JUDGMENT M.C. Agarwal, J.
1. The Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, has referred the following questions for the opinion of this court :
"1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the interest derived by the minors on the investments made with the firm was not as a result of their admission to the benefits of the partnership and that it could not be included in the assessee's income under Section 64(1)(iii) of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in confirming the Appellate Assistant Commissioner's action in holding that the interest earned by the minors be bifurcated in two parts, (i) on initial deposits, and (ii) on accumulated profits and that the interest falling in the first category was to be excluded from the income of the father whereas the income falling in the second category was to be included in the income of the father ?
3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in deleting the following interest from the hands of the minors :
Rs.
Shri Pradeep Kumar 11,075 Shri Anil Kumar 11,082 Shri Jitendra Kumar 10,770 ?"
2. The first question arises out of the Tribunal's order in Income-tax Appeal No. 748 of 1978 and cross-objection No. 31 of 1977-78. This was an appeal by the Revenue and the cross-objection was filed by the assessee, Ram Ratan. Questions Nos. 2 and 3 arise out of the Tribunal's order in Departmental Appeals Nos. 749, 750 and 751 in the cases of Jitendra Kumar, Anil Kumar and Pradeep Kumar who were the minor sons of the aforesaid Ram Ratan. The aforesaid appeals and the cross-objection related to the assessment year 1976-77 and were disposed of by the Income-tax Appellate Tribunal by a common order.
3. We have heard Sri Rakesh Rajjan Agarwal, learned counsel for the Revenue and Sri Shakeel Ahmad, learned counsel for the assessee-respon-dent.
4. Sarvarsri Anil Kumar, Jitendra Kumar and Pradeep Kumar are the minor sons of Ram Ratan. These three minors were admitted to the benefits of a partnership, Ratan Cold Storage, Farrukhabad, that was constituted by Sarvasri Subhash Chandra and Jageshwar Dayal. The profits of the partnership firm were to be distributed amongst the aforesaid two partners in the ratio of 24 paise and 4 paise in a rupee, respectively, while the losses were to be shared in the ratio of 80 paise and 20 paise in a rupee, respectively. The aforesaid minors, admitted to the benefits of the partnership, were also to receive 24 paise each per rupee from the partnership profits. They were not responsible for the losses. Clause 14 of the partnership deed provided that the partners shall be allowed an interest of 12 per cent. per annum on their investment with the firm.
5. The firm as aforesaid was constituted with effect from January 1, 1967. The minors invested certain amounts in the firm at the time of the constitution of the firm. They also invested certain amounts later. All such amounts were credited to the accounts of the minors with the said firm. Interest allowed on the investments and the profits accrued to the minors in terms of the partnership agreement were also credited to those accounts. In the assessment of their father, Shri Ram Ratan, for the year 1976-77, the Income-tax Officer included the amounts of interest allowed to the minors on the said balances in terms of Section 64(1)(iii) of the Income-tax Act. The said amounts were also included in the income of the respective minors on protective basis as it was contended in the case of their father that such amounts are not of the nature of benefit arising to the minors from their admission to the benefits of the aforesaid partnership firm. The assessee, Ram Ratan, appealed to the Appellate Assistant Commissioner who took the view that only interest relating to the initial deposit made by the minors was includible in the income of their father under Section 64(1)(iii) and that the interest relating to the rest of the amounts could not be treated as income arising directly or indirectly to the minors from their admission to the benefits of a partnership-firm. The Revenue appealed to the Income-tax Appellate Tribunal which upheld the view taken by the Appellate Assistant Commissioner and dismissed all the aforesaid Departmental appeals.
6. The Income-tax Appellate Tribunal observed as below :
"In our opinion, there is enough justification for the conclusion reached by the learned Appellate Assistant Commissioner. There is nothing in the partnership deed to show that the minors were, in any way, under the obligation to contribute capital. That despite this lack of obligation, the minors made investments with the firm, would only go to show that the minors found profitable to make investments for earning interest and as many other persons were giving loans to the firm to the benefits of which they were admitted, they also gave loans. That these were contributions of capital and that they were not by way of deposits simpliciter as affirmed by them has to be proved by the Department. The Department has tried to discharge this onus by pointing out that profits accruing and arising to the minors from the business of the firm have been credited to these accounts. This fact alone, in our opinion, is not enough to convert the deposits into capital. May be that the firm should have kept two accounts separate but simply because the two have not been kept separate, it cannot be said that the fact of credit of the profit in this account turned what was originally a deposit account into a capital account. The Revenue's appeal on this account, in our opinion, has no merit and is, therefore, hereby dismissed."
7. Section 64(1)(iii) as it stood at the relevant time reads as under :
"64. Income of individual to include income of spouse, minor child, etc.--(1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly-- ....
(iii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm."
