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Petitioner: COMMISSIONER OF INCOME-TAX, BOMBAY CITY-II VS Respondent: CHANDAMAL KASTURCHAND
1980 P T D 387
1980 P T D 387
[Bombay India)]
Before Tulzapurkar and Desai, JJ
COMMISSIONER OF INCOME‑TAX, BOMBAY CITY‑II
versus
CHANDAMAL KASTURCHAND
Income‑tax Reference No. 27 of 1967 and 215 of 1971, decided on 1st December, 1976.
Income‑tax Act (XI of 1922)‑-
‑‑‑ S. 16(3)(a)(ii)‑.Income of individual‑Computation‑Hindu un divided family partitioned and co‑parceners of family forming partnership to carry on business and minor sons of assessee admitted to benefits of partnership‑‑Interest on capital invested by minors in partnership‑Held; can be included in total income of assessee father‑‑Interest accumulated profit remaining with firm cannot, however, be included in total income of father‑Indian Income‑tax Act 1961, S. 64(ii).
S. Srinivasan v. C. I. T. 631 T R 273 (S C) rel.
Bhogilal Laherchand v. C.I. T. (1954) 25 I T R 523 (8om.) distinguished.
Chouthmal Kejtiwal v. C. I. T. (1961) 411 T R 570 (Assam); C. I. T. v. Chinubhal (M) Modi (1968) 69 I T R 76 (Guj.); C. 1. T. v. Shah Jethaji Phulchand (1965) 57 I T R 588 (S C); C.I. T. v. Shah Mohandas Sadhuram (1965) 57 I T R 415 (S C) and Ram Narain Garg (L.) v. C. I. .T. (1965) 55 I T R 435 (All.) ref.
R. J. Joshi with V. J. Pandit for the Commissioner.
S. E. Dastur instructed by Mulla and Craigie, Blunt and Carat (Attorneys) for the Assessee.
JUDGMIENT
TULZAPURKAR, J. ‑These two references which have be‑.n made by the Income‑tax Appellate Tribunal to this Court under section 66(1) of the Indian Income‑tax Act, 1922, and section 256(1) of the Income‑tax Act, 1961, could be conveniently disposed of by a common judgment, inasmuch as the facts giving rise to the two questions which have been referred to us in each are common and the questions pertain to whether interest credited to the accounts of the respective minor sons of the assessee are liable to be included in the assessee's total income under section 16(3)(a)(ii) of the 1922 Act, and under section 64(ii) of the 1961 Act, though for different assess ment years.
In the first reference (No. 27 of 1967), the precise question referred to us for our determination runs thus:
"Having regard to the terms of Annexure 'A', are the sums of Rs. 1,626, Rs. 1,808, and Rs. 2,008, credited to the accounts of the respective minor sons of the assessee as interest liable to be included in the assessee's total income under section 16(3) (a)(ii) of the 1922 Act of the assessment year 1961‑62 and under section 64(11) of the 1961 Act for 1962‑63 and 1963‑64?
The question in the other reference (I. T. R. No. 215. of 1971) runs thus:
"Whether, on the facts and in the circumstances of the case, the sums of Rs. 7,177, and Rs. 7,265 credited in the accounts of the two minors with the firm were liable to be included in the total income of the assessee under section 64(ii) of the Income‑tax Act, 1961?"
The said question relates to the assessment year 1967‑68.
