Shri V.r.chinnan Chettiar, Kandannor v. Commissioner Of Income-Tax, Madurai

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 17/12/2003 CORAM THE HON'BLE MR.JUSTICE R.JAYASIMHA BABUandTHE HON'BLE MR.JUSTICE S.R.SINGHARAVELU T.C.No.59 of 2000 and T.C.No. 228 of 2000 Shri V.R.Chinnan Chettiar,Kandannor. ..Applicant -Vs- Commissioner of Income-tax,Madurai. ..Respondents !For Applicant : Mr.N.Quadir Huzzain For respondent : Mrs.Pushya Sitaraman,Sr. Standing Counselfor I.T. Department. :JUDGMENT (Delivered by R.JAYASIMHA BABU, J.) The assessee's minor children had been admitted to the benefits of apartnership of which the assessee and his mother were partners. On thecapital contribution made by the minors, the distributable profits had beenallowed to accumulate. The accumulation as on 1.4.1980 was Rs.1,00,000/- inthe accounts of the minors and Rs.50,000/- each in the account of the assesseeand his mother. These accumulations had apparently accrued over a long periodfrom 1974 to 1980, the firm having first been constituted in the year 1974 andlater reconstituted in the year 1977. On 1.4.1980, the parties entered intoan agreement which reads thus:- "Whereas the parties to this deed along with minor C.Veerappan andC.Subramania, all sons of the party of the first part are running the firm M/sSVR Cycle Mart, Karaikudi in which the above said two minors are admitted tothe benefits of partnership and whereas the partners are having balances intheir respective current accounts with the firm and whereas the partiesexpressed their intention to withdraw major balances in current accounts andwhereas the business of the firm badly requires finance and after discussionand consultations it has been agreed that the partners shall retain with thefirm the following amounts as deposits with the firm for a period of five years at the rate of 12% p.a. From the first two years and at the rate of 15%p.a. For the balance of three years. Such amount retained as deposit shallbe transferred from the current account of the respective partners to theirrespective deposit account." 2. It is clear from this agreement that as on the date of the agreement, the partners and the two minors had, to their credit, amounts whichrepresented accumulation of the profits and which sums they had so far notdrawn. It was open to them to draw these amounts and instead of drawing thesame and placing the amounts in deposits in banks or companies so that thoseamounts could yield interest, they had agreed to treat those amounts asdeposits with the firm itself on which the firm was to pay interest. Theperiod for which the deposit was to be retained by the firm as also the rateof interest payable were set out. 3. Though initially the interest paid to the two minors on their deposits were not taxed in the hands of the assessee, the Commissioner, byusing his powers under Section 263, made an order requiring the assessingofficer to tax those amounts in the hands of the assessee. This he did bycompletely misreading the judgment of the Supreme Court in the case ofS.Srinivasan v. The Commissioner of Income Tax, Madras (1967) 63 ITR 273. 4. The assessing officer having thereafter brought that amount to taxin the hands of the assessee by placing reliance on Section 64 (1) (3) of theAct, the assessee took the matter in appeal successfully, but that success wasshortlived as the Tribunal took the view that this amount is required to betaxed in the hands of the assessee. 5. Section 64 (1)(3) of the Act, as it stood at the relevant time, that provision having been repealed with effect from 1.4.93, reads as under:- "In computing the total income of any individual, there shall beincluded all such income as arises directly or indirectly. ..... (iii) to a minor child of such individual from the admission of the minor tothe benefits of partnership in a firm." 6. The question which thus required consideration by the Tribunal wasas to whether the interest paid on these deposits was capable of beingregarded as benefit accruing to the minors by reason of their admission to thebenefits of the partnership firm. 5. Section 64 (1)(3) of the Act, as it stood at the relevant time, that provision having been repealed with effect from 1.4.93, reads as under:- "In computing the total income of any individual, there shall beincluded all such income as arises directly or indirectly. ..... (iii) to a minor child of such individual from the admission of the minor tothe benefits of partnership in a firm." 6. The question which thus required consideration by the Tribunal wasas to whether the interest paid on these deposits was capable of beingregarded as benefit accruing to the minors by reason of their admission to thebenefits of the partnership firm. 7. A case very similar to the present one was considered by the Supreme Court in the case of S.Srinivasan v. The Commissioner of Income Tax(1967) 63 ITR 273. In that case also there was accumulation of undrawnprofits of the wife and the minor sons in the firm and on those sums the firmhad paid interest. Such payment of interest was held by the Court to be abenefit indirectly obtained by the spouse and the minor children from thefirm. While so holding, the Court considered the argument that had beenadvanced that those amounts were in the nature of loans and deposits. The Court pointed out that as there was no agreement in that case by which theparties had agreed to treat that amount as loans and deposits they had notbeen so regarded. 8. The Court observed thus:- "The profits accumulated to the credit of the wife and the minor sons,because they did not draw their share of profits when distribution of profitstook place, and allowed those profits to remain with the firm; but there is nosuggestion at all that, at that stage, either the wife or the minor sons, oranyone on their behalf, purported to enter into an arrangement with the firmto keep these accumulated profits and deposits. Similarly, there was no suchcontract which could convert those accumulations into loans and advances tothe firm by these persons." Those observations of the Court clearly point out that it is the absence of anarrangement or a contract to treat the accumulated undrawn profits as loansand deposits that resulted in the interest paid on those undrawn accumulationsas having to be regarded as indirect benefits received by the spouse and theminors who had been admitted to the benefits of the firm. 9. In this case, the undrawn accumulation had been, by an agreement among the parties, treated as deposits and the interest that was paidsubsequently was only on that deposit and was not an amount paid as intereston the undrawn accumulation. The fact that the parties had voluntarily agreedthat the undrawn accumulation would not be immediately drawn but would be keptwith the firm as deposit on which the firm agreed to pay interest does not inany manner render the interest so paid an indirect benefit covered by Section64 (1) (3) of the Act. 10. The Tribunal's view that the undrawn profits should be regardedas additional capital brought in by the partners cannot be approved, as thelater agreement, the genuineness of which has not been doubted, clearly setsout that those profits were to be henceforth held as deposits. The questionreferred viz., 'Whether the Tribunal is right in holding that the interest paid bythe firm M/s S.V.R.Cycle Mart to the assessee's minor sons VR.C. Veerappanand VR.C.Subramanian is includible in the assessment of the assessee undersection 64 (1) (iii) of the Income-tax Act" is, therefore, answered in favour of the assessee and against the Revenue.The assessee shall be entitled to costs in the sum of Rs.2500/-. dev/ To 1.The Assistant Registrar,Income Tax Appellate Tribunal,Rajaji Bhavan,III Floor, Besant Nagar,Madras-90. (with records) (5 copies) 2.The Secretary,Central Board of Revenue,New Delhi. (3 copies) 3.The Commissioner of Income Tax,Madurai. 4.The Inspecting Asst. Commissioner of Income-tax,Madurai Range, Madurai. 5.The Asst. Commissioner of Income-tax,Circle 1 (3), Karaikudi. Dev/