COMMISSIONER OF INCOME TAX Vs. BAJRANG LAL

JUDGEMENT

(1.) The Income-tax Tribunal, Hyderabad, has stated the following questions for our opinion under section 256(1) of the Income-tax Act :

(2.) Jagdish Prasad and his brother, Musaddilal, constituted a partnership firm, Jagdish Prasad Co. One Bajranglal is the assessee herein. In 1970, his elder son by name, Sanjay Kumar brought in a sum of Rs. 10,000 into the partnership. Four years later, the other son of Bajranglal, Master Manoj Kumar, was also admitted to the benefits of the partnership. A similar Sum of Rs. 10,000 was brought in by Master Manoj Kumar on the occassion of his admission. When Sanjay Kumar was admitted, a deed of partnership was executed. For the assessment year 1976-77, the Income-tax Officer included the share income of the above two minors in the assessment of the father, Bajranglal. The income so included was Rs. 21,881 in the case of Sanjay Kumar and Rs. 18,359 in the case of Manoj Kumar. These amounts included interest amounts in sums of Rs. 4,272 and Rs. 750 respectively, that is, interest paid on the amounts to the credit of each of the minors at the time of their admission to the benefits of the partnership and also on the accumulated profits of Sanjay Kumar. The assessee appealed to the Appellate Assistant Commissioner against the inclusion of interest amounts of the minors in his income. The Appellate Assistant Commissioner dismissed the appeal relying upon clause 3 of the deed of the partnership which provided that the partners shall contribute the capital required by the firm and that such capital shall carry interest at 7.5%. The Appellate Assistant Commissioner observed that interest was paid to the minors at the rate of 7.5% only which indicated that the amount contributed by the minors was in the nature of capital. On further appeal, however, the two Members of the Tribunal differed. The Accountant Member agreed with the assessees contention. He was of the opinion that clause 3 of the partnership deed refers treated as partners. He observed that the said amounts represent deposits by the minors and not contribution to capital. On the other hand, the Judicial Member opined that the definition of partner in the Income-tax Act takes in a minor further that there was no express agreement or arrangement with the firm to keep the accumulated profits of the minors as deposits. He was of the opinion that in the circumstances on record, it is also not possible to spell out an oral contract or agreement to the effect that the said amounts shall be treated as deposits. He was, therefore, of the opinion that the interest income earned by the minors was includible in the assessees total income. In view of the differece of opinion between the two Members, the matter was referred to a third Member.

(3.) The third Member, by his order dated 7/04/1982, agreed with the view taken by the Accountant Member of the Tribunal. He was of the opinion that there was no obligation cast on the minors to contribute any capital. He was, therefore, of the opinion that the amounts brought in by the minors and also the accumulated profits in the case of Sanjay Kumar represent only deposits. On this basis, he held that the interest paid to the minors cannot be included in the assessees income. With respect to the accumulated profits, the said Member declined to apply the ratio of the decision of the Supreme Court in on the ground that the facts of the case before the Supreme Court are distinguishable from the facts of the present case. Thereupon, the Revenue applied for and obtained this reference.