BHOGILAL LAHERCHAND Vs. COMMISSIONER OF INCOME TAX BOMBAY

JUDGEMENT

(1.) THE question that arises on this reference is a very simple one and not capable of much elaboration. THE assessee started a partnership business along with his major son and he admitted to the benefit of this partnership his two minor sons. In the assessment year 1950-51 the share of the profit of each of the minors came to Rs. 1,05,077 and this amount was included in the income of the assessee under the provisions of Section 16(3)(a)(ii). Each of the minors also received interest in the sum of Rs. 43,210 on deposits which stood to their credit in the firm, and the question that we have to consider is whether the interest which the minors received could be included in the income of the assessee under the provisions of Section 16(3)(a)(ii).

(2.) NOW, what Section 16(3)(a)(ii) requires is that a minor must be admitted to the benefits of the partnership in a firm of which the assessee is a partner and income must arise either directly or indirectly to the minor from his admission to such a partnership. Therefore there must be a connection between the income and the admission of the minor to the partnership. The connection need not be direct; it may even be indirect. We have to look to the partnership deed in order to determine whether there was a connection direct or indirect between the interest received by the minors on the deposits and their admission into the partnership. For this purpose the relevant clause in the partnership deed is clause 3 and that clause provides :-

(3.) IF therefore this be the true position under the partnership deed, can it be said that the interest which the minors earned was an income which directly or indirectly arose from their admission to the benefits of the partnership ? It is clear that the minors earned interest primarily and substantially by reason of the fact that they deposited moneys in the firm. It is not by reason of the fact that they were partners, nor was it by reason of the fact that they were obliged under the partnership deed to make the deposits, that this interest was earned. Therefore, this income arose to the minors not from their admission to the benefits of the partnership, but the income arose because the minors chose to keep moneys in the partnership firm. They could have earned interest on their deposits without being partners, they could have earned interest on their deposits by keeping the deposits in any other firm, and really apart from the fixing of the rate of interest there is no connection whatsoever between the minors being admitted to the benefit of the partnership and their earning interest on the deposits which they have made or on the moneys that stand to their credit. The position undoubtedly would have been different if there was any obligation upon the minors to make deposits or, on the other hand, if the partnership firm was under an obligation to keep the moneys of the minors, whether they needed them or not.