L. RAM NARAIN GARG Versus COMMISSIONER OF INCOME-TAX

1. M. C. DESAI, C. J . ‑‑‑‑At the assessee's instance the Income‑fax Appellate Tribunal, Allahabad Bench, has submitted this answer the following question statement inviting this Court to answer the following question:

2. "Whether, on the facts and in the circumstances of the case, the two sums of Rs. 6.727 and Rs. 6,728 being interest credited to the minors, Kailash Narain, and Prem Narain, n their respective accounts, are both to be included in the assessment of their father, L,. Ram Narain Garg, under section 16(3)(a)(ii) of the Incomes‑tax Act?"

3. The assessee is individual. He his four sons, Krishna Narain, Vishnu Narain Kailash Narain and Prem Narain. They formed a Hindu undivided family up to March 31, 1946, and family carried on a certain business. On March 31, 1946, the corparceners separated from one another and the business assets were divided among them each getting a sum of Rs. 91,000 and odd. On August 1, 1946, the assessee entered into a part nership with his two sons, Krishna Narain and Vishnu Narain, who were majors, and Kailash Narain and Prem Narain who were admitted to the benefits of the partnership The partnership was formed to conduct and carry on the business. The relevant terms of the partnership were these: ‑

4. "The partners wilt share profits and losses equally. The capital of the partnership has been contributed by the partners equally, being the amount of shares of partners, in distribution of investments of the joint family business. Further capital will be contributed and/or raised as the partners mutually decide. Interest at the rate of 6% per annum shall be allowed on the minimum monthly balance to the partners' capital accounts at the close of the year. Kailash Narain and Prem Narain on becoming majors will become partners unless they elect otherwise."

5. On April 1, 1947, another partnership deed was executed by the assess Krishna Narain and Vishnu Narain, because the assessee wanted to be relieved of the Management of the partnership business and certain modi fications in the earlier partnership were desired. Its relevant terms are as follows: ‑

6. "The parties to the deed are Ram Narain, Kirshna Narain, Vishnu Narain, Kailash Narain and Prem Narain, who were minors, were by mutual consent admitted to the benefits of the partnership. There would be five equal shares in profits and losses of the partnership, but Kailash Narain and Prem Narain during their minority will not be responsible for losses and their liability for losses will extend to and be limited to their `capital investment if any for the time being in the partnership business.

7. The parties hereto including the said minors shall be entitled to get and be paid interest at the rate of 6 % per annum on all their respective investments and such interest shall be calculated and allowed to the partners and/or the minors before the profit and loss account is made out and shall be debited to the revenue account."

8. The amount of Rs. 91,000 and odd received by each coparcener, includ ing the two minors, was invested by him in the business. In accordance with the terms of the partnership deed, Rs. 6,727 were credited in the account of each of the two minors during the previous year. The name of each of the two accounts in the ledger is "Sri Lekha I. B. Kailash Narain Garh Prem Narain Garh Ka (punji)". The Income‑tax Officer included these amounts in the assessee's income relying upon the provision of section 16 (3) (a) (ii) of the Income‑tax Act. His order was maintained by the Tribunal. Then the Tribunal stated this case.

9. Section 16(3)(a)(ii) reads as follows: ‑

10. "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 minor child of such individual as arises directly or indirectly...

(ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner."

