# • S. SRINIVASAN v. COMMISSIONER OF INCOME-TAX, MADRAS

- **Citation:** [1967] 1 S.C.R. 727
- **Court:** Supreme Court of India
- **Decided:** 1966-10-04
- **Case number:** CIVIL APPELLATE"JUR!SDICTJON : Civil Appeal No. 556 of 1965
- **Bench:** J.C. Shah, V. Ramaswami, V. Bhargava
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/s-srinivasan-v-commissioner-of-income-tax-madras-3907
- **Pages:** 5

## Headnote

Income-tax Act (11 of 1922), s. 16(3) (a)(i) and (ii)-Assessee a~d
.his wife partners in a firnz-Minor sons entitled to benefits-Profits of wife
and minor sons a!lolved to accu1nulate with ·firm-Payment of interest by
fjrnz-Wfzether can be included in inco111e of the assess.ee.
The appellant was a partner in a firm in which the o'her two partners.
were his wife and a stranger.
Two minor sons of the appellant were also
admitted to the benefits of the partnership. Under the partnership deed,
the shares of tha five persons in the profits were defined, and it was also
provided that a partner may advance a loan for meeting the expenses of
the firm and receive Interest on such Joan upto 12%. The amounts of
profits falling to the shares of the wife and sons were allowed to accumulate in the accounts of the firm. Till the beginning of the accounting year
1956-57, the profits that were accumulating were kept without any interest,
but thereafter the firm allowed interest at 9% per annum.
On the question whether the interest could be added to the income of the appellant·
for purposes of assessment. under s. 16(3) (a) (i) and (ii) of the Incometax Act, 1922.
HELD : The interest indirectly arose and accrued to the wife and the
minor sons because of their capacity me.ntioned ins. 16(3) (a) (i) and (ii)
and could therefore be included for assessment in the income of the asses.-
see, under the section. [730 F-GJ
The accumulated profits remaining in the hands of the firm could not
be equated with deposits made with or loans advanced to the firm. The·
wife and minor sons earned the profits because of their membership of the
firm or because of their admission to the benefits of the firm!. and having
earned them in that capacity, they allowed the use of the profits to the
firm without any specific arrangement as would have been entered into if
the !funds belonged to a stranger. They let the firm use the funds because
they were interested in the profits of the firm, and interest was allowed on
the accumulation simply ·because the funds belonged either to a partner or
to minors admitted to the benefits of the partnership. [730 B, C-D, F]

