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S. Srinivasan v. Commissioner Of Income-Tax
Judgment Summary — Srinivasan, J.
Factual and Procedural Background
The case concerns the firm Ranjaneya Motor Transport, constituted by a deed dated 17 December 1951. The assessee was a partner; the other partners named in the deed were his wife, Shambagammal, and a third party, Sivachidambaram Pillai. Two minor sons of the assessee were admitted to the benefits of the partnership.
For the assessment year 1957–1958 (previous year ending 30 September 1956), the assessee sought exclusion from the operation of Section 16(3)(a)(i) and (ii) of (then) the Income-tax Act of (a) the shares of profit credited to his wife and two minor sons and (b) interest credited by the firm on those accumulated profit balances. The amounts credited as shares of profit in the relevant year were Rs. 1,944; Rs. 23,336; and Rs. 19,447 respectively. Under a clause of the partnership deed partners or persons admitted to the benefits of the partnership were entitled to interest at 12 annas per cent per mensem (i.e., 9% per annum). Interest had not been credited in prior years; interest was credited for the first time in the year ended 30 September 1956, in amounts of Rs. 7,879; Rs. 6,971; and Rs. 7,702 for the wife and the two minor sons respectively.
The Income-tax Officer rejected the assessee's contention (including that the shares had been gifted to those persons by others and hence not a transfer from the assessee). The assessee appealed to the Appellate Assistant Commissioner, relying on the decision in Bhogilal Laherchand v. Commissioner of Income-tax, Bombay City (Bombay High Court), whereby the AAC excluded only the interest portion. Both the assessee and the Department further appealed to the Tribunal. The Tribunal rejected the constitutional challenge to S.16(3)(a)(i) and (ii) (relying on B.M. Amina Umma v. Income-Tax Officer, Kozhikode), but allowed the Department's appeal in part: it held that interest attributable to sums gifted to the minors by others was not income arising (directly/indirectly) from admission and could be treated as investment interest, but interest on balances that were profits credited to the wife and the minors was within S.16(3)(a)(i) and (ii).
Two questions of law were referred under Section 66(1) of the Act:
- Whether the provisions of S.16(3)(a)(i) and (ii) offend clauses (f) and (g) of Article 19(1) of the Constitution of India?
- Whether interest by the aforesaid firm to the assessee's wife and minor children attributable to past profit accumulations only is includible in the assessment of the assessee under S.16(3)(a)(i) and (ii)?
Legal Issues Presented
- Whether the provisions of S.16(3)(a)(i) and (ii) offend clauses (f) and (g) of Article 19(1) of the Constitution of India?
- Whether interest by the aforesaid firm to the assessee's wife and minor children attributable to past profit accumulations only is includible in the assessment of the assessee under S.16(3)(a)(i) and (ii)?
Arguments of the Parties
Assessee's Arguments
- The shares of profit credited to the wife and two minor sons, and the interest credited on those balances, should be excluded from the operation of Section 16(3)(a)(i) and (ii).
- The shares held by the wife and minors had been gifted to them by other persons; since their interests were not the result of a transfer from the assessee, their share income should not be included in the assessee's total income.
- Challenged the constitutional validity of Section 16(3)(a)(i) and (ii) as ultra vires Article 19(1) clauses (f) and (g) of the Constitution.
- Contended that the interest earned by the wife and minors on accumulated profits could not in any event be included in the assessee's total income.
Department's Arguments
- Contended that the assessee's total income should include the shares and interest as falling within S.16(3)(a)(i) and (ii); specifically, the Department argued that exclusion of the interest earnings was erroneous.
