Andhra Pradesh H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the interest of Rs. 9,435 debited to the capital account of the minor and paid to the firm in which she was a partner is deductible from the share income arising to her from the partnership firm, especially when the interest is paid to the firm itself and not to any outsider ?

Counsel Appeared

M. Suryanarayana Murthy & A.V. Krishna Koundinya, for the Revenue : M.J. Swamy & D. Man Mohan, for the Assessee

Y.V. ANJANEYULU, J.:

This reference under the IT Act relates to the three asst. yrs. 1978-79, 1979-80 and 1980-81. The CIT sought this reference and the following three questions were referred by the Tribunal under s. 256(i) of the IT Act:

” 1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the interest of Rs. 9,435 debited to the capital account of the minor and paid to the firm in which she was a partner is deductible from the share income arising to her from the partnership firm, especially when the interest is paid to the firm itself and not to any outsider ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the interest of Rs. 8,839 debited to the capital account of the minor and paid to the firm in which she was a partner is deductible from the share income arising to her from the partnership firm, especially when the interest is paid to the firm itself and not to any outsider?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the interest of Rs. 8,533 debited to the capital account of the minor and paid to the firm in which she was a partner is deductible from the share income arising to her from the partnership firm, especially when the interest is paid to the firm itself and not to any outsider? “

2. We may point out that questions Nos. 1, 2 and 3 relate to the asst. yrs. 1978-79, 1979-80 and 1980-81, respectively.

3. The questions arise for consideration in the following circumstances : The assessee as well as his minor daughter were partners in a firm known as M/s Krishna Dall and Flour Mill, Bhavanipuram, Vijayawada. The partnership was constituted under a deed of partnership executed on February 15, 1977. There were four major partners and two minor partners admitted to the benefits of the partnership, including the assessee’s minor daughter. It would appear that all the partners including the minor partners own sites in Bhavanipuram and on the sites a dall mill was constructed by all the partners contributing the money together. It is an undisputed fact that on behalf of the minor, funds were borrowed and invested in the partnership firm for construction of the dall mill.

4. In connection with the income-tax assessment for the year 1978-79 of the assessee, the income of the minor daughter was not included initially under s. 64(1)(iii) of the Act. For the asst. yrs. 1979-80 and 1980-81, the ITO realised that the share income of the minor daughter was liable to be included in the total income of the assessee under s. 64(1)(iii) of the Act. Consequently, in the regular assessments for the years 1979-80 and 1980-81, the share income arising to the minor daughter was so included. In connection with these two assessments, the assessee claimed that interest on monies borrowed and invested in the partnership firm on behalf of the minor for the purpose of construction of dall mill should be deducted from the share income and only the resultant income included in his total income under s. 64(1)(iii) of the Act. It was claimed that interest of Rs. 8,839 and Rs. 8,533 were paid on the monies borrowed by the minor daughter and deduction of these two sums from the share incomes was claimed. The ITO declined to accept the aforementioned claim of the assessee. At the same time, the ITO revised the income-tax assessment for the year 1978-79 under s. 154 of the IT Act as if there was a patent and self-evident error. In an order passed under s. 154 of the Act, the ITO likewise included the share income of the minor daughter in the total income of the assessee rejecting the contention that the interest of Rs. 9,435 paid for this assessment year should be allowed as a deduction.

5. Aggrieved by the assessments made by the ITO, the assessee filed appeals before the AAC who, by his order dated March 12, 1982, confirmed the assessments and dismissed the appeals filed by the assessee. The assessee filed second appeals before the Tribunal. The assessee reiterated his contention for deduction of the interest paid on the monies borrowed by the minor daughter for the construction of the dall mill. The Tribunal upheld the assessee’s claim and directed that the interest paid for all the three assessment years should be allowed as a deduction from the share income of the assessee’s minor daughter and only the resultant income after such deduction should be included in the total income of the assessee under s. 64(1)(iii) of the Act. The Commissioner was aggrieved by the decision of the Tribunal and consequently he sought reference to this Court of the three questions already mentioned above.

6. The contention of standing counsel for the Revenue is that when s. 64(1)(iii) authorised the inclusion of the share income arising to a minor child, it is the gross income that is referable and not the net income. According to learned standing counsel, the share income of the minor daughter liable to be included in the total income of the assessee must be ascertained without giving any deductions to which the minor daughter may be entitled if she had been directly assessed. In that view of the matter, learned standing counsel submitted that the Tribunal was in error in directing that the interest paid for the three years should be deducted.

7. We find no authority for the proposition made by learned standing counsel. While s. 64(1)(iii) of the Act authorises the inclusion of the share income of the minor child, it obviously refers to the share income determined in the hands of the minor child by applying all the provision of the Act. Sec. 67(3) of the IT Act provides that :

” Any interest paid by a partner on capital borrowed by him for the purposes of investment in the firm shall, in computing his income chargeable under the head ‘Profits and gains of business or profession’ in respect of his share in the income of the firm, be deducted from the share. “

8. It is not denied that the minor admitted to the benefits of the partnership is regarded as a partner for all purposes. That being so, full effect must be given to the provisions contained in s. 67(3). The minor partner is entitled to claim deduction of the interest paid on capital borrowed for the purpose of investment in the firm. There is no dispute about the fact that on behalf of the minor daughter, the assessee borrowed funds and invested the same in the partnership firm in the name of the minor daughter. Consequently, the interest payable on capital borrowed by the assessee on behalf of the minor daughter qualifies to be deducted under s. 67(3) of the Act. It is, therefore, imperative that the deduction under s. 67(3) is provided first as contemplated therein and only the resultant income included in the total income of the assessee under s. 64(1)(iii) of the Act. The Tribunal was perfectly justified in holding that the interest paid by the assessee in respect of the monies borrowed on behalf of the minor daughter for investment in the partnership firm is liable to be deducted from the share income and only the resultant income could be taxed in the hands of the assessee by applying the provisions of s. 64(1)(iii) of the Act. We accordingly answer the reference in the affirmative, that is to say, in favour of the assessee and against the Revenue.

No costs.

[Citation : 171 ITR 318]