Law:

Section:

Section 64(1)(iii) of the Income-tax Act, 1961 - Transfer of assets - For benefit of spouse or minor child - Assessment years 1976-77 to 1977-78 - Assessee's minor children were admitted to benefits of partnership - As per provision in partnership deed, interest was allowed to those minors on outstanding balance in their accounts - Whether interest credited to accounts of minors was includible in hands of assessee - Held, yes FACTS Two minor children of the assessee were admitted to the benefit of partnership in a firm. The profits each year were credited to the capital accounts of the minors and interest was allowed thereon in view of clause 7 of the partnership agreement. In view of the provisions contained in section 64(1)(iii), as amended with effect from 1-4-1976, the ITO added the interest in the hands of the assessee. The AAC agreed with the ITO. On second appeal, the Tribunal found that the minors had not contributed any capital nor was there any stipulation for the same in the agreement. The Tribunal treated the accumulated profits as advances or deposits by the minors to the firm and held that the minors were given the interest not by virtue of their being admitted to the benefits of partnership but because of their advances. The Tribunal accordingly held that section 64(1)(iii) had no application. On reference: HELD The benefits of partnership in a firm will not only be the right to get the share of the profits of the firm but will also include other benefits which a minor may enjoy from his being admitted to the firm. The income by way of interest received by the minor was by virtue of a specific clause in the partnership. The minor as well as other partners were entitled to get interest on their accounts in the firm. This was a specific provision in the partnership deed and because the minors were admitted to the benefits of the partnership firm they were given this interest on their accounts. Further, any income which arises indirectly to a minor by virtue of admission to the benefits of the partnership firm will also attract the provisions of section 64(1)(iii). The interest credited to the accounts of the minors was, therefore, includible in the…

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