- Opposed the claim that the relevant provisions were constitutionally invalid.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Bhogilal Laherchand v. Commissioner of Income-tax, Bombay City, (1954) 25 ITR 523; (AIR 1955 Bom 16) | Held that interest on deposits credited to minors was not necessarily connected to their admission to the partnership where the partnership clause made interest optional and did not oblige retention of profits; applied to exclude interest in that case. | The court reviewed the Bombay decision and expressly disagreed with its reasoning for the facts of the present case, explaining why the present partnership clause and facts produced a direct connection between membership/admission and the right to interest. |
| B.M. Amina Umma v. Income-Tax Officer, Kozhikode, 1954, 26 ITR 137; (AIR 1954 Mad 1120) | Used as authority on the constitutional validity issue regarding S.16(3) (as understood by the Tribunal). | The Tribunal relied upon this Court's decision to reject the assessee's constitutional challenge; the present court notes the Tribunal's reliance in the procedural history. |
| Balaji v. Income-tax Officer Special Investigation Circle, Akola, 1961, 43 ITR 393; (AIR 1962 SC 123) | Authority addressing the constitutional challenge to section(s) relevant to the case; treated as binding authority against the assessee on the constitutional point. | Counsel for the assessee conceded that this Supreme Court decision was against his contentions on the first question; consequently the court answered the constitutional question against the assessee. |
| Chouthmul Kejriwal v. Commissioner of Income-tax, Assam, (1961) 41 ITR 570 (Assam) | Considered the question whether interest on capital supplied by a minor admitted to the benefits of a partnership arises from the admission; held that supply of capital is tied to the relationship and thus interest arises from admission. | The court cited the Assam decision and used its reasoning (that the right to interest on contributed capital arises from the partnership relationship) to support the view that interest on profits standing to credit under a partnership clause likewise arises from membership/admission. |
Court's Reasoning and Analysis
The court began by analysing the partnership deed and the statutory context. It identified that:
- The partnership deed provided that partners or persons admitted to the benefits of the partnership were entitled to interest at 9% per annum on sums advanced to the firm when the firm required such sums for management expenses.
- Section 13(d) of the Partnership Act (quoted in the opinion) confers on a partner or a person admitted to the benefits of the partnership the right to receive interest on balances standing to his credit — indicating that the right to interest is among the rights that follow membership/admission under the statute.
Applying these points to the facts, the court observed that (a) in the present case there was no indication that the interest payments resulted from a separate creditor–debtor transaction independent of the partnership relationship, and (b) the interest in question was first credited by the firm only in the accounting year relevant to the assessment. The court considered whether the right to receive that interest could be dissociated from membership/admission and concluded it could not.
The court contrasted the present facts with the Bombay High Court's decision in Bhogilal Laherchand. The Bombay court had emphasised that in its case the deed's clause made interest optional and did not impose an obligation on either party to keep deposits, allowing the conclusion that the interest arose from a deposit transaction rather than from admission to the partnership. Srinivasan, J. rejected applying that reasoning to the present facts because:
- Here the partnership document and the statute gave the partner or person admitted an express right to interest on balances standing to their credit; that right therefore flowed from the contractual relationship of partnership and the statutory rights attaching to membership/admission.
- In enforcement of the interest claim the wife or the minors would have to rely on the partnership terms; that shows the interest claim rests on the partnership relationship.
The court accepted that in some hypothetical cases interest might arise from an independent loan transaction between the firm and the person, but stated that it was unnecessary to decide that issue here because on the facts the interest payment was "fully and clearly rested on the solitary consideration" that the recipient was a member or person admitted to benefits — i.e., the right to interest derived from membership/admission.
The court also noted the reasoning in Chouthmul Kejriwal (Assam) in which interest on capital supplied by a minor was regarded as arising from the person's admission; it found that reasoning applicable by parity to interest on profits standing to credit under a clause in the partnership deed.
On the constitutional challenge (first question), the court recorded that learned counsel for the assessee conceded that the Supreme Court decision in Balaji was authority against the contention that the provisions offended Article 19(1)(f) and (g); accordingly, the court answered that question against the assessee without further elaboration.
Holding and Implications
Holding:
Question 1: Answered against the assessee.
Question 2: Answered against the assessee — the interest paid by the firm to the assessee's wife and minor children that is attributable to past profit accumulations is includible in the assessment of the assessee under S.16(3)(a)(i) and (ii).
