COMMISSIONER OF INCOME TAX Vs. NASHTE S V

JUDGEMENT

(1.) A firm by name M/s V. L. Nashte & Co. was constituted under an instrument of partnership dated 25th November, 1960, with five partners, that is, the assessee in this case and his four major sons. Three minor sons of the assessee, namely, A. S. Nashte, R. S. Nashte and K. S. Nashte, were admitted to the benefits of the partnership. Under cl. 5 of the deed of partnership dated 21st January, 1955, the two minor sons, A. S. Nashte and R. S. Nashte, contributed a capital of Rs. 42,753. By a subsequent deed dated 24th October, 1957, the assessee's other minor son, K. S. Nashte, was admitted to the benefits of the partnership and he had contributed a capital of Rs. 25,000 as provided in cl. 3 of the partnership deed. It is common ground that the capital contributions made by the three minor sons of the assessee came out of the assets received by them on a partial partition of their HUF property. By a letter dated 1st of November, 1958, written by the assessee in his capacity as guardian of his three minor sons he instructed the firm to transfer a sum of Rs. 64,500 from the capital account of the two minors, A. S. Nashte and R.S. Nashte, and a sum of Rs. 42,000 from the account of the third minor son, K. S. Nashte, to the loan accounts to be opened in their respective names in the books of the firm. This letter said that the firm had to pay interest at the rate of 6per cent p.a. on these amounts transferred to the loan accounts. In subsequent years also some more amounts from the minors' capital accounts were transferred to the loan accounts in their respective names on which the firm paid interest to the minors. In assessment proceedings of the assessee for the asst. yrs. 1962-63, 1963-64 and 1964- 65, apart from including the share income of the three minor sons in the income of the assessee, the interest credited to these minors' loan accounts was also included in the income of the assessee by the ITO purporting to give effect to s. 64 (ii) of the IT Act, 1961, as the provisions stood at the material time.

(2.) IN appeal by the assessee, the AAC upheld the inclusion of the shares of the profit of the minors in the assessment of the assessee but directed the ITO to exclude the interest amounts from the assessee's assessments following a decision of this Court in Bhogilal Laherchand vs. CIT (1954) 25 ITR 523 (Bom). The ITO filed an appeal before the Tribunal against the order of the AAC. The Tribunal took the view that the interest earned on the loan accounts in the firm in which the assessee was also a partner did not lead to the inference that the interest income was earned by the minors on account of their admission to the benefits of partnership. The Tribunal observed that if the assessee, instead of transferring a part of the minors' capital accounts to the loan accounts opened in their names, had chosen to take out that portion of the capital and invested it somewhere else, the interest earned thereon would not have been taxed as the income of the assessee.

(3.) NOW, a bare reading of the provisions in s. 64(ii) would indicate that there must be some nexus direct or indirect between the income which accrues to a minor and his admission to the benefits of the partnership firm. It is not in dispute that the amounts which were originally contributed as capital and which were then transferred to the loan accounts belonged to the minors in their own right because they came to them as their share at the partition of the property of the joint Hindu family. The assessee acting as the guardian of the minors could well have invested moneys belonging to the minors in any other manner or, as it is not disputed by Mr. Joshi, they could initially have been advanced as loan to the partnership firm. There was no obligation on any of the minors to advance any moneys by way of loans to the partnership firm and it is not that unless he advanced that amount by way of loan, he could not be admitted to the benefits of the partnership. It is true that the moneys initially were contributed as capital of the partnership firm. But the moment the guardian of the minor, that is, the assessee, had directed that a part of the capital amount should be withdrawn and be treated as a loan, the nature of the amount immediately underwent a change and the amount now stood as a loan advanced by the minor. Whether this loan came out of the capital, which was originally invested in the partnership firm or whether this loan was made independently, would not be relevant because in neither case could this transaction be related, even remotely, to the admission of the minor to the benefits of the partnership. The minor received interest in his own right as a lender of money to the partnership firm and if this was not in any way related to his admission to the benefits of the partnership, it will not be possible to bring it within the words of s. 64(ii) of the IT Act, 1961. Sec. 64(ii), which fictionally or notionally makes the income of the minor child includible in the income of the assessee, must be strictly construed. Giving the words their natural and normal meaning, interest received on loans advanced by a minor out of his own funds to a partnership firm to the benefits of which he is admitted cannot be said to be income arising directly or indirectly from the admission of the minor to the benefits of the partnership. In Bhogilal Laherchand vs. CIT (supra), this Court has taken the view that the interest earned by the minors on the amounts standing to their credit in the firm could not be included in the total income of the assessee under s.16(3)(a)(ii) of the Indian IT Act, 1922, which was the corresponding provision under that Act. In that case, the assessee had started a partnership business with his major son and admitted to the benefits of partnership his two minor sons. In the relevant assessment year, the share of profit of each of the minors was included in the total income of the assessee under s. 16(3)(a)(ii) of the Indian IT Act, 1922, and the question which had to be decided by this Court was whether interest which the minors received on deposits standing to their credit in the firm could not be included in the total income of the assessee under s.16(3)(a)(ii). In that case, it was found that the partnership deed did not cast any obligation upon the minors to maintain any deposits in the firm or upon the firm to keep any deposits made by the minors. The partnership deed had fixed the rate of interest and had provided that interest at that rate should be paid by the firm if there were any deposits or moneys standing to the credit of the minors. This Court on those facts held that s. 16(3) must be very strictly construed and that the interest earned by the minors on the amounts standing to their credit in the firm could not be included in the total income of the assessee.