Law:

Section:

Section 64(1)(iii) of the Income-tax Act, 1961 - Transfer of assets - For benefit of spouse or minor child - Assessment year 1977-78 - Assessee's minor sons were admitted to benefits of two partnerships - Interest paid on accumulated profits of minors was assessed by ITO as assessee's income - Tribunal found that neither minors nor anyone on their behalf did any overt Act to convert accumulated profits into deposit or loans to firm in spite of such resolution passed by partners of firms - Whether interest paid to minors on accumulated profits was rightly assessed in hands of assessee-father - Held, yes FACTS Three minor children of the assessee were admitted to the benefits of two partnership firms, viz., V and A. The assessee was a partner in firm V only. These minors were not only paid the share of profits but they also received interest on the accumulated profits and this interest was assessed in the hands of the assessee by the ITO, by invoking the provisions of section 64(1)(iii). The Tribunal found that there was no exercise of volition by the minors or anyone on their behalf to convert the accumulated profits to a loan or deposit to the firm. It, therefore, upheld the ITO's order. On reference: HELD A bare reading of section 64(1)(iii ) shows that any income which arises directly or indirectly to a minor child of an individual from the admission of the minor to the benefits of the partnership is to be taxed in the hands of the individual The observations of the Supreme Court in S. Srinivasan v.CIT [1967] 63 ITR 273 clearly show that any interest which is received on the accumulated profits would be relatable to the minor's admission to the benefits of the partnership. It is only if by an independent volition on the part of the minors or their guardians the accumulated profits are imparted with a character of a deposit or a loan and interest earned thereon, that such an income can escape from being assessed in the hands of the father. To put it differently if any income arises to the minor as a result of the partnership deed, whether it be in the form of share of profit, commission, fee or even interest, the same would be assessable in the hands of the…

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