Direct consequences and implications:
- As a direct effect of the holding, interest credited by the firm on past profit accumulations in respect of the wife and the minor children is treated as income arising (directly or indirectly) from their membership/admission and is therefore includible in the assessee's total income under Section 16(3)(a)(i) and (ii), to the extent indicated by the court and the Tribunal's findings.
- The court ordered costs: the assessee was to pay the costs of the department; counsel's fee was fixed at Rs. 250.
- The opinion reasons with reference to existing authorities (Bombay High Court, Assam High Court, a Madras decision, and a Supreme Court decision on the constitutional point). The opinion does not purport to state that it establishes a novel general rule beyond the application to the present facts; it grounds its conclusion on the deed clauses and Section 13(d) of the Partnership Act and shows why the Bombay decision was distinguishable on the facts before it.
Question(s) answered. (Costs awarded to the department: counsel fee Rs. 250.)
Srinivasan, J.:— In the firm of Ranjaneya Motor Transport constituted by a dead dated 17th December 1951, the assessee is a partner. The other partners in the firm are his wife Shambagammal and one other stranger Sivachidambaram Pillai. The two minor sons of the assessee were admitted to the benefits of the partnership. For the assessment year 1957-1958, the revious year ending on the 30th September 1956, the assessee claimed that the share of the profit and the interest allowed by the firm on such shares to his wife and the two minor sons should be excluded from the operation of Sec. 16(3)(a)(i) and (ii). During the relevant account year, the share of the profit credited to the accounts of the wife and the two minor sons were the sums of Rs. 1944/-, Rs. 23336 and Rs. 19447 respectively. Under a clause of the deed of partnership, members of the firm or persons admitted to the benefits of the partnership were entitled to receive interest on the amounts standing to their credit at the rate of 12 annas per cent per mensem, i.e, nine per cent per annum. Such interest was not credited in any of the previous years, and on the accumulation of the profits of these persons, interest was credited for the first time an the year ended 30th September 1956. These interest amounts were Rs. 7879, Rs. 6971 and Rs. 7702 in respect of the wife and the two minor sons. Relief from the application of S. 16(3)(a)(i) and (ii) was sought both un-respect of the profits earned during the year of account and the interest payment credited as above. The Income-tax Officer rejected the assessee's contention, which was that the shares held by his wife and the two minor sons had been gifted to them by other persons and since it was not as a result of a transfer from him that these persons had obtained their interest in the firm, their share Income should not be included in the total income of the assessee. This contention was rejected. An appeal was taken to the Appellate Assistant Commissioner before whom it was urged that the provision, S. 16(3)(a)(i) and (ii) was ultra vires the Constitution, and that the interest earned by the wite and the minor children on the accumulated profits in that firm could not in any event be included in the total income of the assessee. Before the Appellate Authority, the decision in Bhogilal Laherchand v. Commissioner of Income-tax, Bombay City, (1954) 25 ITR 523: ((S) AIR 1955 Bom 16) was relied upon. The Appellate Assistant Commissioner thought that this decision applied and accordingly excluded only the interest portion of the amount brought to assessment.
2. Against this decision, both the assessee and the department appealed, the assessee again raising the constitutional validity of S. 16(3)(a)(i) and (ii), and the department contending that the exclusion of the interest earnings from the assessee's total income was erroneous. The Tribunal rejected the first contention relying upon a decision of this Court in B.M Amina Umma… v. Income-Tax Officer, Kozhikode…., 1954-26 ITR 137 : (AIR 1954 Mad 1120). On the question of the interest earnings, the Tribunal thought that in so far as the interest was attributable to the two sums gifted to the two minors by certain other persons, that interest could not be said to be income arising directly or indirectly from the admission of the wife or the admission of the minors to the benefits of the partnership and that, if at all, such interest should be regarded as interest arising from investment of the amounts With the firm. To this extent, the view taken by the Appellate Assistant Commissioner was confirmed. But with regard to the remaining portion of the interest which accrued on the balances of profits of the firm credited to the wife and the two minor sons, the Tribunal was of the view that S. 16(3)(a)(i) and (ii) directly applied. Accordingly, the Departmental appeal was allowed in part. It is from these orders of the Tribunal that the present questions of law arise and the questions so referred to us under S. 66(1) of the Act are:
“1. Whether the provisions of S. 16(3)(a)(i) and (ii) offend clauses (f) and (g) of Art. 19(1) of the Constitution of India?