The facts giving rise to the aforesaid two questions may now be stated:
The assessee, Chandanmal Kasturchand, is an individual. He has two major sons. Gulraj and Bhupatrai, and two minor sons, Mahendra Kumar and Devendra Kumar. He was also the karta of a joint family which carried on business in cloth in the name and style of Chandanmal Kasturchand Rathod at Mulji Jetha Market, Bombay. On October 31, 1959, there was a partial partition in the joint family, the facts whereof were recorded in a joint declaration dated February 22, 1962, made by the adult members of the joint Hindu family, viz., Chandanmal Kastur chand, Gulraj Chandanmal Rathod, Bhupatrai Chandanmal Rathod, and Jivabai, wife of Chandanmal. By that declaration, the declarants confirmed that the partial partition of certain assets of the joint family had taken place on October 31, 1959, and on such partition the said assets were divided in certain manner between the members of the joint family and it was further declared that the said joint family business that was being carried on in the name and style of Chandanmal Kastur chand was divided amongst the members of the said joint family and that such division had been recorded in the books of the said business. Admittedly, the capital of the joint family business was divided equally amongst the six persons (Chandanmal, Gulraj, Bhupatrai, Mahendra Kumar, Devendra Kumar and Jivabai) with effect from November 1, 1959. The business which was carried on by the family was converted into a partnership business under an agreement in writing dated October 19, 1960. Under the deed, the partnership was declared to have come into existence on April 26, 1960. There are three parties' to this agree ment, viz., the assessee, Chandanmal, and his two major sons, Gulraj and Bhupatrai. The two minor sons, Mahendra Kumar and Devendra Kumar have been admitted to the benefits of the partnership. In the account of each one of them on the opening date, namely, November 1, 1959, being the 1st day of Samvat year 2016, a sum of Rs. 25,788.89 was credited. It may be stated that the firm itself was registered under section 26‑A of the 1922 Act for the assessment year 1961‑62 and under the corresponding provisions of the 1961 Act for the subsequent assessment years 1962‑63 and 1963‑64. The following sums were credited to each of the accounts of the two minor sons as interest, viz.
Rs.
1961‑62
1,526
1962‑63
11,808
1963‑64
2,008
In making the assessments for the aforesaid three years of the assessee (Chandanmal), the Income‑tax Officer included the share of profit credited to the accounts of the two minor sons including the interest amounts mentioned above in the assessee's total income applying the provision of section 16(3)(ii) of the 1922 Act for 1961‑62 and section 64(ii) of the 1961 Act for 1962‑63 and 1963‑64. The assessee appealed to the Appellate Assistant Commissioner and objected to the inclusion in the assessee's income the aforesaid amounts of interest credited to the accounts of his two minor sons and the Appellate Assistant Commissioner by common order for all the three years under consideration took the view that the money standing to the credit of the minors represented their investment in the firm and the interest thereon was properly includible in the income of the assessee under sec tion 16(3)(ii) of the 1922 Act and section 64(ii) of the 1961 Act for the relevant years and in support of his view he relied upon the two decisions, one of the Assam High Court in Chouthmal Kejriwal v. Commissioner of Income‑tax (1961) 41 I T R 570 (Assam), and the other of the Allahabad High Court in the case of L. Ram Narain Garg v. Commissioner of Income‑tax (1965) 55 I T R 435 (All.). The matter was carried by the assessee in further appeal to the Tribunal and it was contended on his behalf that under the partnership deed dated October 19, 1960, (Annexure "A") there was no clause which required contribution of capital by any of the minors and as such the interest earned on the amounts left in the firm could not be said to arise from admissions of the minors to the benefits of the partnership. On behalf of the Department reliance was placed on clause 4 of Annexure "A" and it was contended that whatever capital was required for the business of partnership was to be brought in by the parties in such shares and proportions and in such manner in all respects as may be agreed to between them without reference to their shares in the partnership and, therefore, the provisions of section 16(3)(a)(ii) and section 54 were applicable. The Tribunal referred to two differing decisions which had dealt with similar question earlier, viz., the decision of the Allahabad High Court in L. Ram Narain Garg v. Commissioner of Income tax, on the one band and the decision of this Court in Bhogilal Laherchand v. Commissioner of Income‑tax (1954) 25 I T R 523, on the other, and on a construction of clause 4 of Annexure "A", took the view that the expression "parties" appearing therein had been used only with reference to three major persons who were parties to the document and held that the liability to bring in capital had only been cast on the three major persons to contribute any capital. It also noticed that there was no recital in the document showing that the admission of the minors to the benefits of the partnership was because of any contribution of funds by them. The Tribunal, therefore, held that the interest had no direct or indirect connection with the admission of the minors to the benefits of the partnership, and therefore, the provisions of section 16(3)(a)(ii) of the 1922 Act or section 64(ii) of the 1961 Act did not apply. Accordingly, the Tribunal directed that from each of these assess ments the interest credited to the respective minors' accounts and included in the share income should be excluded from the said assessments. At the instance of the Commissioner of Income‑tax, the question in the first reference set out at the commencement of this judgment has been referred to us for our determination.
