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PETITIONER: S.   SRINIVASAN

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, MADRAS

DATE OF JUDGMENT: 04/10/1966

BENCH: BHARGAVA, VISHISHTHA BENCH: BHARGAVA, VISHISHTHA SHAH, J.C. RAMASWAMI, V.

CITATION:  1967 AIR  517            1967 SCR  (1) 727

ACT: Income-tax  Act  (11 of 1922), s. 16(3) (a)  (i)  and  (ii)- Assessee and his wife partners in a firm-Minor sons entitled to  benefits-Profits  of  wife and  minor  sons  allowed  to accumulate with firm-Payment of interest by firm-Whether can be included in income of the assessee.

HEADNOTE: The appellant was a partner in a firm in which the other two partners  were his wife and a stranger.  Two, minor sons  of the  appellant  were also admitted to the  benefits  of  the partnership.  Under the partnership deed, the shares of  the five  persons  in the profits were defined and it  was  also provided  that a partner may advance a loan for meeting  the expenses of the firm and receive interest on such loan  upto 12%.   The amounts of profits falling to the shares  of  the wife and sons were allowed to accumulate in the accounts  of the  firm.  Till the beginning of the accounting year  1956- 57, the profits that were accumulating were kept without any interest, but thereafter the firm allowed interest at 9% per annum.  On the question whether the interest could be  added to  the income of the appellant for purposes of  assessment, under  s.  16 (3) (a) (i) and (ii) of  the  Income-tax  Act, 1922. HELD : The interest indirectly arose and accrued to the wife and the minor sons because of their capacity mentioned in s. 16 (3) (a) (i) and (ii) and could therefore be included  for assessment in the income of the assessee, under the section. [730 F-G] The  accumulated profits remaining in the hands of the  firm could  not  be  equated with deposits  made  with  or  loans advanced  to the firm.  The wife and minor sons  earned  the profits  because of their membership of the firm or  because of their admission to the benefits of the firm., and  having earned  them in that capacity, they allowed the use  of  the profits  to  the firm without any  specific  arrangement  as would  have  been entered into if the funds  belonged  to  a stranger.  They let the firm use the funds because they were interested  in  the profits of the firm,  and  interest  was allowed  on  the  accumulation  simply  because  the   funds belonged  either to a partner or to minors admitted  to  the

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benefits of the partnership. [730 B, C-D, F] Case law referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 556 of 1965. Appeal  by special leave from the judgment and order  dated’ August  27, 1962 of the High Court of Madras in T.C. No.  82 of’ 1960. A. K. Sen and R. Gopalakrishnan, for the appellant. S.  T.  Desai,  A. N. Kripal and R.  N.  Sachthey,  for  the respondents. 728 The Judgment of the Court was delivered by Bhargava, J. 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 year 1957-58, the  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 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 a(-,counts 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 section 16(3) (a) (i) and (ii) of the Income-tax Act.  These additions were challenged by the appellant on two  different grounds.   The  first ground was that the provisions  of  s. 16(3)  (a) (i) & (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 were  over-ruled by the Income-tax Officer.  On appeal,  the Appellate Assistant Commissioner upheld the decision of  the Income-tax  Officer  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 sons from  the  firm could  not  be included in the income of the  appellant  for

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purposes  of  charging it with income-tax.   The  Income-tax Appellate Tribunal, on further appeal, 729 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 their grand-father and grand-mother 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 High Court:- "(i)  Whether  the provisions of section 16(3) (a)  (i)  and (ii)  offend  clauses (f) and (g) of Article  19(1)  of  the Constitution of India ? (ii)Whether interest credited by the aforesaid firm to  the assessee’s  wife  and minor children  attributable  to  past profit accumulations only is includible in the assessment of the assessee under Section 16(3)(a)(i) and (ii) The  High  Court  answered both the  questions  against  the appellant, and consequently, he has come up to this Court by special leave. 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. Income-tax Officer, Special Investigation Circle, Akola, and Others(’).   That  point was earlier decided by  the  Madras High  Court  in  B. N. Amina  Umma  v.  Income-tax  Officer, Kozhikode(2).   It has been held by this Court  in  Balaji’s case(’)  that the provisions of s. 16(3)(a)(i) and (ii)  did not  impose any unreasonable restriction on the  fundamental rights of the assessee under Article 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 the appellant. Learned  counsel appearing for the appellant  mainly  argued before  us  the second question and urged  that  though  the profits  earned  from the partnership by the  wife  and  the minor sons of the appellant were undoubtedly income  arising to  them  directly from the partnership of the wife  in  the firm  or the admission of the minors to the benefits of  the partnership  in  the  firm, the  interest  accruing  on  the accumulated  profits  should  not be held  to  arise  either directly  or indirectly from the same source.  The  argument was  that the accumulated profits belonging to the wife  and the  minor  sons  should  be held to be  in  the  nature  of deposits made (1) [1962] 2 S.C.R. 983 :43 I.T.R. 393. M17SUPCI/66-2 (2) 26 I.T.R. 137. 730 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  in  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

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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 these funds of theirs, because they  had  in- terest 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 s. 16(3)(a)(i) and (ii) of the Income-tax Act. In this connection, learned counsel for the appellant relied on  a  decision  of  the  Bombay  High  Court  in   Bhogilal Laherchand v. Commissioner of Income-Tax, Bombay City().  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 (1)25 I.T.R. 523. 731 appellant  was not the result of any deposits made  by  them with the firm. Chouthmal Kejriwal v. Commissioner of Income-tax,  Assam,(’) and  Akula Venkatasubbaiah v. Commissioner of  Income-tax(2) 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 sons  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  assess- ment.   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.  Reference was also made by learned counsel to a decision of the  Allahabad  High  Court  in  L.  Rain  Narain  Garg   v. Commissioner  of Income-tax, U.P.(3), 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

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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.   In  the circumstances, the answer returned by the High Court to  the second question was also correct. Appeal dismissed. The appeal fails and is dismissed with costs. V.P.S. (1)41 I.T.R. 570. (2)47 I.T.R. 458. (3)55 I.T.R. 435. 732