2. Whether interest by the aforesaid firm to the assessee's wife and minor children attributable to past profit accumulations only is includible in the assessment of the assessee under S. 16(3)(a)(i) and (ii)?”
Learned counsel for the assessee concedes that in so for as the first of these questions is concerned, the authority of a decision of this Court (Sic) (Supreme Court?) in Balaji v. Income-tax Officer Special Investigation Circle, Akola, 1961-43 ITR 393 : (AIR 1962 SC 123) is against his contentions. This question is, therefore, answered against the assessee.
3. The second question has given rise to some difficulty for the reason that the decision of the Bombay High court in 1954-25 ITR 523: ((S) AIR 1955 Bom 16) appears to be in favour of the assessee. Before dealing with the facts of that decision and the reasoning that appealed to the learned Judges who decided that case, we may refer to the relevant clauses of the partnership deed in the present case. The partnership was entered into between the assessee, his wife Shanbagammal and one Sivachidambara Pillai. It provided that the account shall be closed on the 30th September of each year and not proof its or loss determined as on that date. After setting out the profit sharing ratio as it obtained previously, the document provided that the profits for the year ending on the 30th September 1952 and for subsequent years shall be shared in the ratio or 190/300, 25/300 and 30/300 among the three partners, and that the two minors be entitled to 30/300 and 25/300 of the profits. In the event of there being a loss, it was to be shared among the three partners in certain proportions. The further clauses read:
“If any of our partners require excess amount, he shall draw such amount by way of debt transactions, such amount shall be deducted from the not profit or loss by such partner at each year and the balance shall be paid to him.
If the firm requires any sum for meeting the expenses for its management and if any of the partners has and is willing to give such amount, he may advance (such amount) as loan. He may receive interest for such sum at the rate of twelve annas per cent per mensem.”
4. It is seen from this clause that a partner becomes entitled to receive interest at nine per cent per annum in the case of amounts advanced by him to the firm, should the firm require any sums for its expenses of management. In the present case, however, there is no Indication anywhere that it was as a result of any separate agreement between the parties stemming from the above clause that the balances standing to the credit of the wife and the two minor sons were taken over and utilised by the Arm, or that it was on the basis of any such separate agreement that the interest was paid to these parties. On the one hand, it is common ground that the share of the profits credited to the wife and the two minor members was left to accumulate in the accounts of the firm year after year and for the first time in the account year relevant to the assessment year 1957-1958 an interest calculation was made and a further sum by way of interest was added to the amounts so standing to the credit of these persons, me short question is whether this interest can be said to be income of the wife or the minor children which arises directly or indirectly from the membership of the wife in the firm of which her husband is a partner or from the admission of the minor to the benefits of the partnership in a firm of which the assessee is a partner. Considering the matter from first principles and without any reference to authority, it seems to us to be difficult to see how the receipt of this amount or the right to receive this amount cannot but be the consequence of the membership of the wife in the partnership or the admission of the minors to the benefits of the partnership. Even apart from any provision in the partnership deed, a is seen that under Section 13(d) of the Partnership Act, the partner or a person admitted to the benefits of the partnership is entitled to receive interest on the balances standing to his credit the statute itself accordingly provides that one of the rights following the membership or the admission to the benefits of a firm shall include the right to receive the interest. Turning to the clause in the partnership deed, the firm undertakes to pay a member or a person admitted to the benefits of the partnership interest at a rate specified. This right in the strictest sense flows from the contractual relationship created between the parties by the partnership document. It would therefore appear that the receipt of this amount cannot be dissociated from the agreement of partnership and can be said to flow directly from the membership of the wife in the one case or the admission of the minors in the other case.