So far as the question referred to us in the second reference is con cerned, the additional facts that require to be stated are these: That apart from crediting the interest on the initial amounts that stood to the credit of these two minors in their accounts in the firm the profits falling to the shares of each of the minors were also credited in their respective accounts year after year and it does appear that there were practically negligible withdrawals made by the minors from their respective accounts, with the result that in the beginning of Samvat year 2022, relevant for the assessment year 1967‑68 under reference, a sum of Rs. 74,488.36, had remained accumulated in the account of Mahendra Kumar while a sum of Rs. 76,610.16, had remained accumulated in the account of Devendra Kumar on that date. At the end of Samvat year 2022, a sum of Rs. 7,116.95 was credited to the account of Mahendra Kumar as interest on the credit balance in his account while a sum of Rs. 7,265.16, was similarly credited in the account of Devendra Kumar. The Income‑tax Officer included the aforesaid interest amount that had been credited in the two respective accounts of the minors at the end of Samvat year 2022 in the total income of the assesses under section 64(ii) of the 1961 Act. The assessee objected to such inclusion in the appeal which he preferred to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner excluded the interest amount, following the decision of the Tribunal in the assessee's appeal for the assessment years 1961‑62 to 1963‑64. The revenue thereupon preferred an appeal to the Tribunal and on behalf of the revenue it was contended that the credit balance in the account of the minors with the‑ firm consisted of the amounts received by them on the partition of the family business and all the profits derived by them year after year and of the interest credited therein year after year and relying upon the Supreme Court's decision in S. Srinivasan v. Commissioner of Income‑tax (1967) 63 I T R 271 it was urged that the aforesaid two interest amounts were liable to be included in the total income of the assessee under section 64(ii) of the Act. It appears that in Samvat year 2020, Bhupatrai Chandanmal, one of the major sons of the assessee, had retired from the partnership business leaving the same to be carried on as a going concern by Chandanmal and Gulraj and upon the retirement of Bhupatrai another .partnership deed dated February 17, 1965, regarding the terms and conditions of such business came to be executed. One of the clauses being clause 3(a) of this deed dated February 17, 1965, was to the effect that if any moneys belonging to a minor admitted to the benefits of the partnership were brought into partnership or retained in the partner ship, the same should be treated as deposit and interest shall be paid on it at nine percent per annum. Having regard to this term which was to be found in the deed of partnership dated February 17, 1965, the Tribunal took the view that the amounts of interest credited in the two minors accounts for Samvat year 2022 was not includible in the assessee's total income under section 64(ii). It held that though the question of includibility of such interest on profits standing in the accounts of minors who had been admitted to the benefits of the partnership in which the assessee was also a partner was concluded by the Supreme Court's decision in S. Srinivasa's case, the Supreme Court in that case had taken into con sideration the fact that there was no suggestion at that stage of either the wife or the minor sons of any one on their behalf having entered into an arrangement with the firm to keep the accumulated profits as deposits and the Tribunal took the view that having regard to clause 3(a) of the deed dated February 17, 1965, the instant case fell within the exception carved out by the Supreme Court and the two amounts of interest could not be included in the total income of the assessee. The Tribunal, therefore, rejected the appeal of the revenue. The second reference is at the instance of the Commissioner of Income‑tax.