8. The Supreme Court had occasion to deal with a similar matter arising under Section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922, in S. Srinivasan v. CIT [1967] 63 ITR 273. In that case, interest was allowed by the firm to the wife and minor sons of the assessee on the amounts standing to the credit of the wife and minor sons on account of accumulated profits. It was contended on behalf of the assessee that the accumulated profits belonging to the wife and minor sons should be held to be in the nature of deposits made by them with the firm, or in the nature of loans advanced by them to the firm, and that interest earned on such deposits or loans can have no relationship with the membership of the firm of the wife or the admission to the benefits of the partnership of the minor sons. The Supreme Court repelled this contention as follows (at page 276) :
"It appears to us that these accumulated profits remaining in the hands of the firm cannot, on any principle, be equated with deposits made or loans advanced. 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 profits took place, and allowed those profits to remain with the firm ; but there is no suggestion at all that, at that stage, either the wife or the minor sons, or anyone on their behalf, purported to enter into an arrangement with the firm to keep these accumulated profits as deposits. Similarly, there was no such contract which could convert those accumulations into loans advanced to the firm by these persons. The facts and circumstances indicate that the wife and the minor sons had earned these profits because of their membership of the firm or because of their admission to the benefits of the firm, and having earned these profits in that capacity, they allowed the use of their profits to the firm without any specific arrangement as would naturally have been entered into if these funds had belonged to a stranger. They let the firm use funds of theirs, because they had interest in the profits of the firm. The facts also show that the use of these moneys was allowed to the firm without asking for any interest, and it was only at a later stage that the three partners of the firm decided to give interest on these amounts. When the decision was taken to give interest, the nature of the funds did not change. They did not get converted into deposits or loans. They still remained accumulations belonging to a partner or persons admitted to the benefits of the partnership and allowed to be used by the firm. The interest also appears to have been allowed by the firm simply because these funds belonged either to a partner or to the minors who had been admitted to the benefits of the partnership. It is thus clear that the interest at least indirectly arose and accrued to the wife and the minor sons because of their capacity mentioned in Section 16(3)(a)(i) and (ii) in the Income-tax Act."
9. The Supreme Court held that the cases where interest is earned on a deposit or a loan differ from a case of the type aforesaid where interest was earned tin amounts of which the minors permitted the use by the firm, because they were their accumulated profits arising from the firm itself and because of their interest in the firm as persons admitted to the benefits of the partnership. In CIT v. Smt. Nirmala Devi [1987] 166 ITR 253 (MP), it was held by the Madhya Pradesh High Court that the Income-tax Appellate Tribunal was not justified in holding that if there was independent investment of capital by the minors, interest on such capital would not be liable to tax in the hands of the assessee. On behalf of the assessee-respondent, reliance is placed on a judgment of the Gauhati High Court in CIT v. B.P. Sikaria [1992] 195 ITR 836 in which the finding of the Tribunal was that the circumstances of the case showed that the money kept in the firm by the minor was a deposit in the sense that it was payable by the firm at any time the minor wanted it and that it was not in the nature of capital. On this finding, the conclusion of the Income-tax Appellate Tribunal that interest earned by the minor on such deposit did not amount to a benefit accrued to the minor from his admission to the benefits of partnership was upheld.
10. In the case before us the order of the Tribunal shows that it has misdirected itself in placing the burden of proof on the Revenue and in not properly appreciating the facts of the case. The admitted facts of the case are that the minors contributed certain amounts at the time of the constitution of the firm and they also contributed Rs. 15,000 each on September 20, 1967, and Rs. 28,000 each on January 31, 1968. The adult partners also contributed further amounts after the initial contribution of Rs. 2,100 by each of them, i.e., the adults and the minors admitted to the benefits of partnership. Admittedly, the amounts of subsequent deposits were also credited in the capital account of the minors that were opened with the initial deposit of Rs. 2,100. In respect of subsequent deposits no separate account was maintained nor were such subsequent amounts shown as loans in the balance-sheet of the year in question or of any earlier year. There was no material to show that while depositing the subsequent amounts, there was any separate contract with the minors as there would be in respect of the other creditors nor was there any material to show that the interest credited to the accounts of the minors was not in terms of the partnership deed and was in pursuance of any independent contract. The burden to prove that the interest in question or any part thereof was not directly or indirectly related to the admission of the minors to the benefits of the partnership lay on the assessee as held by the Supreme Court in the case of S. Srinivasan [1967] 63 ITR 273, and this burden was not discharged by the assessee by leading any evidence whatsoever. The mere fact that the firm had raised loans from others as well and had paid interest to them at the same rate was of no consequence. We, therefore, hold that the Income-tax Appellate Tribunal was not correct in law in holding that the interest derived by the minors on the investments made with the firm was not as a result of their admission to the benefits of the partnership and that it could not be included in the assessee's income under Section 64(1)(iii) of the Income-tax Act, 1961. We answer the aforesaid question in the negative and in favour of the Revenue and further hold that the amount in question was includible in the income of the assessee, Ram Ratan, in terms of Section 64(1)(iii) of the Income-tax Act, 1961.
11. As a consequence, question No. 2 is also answered in the negative. As regards, question No. 3, we are of the view that the entire amounts of interest being taxable in the hands of the assessee, Ram Ratan, the entire amounts of interest credited to the accounts of the minors, Pradeep Kumar, Anil Kumar and Jitendra Kumar, should have been excluded from the computation of income of the said minors and not merely the sums mentioned above in question No. 3. This question is answered accordingly.
12. In the circumstances of the case, we direct the parties to bear their own costs.
13. A certified copy of this judgment, be sent to the Registrar of the Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, in accordance with Section 260 of the Income-tax Act, 1961.