Law:

Section:

Section 64(1)(iii) of the Income-tax Act, 1961 - Transfer of assets - For benefit of spouse or minor child - Assessment year 1976-77 - JP and ML constituted a partner-ship firm - They admitted two minor sons of assessee, M and S, to benefits of partnership and on that occasion both M and S brought in a sum of Rs. 10,000 each into partnership - Relevant partnership deed provided, inter alia, that capital shall be invested by all partners as and when required and shall carry interest at 7½ per cent - Whether interest paid by firm on amounts to credit of each of minors and also on accumulated profits of S was includible in income of assessee under section 64(1)(iii) - Held, yes Facts JP and his brother ML constituted a partnership firm. They had admitted M and S, two minor sons of the assessee, to the benefits of the said partnership, and they brought in a sum of Rs. 10,000 each into the partnership. The relevant partnership deed dated 21-11-1974 provided, inter alia, that the capital would be invested by all the partners as and when required and that it would carry interest at 7½ per cent. The ITO included the share income of the minors, which included interest paid on the amounts to the credit of each of the minors and also on the accumulated profits of S, in the income of the assessee under section 64(1)(iii). The assessee appealed to the AAC against the inclusion of interest amounts of the minors in his income. The AAC dismissed the appeal observing that interest was paid to the minors at the rate of 7.5 per cent only which indicated that the amount contributed by the minors was in the nature of capital. On second appeal, there was a difference of opinion between the Accountant Member and the Judicial Member and, consequently, the matter was referred to the Third Member. The Third Member agreeing with the view taken by the Accountant Member held that there was no obligation cast on the minors to contribute any capital and that the amounts brought in by the minors and also the accumulated profits in the case of S represented only deposits and, as such, the interest paid to the minors could not be included in the assessee's income under section 64(1)(iii). With…

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