S SRINIVASAN Vs. COMMISSIONER OF INCOME-TAX

JUDGEMENT

(1.) IN the firm of Ranjaneya Motor Transport constituted by a deed dated 17th december 1951, the assessee is a partner. The other partners in the firm are his wife Shambagammal and one other stranger Sivachidambaram Pillai, the two minor sons of the assessee were admitted to the benefits of the partnership. For the assessment year 1957-58, the previous- year ending on the 30th September 1956, the assessee claimed that the share of the profit and the interest allowed by the firm on such shares to his wife and the two minor sons should be excluded from the operation of Section 16 (3) (a) (i) and (ii ). During the relevant account year, the share of the profit credited to the accounts of the wife and the two minor sons were the sums of Rs. 1944/, Rs. 23336 and Rs. 19447 respectively. Under a clause or the deed of partnership, members of the firm or persons admitted to the benefits of the partnership were entitled to receive interest on the amounts standing to their credit at the rate of 12 annas per cent per mensem, i. e. , nine per cent per annum. Such interest was not credited in any of the previous years, and on the accumulation of the profits of these persons, interest was credited for the first time in the year ended 30th September 1956. These interest amounts were rs. 7879, Rs. 6971 and Rs. 7702 in respect of the wife and the two minor sons. Relief from the application of Section 16 (3) (a) (i) and (it) was sought both in respect of the profits earned during the year of account and the interest payment credited as above. The Income-tax Officer rejected the assessee's contention, which was that the shares held by his wife and the two minor sons had been gifted to them by other persons and since it was not as a result of a transfer from him that these persons had obtained their interest in the firm, their share income should not be included in the total income of the assessee. This contention was rejected. Appeal was taken to the Appellate Assistant Commissioner before whom it was urged that the provision, Section 16 (3) (a) (i) and (ii) was ultra vires the Constitution, and that the interest earned by the wife and the minor children on the accumulated profits in that firm could not in any event be included in the total income of the assessee. Before the Appellate Authority, the decision in Bhogilal Laherchand v. Commissioner of Income-tax, Bombay City, was relied upon. The Appellate Assistant Commissioner thought that this decision applied and accordingly excluded only the interest portion of the amount brought to assessment.

(2.) AGAINST this decision, both the assessee and the department appealed, the assessee again raising the constitutional validity of Section 16 (3) (a) (i) and (ii), and the department contending that the exclusion of the interest earnings from the assessee's total income was erroneous. The tribunal rejected the first contention relying upon a decision of this Court in Amina Umma v. Income-tax Officer,. On the question of the interest earnings, the Tribunal thought that in so far as the interest was attributable to the two sums gifted to the two minors by certain other persons, that interest could not be said to be income arising directly or indirectly from the admission of the wife or the admission of the minors to the benefits of the partnership and that, if at an, such interest should be regarded as interest arising from investment of the amounts with the firm. To this extent, the view taken by the Appellate Assistant Commissioner was confirmed. But with regard to the remaining portion of the interest which accrued on the balances of profits of the firm credited to the wife and the two' minor sons, the tribunal was of the view that Section 16 (3) (a) (i) and (ii) directly applied. Accordingly, the Departmental appeal was allowed in part. It is from these orders of the Tribunal that the present questions of law arise and the questions so referred to us under Section 66 (1) of the Act are :

(3.) THE second question has given rise to some difficulty for the reason that the decision of the Bombay High Court in 1954-25 ITR 523: ( (S) AIR 1955 Born 16)appears to be in favour of the assessee. Before dealing with the facts of that decision and the reasoning that appealed to the learned Judges who decided that case, we may refer to the relevant clauses of the partnership deed in the present case. The partnership was entered into between the assessee, his wife shanbagammal and one Sivachidambara Pillai. It provided that the account shall be closed on the 30th September of each year and net profits or loss determined as on that date. After setting out the profit sharing ratio as it obtained previously, the document provided that the profits for the year ending on the 30th September 1952 and for subsequent years shall be shared in the ratio of 190/300, 25/300 and 30/300 among the three partners, and that the two minors be entitled to 30/300 and 25/300 of the profits. In the event of there being a loss, it was to be shared among the three partners in certain proportions. The further clauses read :