that were accumulating in the accounts to the credit of the wife and the two minor sons of the appellant were kept without any interest. With effect from the previous year in question, the partnership decided to allow interest at 9 per cent per annum on these accumulated profits, so that, during this previous year the amounts to the credit of these three persons increased on account of two additions in each case. There was addition of further profit falling to their share and there was added interest on the opening balance of the accumulated profits in the accounts of each one of these three persons. All these amounts added to the accounts during the previous year in respect of share of profits as well as interest on accumulated profits were added to the income of the appellant for purposes of assessment under S. 16 (3) (a) (i) and (ii) of theAct. These additions were challenged by the appellant on two different grounds. The first ground was that the provisions of S. 16 (3) (a) (i) and (ii) were ultra vires as being beyond the legislative powers of the Parliament. The second ground was that, even on the application of these provisions, at least the amount added to the income of the appellant in respect of the interest credited in the accounts of his wife and minor sons was not justified in law. Both these objections weretax Officer. On appeal. the Appellate Assistant Commissioner upheld the decision of theOfficer on the first point, but decided the second point in favour of the appellant and held that the interest earned by his wife and minor son from the firm could not be included in the income of the appellant for purposes of charging it withax Appellate Tribunal, on further appeal, again upheld the decision on the first question, but, on the second question, partly rejected the claim of the appellant. The Tribunal held that the amount of interest credited to the amount of the minors in respect of capital provided by theirer had to be excluded from the total income of the assessee, while the interest earned on the accumulated profits was rightly included in the income of the appellant. Thereupon, at the request of the appellant, the following two questions were referred by the Tribunal for the opinion of the Madras HighWhether the provision of Section 16 (3) (a) (i) and (ii) offends Cls. (f) and (a) of Art 19 (1) of the Constitution of India?(ii) Whether interest credited by the aforesaid firm to the assessees wife and minor children attributable to past profit accumulations only is includible in the assessment of the assessee under S. 16 (3) (a) (i) and (ii)High Court answered both the questions against the appellant, and consequently, he has come up to this Court by special leave.

Reasoning: 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