So far as the question in Reference No. 27 of 1967 is concerned Mr. Joshi appearing for the revenue has contended before us that, having regard to the facts and circumstances of the case, particularly the circum stances in which the joint family business came to be converted into a partnership business and the initial capital of the joint family business came to be divided equally amongst the assessee and his two major sons and two minor sons which amounts were credited to the respective accounts of each one of them in the books of the partnership and having regard to the terms of the deed of partnership dated October 19 1960, the three sums of Rs. 1,526 (for the assessment year 1961‑62), Rs. 1,808 (for the assessment year 1962‑63) and Rs. 2,008 (for the assessment year 1963‑64) which had been credited to the amounts of the respective minor sons of the assessee as interest will have to be regarded as includible in the assessee's total income under section 16(3)(a)(ii) of the 1922 Act and section 64(ii) of the 1961 Act. In that behalf strong reliance was placed by him upon the relevant clause contained in the joint declaration made on February 20, 1962, regarding the terms of the partition that had been orally arrived at on October 31, 1959, as well as the relevant clauses of the deed of partner ship dated October 19, 1960, and on the two decisions, one of the Assam High Court reported in Chouthmal Kejriwal v. Commissioner of Income‑tax and the other of the Allahabad High Court reported in L. Qam Narain Garg v. Commissioner of Income‑tax (1955) 55 I T R 435. He also referred us to the decision of the Gujarat High Court in Commissioner of Income‑tax v. Chinubhai M. Moth (1968) 69 I T R 76. On the other hand, Mr. Dastur for the assessee contended that on a proper construction of the terms and conditions of the deed of partnership dated October 19, 1960, it was abundantly clear that there was no obligation cast on the minor to bring in any capital in the firm and as such whatever amounts were standing to the credit of each of the minor s account in the books of the partnership, will have to be regarded deposits or loans or advances made by the minors to the firm, and, therefore, the interest earned by these minors in their respective accounts for to relevant three years could not be said to have any causal connection arid as such the three amounts could not be included in the total income of the assessee. Strong reliance was placed by him upon the decision of this Court in Bhagilal Laherchand v. Commissioner of Income‑tax. The question is whether the instant case falls within the ratio of the decision of this Court in (1954) 251 T R 523 or there is a causal connection direct or indirect between the interest income and the admission of the two minors to the benefits of the partnership.
Before we consider the rival submissions it will be desirable to set out the relevant provisions of the 1922 Act as well as the 1961 Act. Section 16(3) of the 1922 Act, under which the interest amount are sought to be included in the assessee's total income, runs thus:
"16. (3) In computing the total income of any individual for the purpose of assessment, there shall be included‑
(a) so much of the income of a wife or minor child of such individual arises directly or indirectly‑
(ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is partner."
The corresponding provision is to be found in section 64 (ii) and the same in almost identical terms which runs thus:
"64. In computing the total income of any individual, there shall be included all such income as arises directly or indirectly‑
(ii) to a minor child of such individual from the admission of the miner to the benefits of partnership in a firm in which such individual is a partner."
On a reading of the aforesaid material provisions in the two enactment it will appear clear that in deciding whether a case falls under either of the aforesaid provisions, it is necessary to find out whether there is a connection between the income and the admission of the minors to tae benefits of the partnership; the connection need not be direct; it may be indirect and the question in the instant case is whether the three sums whip were credited to each of the accounts of the two minor sons as interest to the three years in question have any connection direct or indirect in their admission to the partnership of Chandanmal Kasturchand in which the assessee was admittedly a partner. At the outset it may be stated that the question whether the two sums of Rs. 25,788.89 each of which wire initially credited in the names of the two minor sons in each one's account on the opening day of January 1,1959, i.e., the 1st day of Samvat year 206 and which credit was thereafter continued in their accounts even after plc partnership had come into existence on April 26, 1960, represented the capital contribution or investment of each of the minors in the firm or not assumes importance because that is one of the ways in which the causal connection between the accrual of income and the minor's admission to the benefits of the partnership gets easily established; in other words, these two sums represent capital investment of the two minors in the partner ship firm then obviously the accruing interest thereon must be taken to be the direct result of the admission of the two minors to the benefits of the partnership. Therefore, on this principal question rival submissions were put forth before us by Mr. Joshi on behalf of the revenue and by Mr. Dastur on behalf of the assesses. It was urged by Mr. Dastur at the outset that having regard to the frame of the question in the first reference this Court will have to answer that question by having regard only to the contents of the partnership deed dated October 19, 1960 (Annexure "A"), and the surrounding facts and circumstances obtaining in the case could not be gone into for the purpose of deciding the question as to whether the two sums of Rs. 25,000 and add that were credited in the respective account of the two minors were capital contributions or not and in this behalf he particularly invited our attention to the fact that initially the Commissioner of Income‑tax had suggested to the Tribunal the framing of the question in a particular manner, namely:‑
"Whether, on the facts and in the circumstances of the case, and having regard to the partnership deed dated October 19, 1960, the interest of Rs. 1,526 credited to the accounts of two minor sons of the assessee is includible in the assessee's total income?"