5. In the Bombay decision to which reference has been made, the facts were these: The assessee therein started a partnership business with his major son. Two of his minor sons were admitted to the benefits of the partnership. The share of the profit of the minors was included in the total income of the assessee. In addition thereto, the interest which the minors received on the deposits standing to their credit in the firm was also sought to be included in the total income of the assessee, and the question was whether this interest came within the mischief of S. 16(3)(a)(ii). The learned Judges observed.
“Now, what S. 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: ‘Interest at the rate of six per cent per annum shall be paid to each partner on the moneys for the time being standing to his credit out of the gross profits of the business and such interest shall be cumulative so that any deficiency in any one year shall be made up out of the gross profits of any succeeding year or years.’ It is significant to note that this clause does not cast any obligation upon the minors to maintain any deposit in the firm. It is equally significant that this clause does not cast any obligation upon the firm to keep any deposits made by the ???. Therefore it is optional on both sides, on the side of the depositor and on the side of the depositee, whether to have deposits or not.”
6. Dealing with the contention of the department was the clause made it obligatory upon the firm to keep the profit in the partnership and to pay interest upon it, learned Judges repelled that argument and said:
“The only obligation upon the firm is to credit to the account of the partners their share of the profits. But there is no further obligation, after having credited the share in the profits, to retain that share and to pay interest under clause (3).”
Proceeding, the learned Judges concluded thus:
“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 me 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 need them or not.”
We regret we are unable to adopt the reasoning of the learned Judges of the Bombay High Court. For one thing, it appears to us that if the partnership document itself provided that the firm should pay interest on the accumulated profits of the members of the firm, such interest cannot but be regarded as arising directly from the membership of the person or the admission of the person to the benefits of the partnership. It is true that in the present case also it is not compulsory on the part of these persons to leave the amount in the deposit with the firm. The clause states that the member may receive interest for any sum advanced as loan if the firm required any such amount and the partners so advanced the amount. This clause provides for an independent transaction creating the relationship of debtor and creditor and only provides that in case where the creditor is a partner, he shall be entitled to nine per cent interest. Whether or not it is, possible to treat the interest payment arising on foot of a separate transaction as falling within the mischief of S. 16(3)(a)(i) or (ii) it is not necessary to consider. In the present case, however, the payment of this interest was fully and clearly rested on the solitary consideration, viz., that the party who was paid interest was either a member of the partnership or a person admitted to the benefits of the partnership. Let us look at the matter in a different way. If both the wife or the minor was called upon to launch legal proceedings against the firm for recovery of the interest, it is manifest that they have to rely only upon the terms of partnership in enforcement of that claim. If that is the case, we see no reason why it should not be said that the interest payment arises directly from the relationship as between them and the firm.
7. It is hardly possible to equate the present case to one where these parties had or could have earned interest by investing their profit receipts in some other manner, either by entering into a separate loan transaction with the firm or investing it with other firms or in any other manner.
8. This decision of the Bombay High Court has been referred to by the Assam High Court in Chouthmul Kejriwal v. Commissioner of Income-tax, Assam, (1961) 41 ITR 570, (Assam). That was a case where a minor admitted to the benefits of the partnership had supplied capital. The question arose whether the income accruing to the minor as interest on capital came within the mischief of S. 16(a)(3)(ii). The learned Judges took the view that the supply of capital by a person could not but be on the basis of his relation to the partnership, that is, his admission to the benefits of the partnership, so that this interest receipt arose directly from that relationship. Though the learned Judges referred to the Bombay decision and observed that case of contribution of capital differed from deposits made by the minor with the firm, it seems to us that the reasoning which they applied to the capital contribution and their conclusion that the right to receive interest thereupon arose only by reason of the relationship of the parties to the partnership applies equally to a case where under a clause in the partnership document a member of the firm and a minor admitted to the benefits of the partnership receives interest on the profits standing to his credit.
9. It follows that the question has to be answered against the assessee.
10. The assessee will pay the costs of the department Counsel's fee Rs. 250.
BG/J/D.V.C
11. Question answered.
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