11. The question referred to us resolves to this whether the interest paid by the partnership to the minors was income derived by them "directly or indirectly from the admission ...to the benefits of partnership?" If it was, the provision applies and the income was rightly included in the assessee income. Every income that a minor derives from the partnership is no income derived directly or indirectly by him from the admission to its benefits. In order that the provision may apply to it, the receipt of the income must have some connection, whether direct or indirect, with the fact of hi admission. Any income that could have been derived by him without hi being admitted to the benefits of the partnership cannot be said to have been derived by him from the admission. Once some connection between the receipt of income and the admission is established, the provision applies, whether the connection is direct or indirect. The words "directly or in directly" are used in the provision simply to make the nature of the connection between the receipt of the income and the admission irrelevant; they are used to emphasize that what is relevant is the existence of connection and not its nature. Receipt by a minor admitted to the benefits of a partnership of his share in the profits of the partnership is income directly, derived by him from the admission. He would not have received the share if he had not been admitted and the connection between the receipt and the admission is direct, no other fact intervening between them. Receipt of any other income, provided that its source is the fact of his admission, would be indirect income from the admission. The income derived by each minor in the instant case was interest on the money paid by him to the partner ship. He could pay 'he money to the partnership either by way of his contribution to the capital required for commencing the partnership business or by way of a loan or deposit to it. The money required to carry on a partnership business comes from the capital contributed by the partners and from loans taken from investors. A partner is not forbidden by law from being an investor merely because he can contribute to the capital, it cannot be said that any money that he pays is by way of contribution to the capital and can never be by way of investment. Whether the amount of Rs. 91,000 and odd paid by each of the minors to the partnership was by way of his contribution to the capital or by way of investment by him was a question of fact and the finding on this question of fact given by the Tribunal is that it was investment of capital. This Court is bound by the finding of fact and is not on this case concerned with the question whether it is correct or supported by evidence or not. If the minors invested Rs. 91,000 and odd by way of capital, the interest paid to them was connect ed, even if indirectly, with their admission to the benefits of the partnership, because they could contribute to the capital only on account of their being admitted to the benefits of the partnership. The Tribunal did not hold that the minors had invested or deposited the money in the partnership as any body not concerned with it could have done. Had it been found as a matter of fact by the Tribunal that they only invested their money in the partnership by way of a loan, the interest paid to them on the loan could not be said to be in any way connected with the fact of their admission, because there is no connection between the admission and investment by way of a loan (unless the partnership deed forbids raising of loans from outsiders). It cannot be stated as a matter of law that interest paid by a partnership to a minors admitted to its benefits can never he said to be con nected even indirectly with the fact of his admission; it may be or may not be. It is connected with the fact, if the interest paid is on capital invest ment by the minor or on a loan advanced to the partnership by the minor and the partnership deed forbids the raising of a to in from any person other than a partner or a person admitted to its benefits. It is not con nected with the fact if the interest is paid on a deposit made, or loan advan ced by the minor, and the partnership was free to accept a depositor a loan from any person even if not connected with it.

12. The assessee relied upon Bhogilal Laherchand v. Commissioner of Income‑tax (1954) 25 ITR 523 in which the facts are similar to these in the instant case but with this distinction‑ that there was no finding of fact reached by the Income tax Appellant Tribunal to the effect that the interest was paid op. capital investment and not on a loan or deposit and the High Court itself was by the reference required to determine the nature. The High Court did not treat the amount on which interest was paid to the minor as his contri bution to the capital. Instead it treated it as a deposit acid since any body could have earned interest on a deposit from the partnership the minor's earning it was held to be not connected in any way with his admission to the benefits of the partnership. That reasoning cannot be applied to the facts of the instant case. The learned. Judges there held that the amount was deposited voluntarily by the minor because he was not bound to deposit it and it could have been deposited by any person not connected with the partnership. Capital contributed by a partner or a person admitted to the benefits of partnership even if voluntary does not stand on the same position as a deposit. The present case is governed more by Chouthmal Kejriwal v. Commissioner of Income-tax (1961) 41 I T R 570 in which the interest paid to a minor admitted to the benefits of a partnership on his capital investment was held to be income derived directly or indirectly by‑him from admission. The basis for the: decision was that the supply of capital by him was connected with his admission to the benefits of the partnership and the interest earnest yes an income derived, even indirectly, from the admission; if he had .not been admitted he could not have contributed to the capital and would not have earned any interest on it&. The learned Judges distinguished interest paid on capital invest ment from interest paid on a deposit which cannot be connected with the minor's admission.

13. In the result our answer to the question is in the affirmative

14. We direct that copies of' the judgment shall be sent under ‑the seal of the Court and the signature of the Registrar to the Income‑tax Appellate Tribunal and the Commissioner of Income‑tax as required by section 66 (6) of the income‑tax Act: The assessee will pay to the Commissioner the costs of this reference which we assess at Rs. 200. Counsel fee is assessed at Rs. 200.

15. Question answered in rte affirmative.