But the Tribunal, while framing the question and referring the same to this Court, had omitted a reference to "the facts and the circumstances of the case" and had merely framed a question in the manner set out at the commencement of the judgment. It is not possible to accept this submission of Mr. Dastur for the reason that by framing the question in the manner it has done, all that the Tribunal wanted to emphasise was that the terms of tile partnership deed (Annexure "A") were an important aspect by reference to which the question may have to be decided but that does not mean that the question framed will have to be answered only by having 'regard to the terms of the deed of partner ship ignoring the facts and circumstances of the case. The terms and conditions of the deed of partnership have themselves to be considered is the light of the facts and surrounding circumstances obtaining in the case and as we shall indicate later on, the facts and surrounding circum stances are not in dispute at all and, therefore, the question will have to be answered by having regard not merely to the terms and conditions of the deed of partnership but also to the facts and surrounding circum stances of the case. We may mention that the question raised in the second reference has been framed in such a manner that the question is expected to be answered by having regard to "the facts and in the circumstances of the case" and, since the question raised in both refer ences is identical and since the facts leading to the question in both are the same, it will be incongruous to answer the question in the first reference ignoring the facts and circumstances of the case and at the same time answer the question in the second reference by taking into consideration the facts and circumstances of the case. It was suggested at one stage by Mr. Joshi for .the revenue that, if necessary, the Court could reframe the question so as to include the consideration of "facts and circumstances of the case", but we are clearly of the view that refraining of the question as suggested by Mr. Joshi is not at all necessary and the question will have to be consideration as indicated above not merely by referring to the terms and conditions of the deed of partnership but also having regard to the facts and circumstances of the case.
On the factual aspect reference will have to be made to two or three glaring tads which indisputably emerge on record. In the first place there was no dispute before us that initially that the assessee as karta of the joint family was carrying on the business in the name and style of Chandanmal Kasturchand". Admittedly, in the books of account pertaining to the business there was maintained a capital account. Thirdly, oral partial partition was effected amongst the coparceners on October 1959, and the terms thereof have been recorded in the joint declaration made by the adult member of the joint Hindu family on February 22,1962. The material part of this declaration is to be found in clause 2 of the declaration which runs thus :‑‑
"We hereby record, declare and confirm that prior to 31st October, 1959, the declarant the said Chandanmal was carrying on joint family business in piece goods in the name and style of `Chandanmal Kasturchand' at Madhavrai Gully, Moolji Jetha Market, Bombay‑2. We hereby further record, declare and confirm that a partial partition of certain assets of the said joint family took place on 31st day of October, 1959, and on such partition the said assets were divided in certain mariner between the members of the said joint Hindu family. We the declarants hereby further declare that on such partial partition, the said joint family business which was being carried on in the name and style of `Chandanmal Kasturchand' was divided amongst the members of the said joint Hindu family and that such division has been recorded in the books of the said business.
The aforesaid recital clearly brings out the fact that in the partial partition that was effected on October 31, 1959, amongst the coparceners the joint Hindu family, the assets of the aforesaid joint family business were divided amongst the members of the said joint family and it was also disputed before us but in fact Mr. Dastur produced before us the relevant entries appearing in the books of account of the joint family mess to show that as a result of the said division of assets of the said ant family business the capital was also divided and a sum of Rs. 25,788.89 forming part of the initial capital of the joint family business came to be credited in the name of each one of the coparceners including the two ;nor sons: It is, therefore, clear that this amount which was credited in respective accounts of the two minor sons was straightaway brought to their account from the capital account which initially stood in the karta's name in the books of the joint family business. Mr. Dastur further stated before us that through the partnership business was commenced as per the deed of partnership dated October 19, 1960, with effect from April 24,1960, the income of the business was disclosed to the income‑tax authorities by filing a return as if the name was…
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