## Text

•
•
•
A
B
c
D
E
F
G
•
S. SRINIVASAN
v.
COMMISSIONER OF INCOME-TAX, MADRAS
October 4, 1966
(J.C. SHAH, V. RAMASWAMI AND V. BHARGAVA, JJ.)
Income-tax Act (11 of 1922), s. 16(3) (a)(i) and (ii)-Assessee a~d
.his wife partners in a firnz-Minor sons entitled to benefits-Profits of wife
and minor sons a!lolved to accu1nulate with ·firm-Payment of interest by
fjrnz-Wfzether can be included in inco111e of the assess.ee.
The appellant was a partner in a firm in which the o'her two partners.
were his wife and a stranger.
Two minor sons of the appellant were also
admitted to the benefits of the partnership. Under the partnership deed,
the shares of tha five persons in the profits were defined, and it was also
provided that a partner may advance a loan for meeting the expenses of
the firm and receive Interest on such Joan upto 12%. The amounts of
profits falling to the shares of the wife and sons were allowed to accumulate in the accounts of the firm. Till the beginning of the accounting year
1956-57, the profits that were accumulating were kept without any interest,
but thereafter the firm allowed interest at 9% per annum.
On the question whether the interest could be added to the income of the appellant·
for purposes of assessment. under s. 16(3) (a) (i) and (ii) of the Incometax Act, 1922.
HELD : The interest indirectly arose and accrued to the wife and the
minor sons because of their capacity me.ntioned ins. 16(3) (a) (i) and (ii)
and could therefore be included for assessment in the income of the asses.-
see, under the section. [730 F-GJ
The accumulated profits remaining in the hands of the firm could not
be equated with deposits made with or loans advanced to the firm. The·
wife and minor sons earned the profits because of their membership of the
firm or because of their admission to the benefits of the firm!. and having
earned them in that capacity, they allowed the use of the profits to the
firm without any specific arrangement as would have been entered into if
the !funds belonged to a stranger. They let the firm use the funds because
they were interested in the profits of the firm, and interest was allowed on
the accumulation simply ·because the funds belonged either to a partner or
to minors admitted to the benefits of the partnership. [730 B, C-D, F]
Case law referred to.
r:..~- ..
~
CIVIL APPELLATE"JUR!SDICTJON : Civil Appeal No. 556 of
1965.
Appeal by special leave from the judgment and ord~r dated
August 27, 1962 of the High Court of Madras in T.C. No. 82 of
1960.
H
A. K. Sen and R. Gopa!akrishnan, for the appellant.
S. T. Desai, A. N. Kripal and R. N. Sachthey, for the respor.-
. dents.
728
SUPREME COURT REPORTS
(1967] I S.C.R.
The Judgment of the Court was delivered by
Bhargava, J. The appellant is a senior partner in a firm
in ~~ch the tw~ other partners are his wife and a stranger. In
al!d11lon, two minor sons of the appellant were admitted to the
benetits of the partnership. Under the deed of agreeme11t constituting the partnership, the shares in the profits of all the five persons
were 4e6ned. There was also specification of the shares in which
lo&s~ were to be shared by the three partners. There was a clause
in the deed of partnership that "if the firm requires any sum for
meeting the expenses for its management and if any of the partners
has and is willing to give such amount, he may advance (such
amount) as loan. He may receive interest for such sum at the rate
of 12 annas per cent per mensem." The firm earned profits which
were distributed in accordance with their shares between the three
partners and the two minors who were admitted to the benefits
of the partnership. The amounts of profit falling to the share
of the wife of the appellant and his two minor sons were allowed
to accumulate in the accounts of the partnership for a number of
years. Up to the beginning of the previous year relevant to the
assessment year 1957-58, the profits that were accumulating in
the accounts to the credit of the wife and the two minor sons of
the appellant were kept without any interest. With effect from
the pre,ious year in question, the partnership decided to allow
interest at 9 % per annum on these accumulated profits, so that,
during this previous year, the amounts to the credit of these three
persons increased on account of two additions in each case. There
was addition of further profit falling to their share and there was
added interest on the opening balance of the accumulate(! profits
in the accounts of each one of these three persons. All these
amounts added to the accounts during the previous year in respect
of share of profits as well as interest on accumulated profits were
added to the income of the appellant for purposes of assessment
11nder sC<.tion 16(3) (a) (i) and (ii) of the Income-tax Act. These
additions were challenged by the appellant on two different grounds.
The first ground was that the provisions of s. 16(3) (a) (i) & (ii)
were ultm vires as being beyond the legislative powers of the Parliament. The second ground was that, even on the application of
these provisions, at least the amount added to the income of the
appellant in respect of the interest credited in the accounts of his
wife and minor sons was not justified in law.
Both these objections were over-ruled by the Income-tax Officer. On appeal,
the Appellate Assistant Commissioner upheld the decision of the
!neon e-tax Officer on the first point. but decided the second point
in favour of the appellant and held that the interest earned by his
wife and minor sons from the firm could not be included in the
income of the appellant for purposes of charging it with incometax. The Income-tax
Appellate Tribunal, on further appeal,
A
B
c
D
E
F
G
H
;
SRINIVASAN v. C.1.T. (Bhargava, l.)
729
A
again upheld the decision on the first question, but, on the second
question, partly rejected the claim of the appellant.
The Tribunal held that the amount of interest credited to the amount
of the minors in respect of capital provided by their grand-father
and grand-mother had to be excluded from the total income of
the assessee, while the interest earned on the accumulated profits
B
was rightly included in the income of the appellant. Thereupon,
at the request
0 of the appellant, the following two questions were
referred by the Tribunal for the opinion of the Madras High
Court:-
c
D
E
F
G
H
"(i) Whether the provisions of section 16(3) (a) (i)
and (ii) offend clauses (f) and (g) of Article 19(1) of the
Constitution of India ?
'
(ii) Whether interest credited by the aforesaid firm
to the assessee's wife and minor children attributable
to past profit accumulations only is includible in the
assessment of the assessee under Section 16(3)(a)(i)
and (ii) ?"
u
The High Court answered both the questions against the appellant, and consequently, he has come up to this Court by special
leave.
So far as the first question is concerned, learned counsel
appearing for the appellant himself did not press it before us· in
view of the decision of this Court in Balaji v. Income-tax Officer,
Special Investigation Circle, Ako/a, and Others('). That point was
earlier decided by the Madras High Court in B. N. Amina Umma
v. Income-tax Officer, Kozhikode(2). • It has been held by this Court
in Balaji's case(') that the provisions
of s. 16(3)(a)(i) and
(ii) did not impose any unreasonable restriction on the fundamental
rights of the assessee under Article 19(l)(f) and (g) of the
Constitution, and were, consequently, valid. The first question
has, therefore, been clearly answered correctly by' the High Court
against the appellant.
Learned counsel appearing for the appellant mainly argued
before us the second question and llrged that though the profits
earned from the partnership by the wife and the minor sons of
the appellant were undoubtedly income arising to them directly
from the partnership of the wife in the firm or the admission of
the minors to the benefits of the partnership in the firm, the interest
accruing on the accumulated profits should not be held to arise
either directly or indirectly from the same source. The argument
was that the accumulated profits belonging to the wife and the
minor sons should be held to be in the nature of deposits made
(I) [1962] 2 S.C,R. 983 : 43 I.T.R. 393.
(2) 26 I.T.R. 137.
Ml 7SupCl/'6-2
730
SUPREME COURT REPORTS
[1967] \ S.C.R.
by them with the firm, or in the nature of loans advanced by them
to the firm, an d interest earned on such deposits or loans can have
no relationship with the membership in the firm of the wife or
the admission to the benefits of the partnership of the minor sons.
It appears to us that these accumulated profits remaining in the
hands of the firm cannot, on any principle, be equated with deposits
m ade 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 conld convert those accumulations
into loans advanced to the firm by these persons. The facts and
circumstances indicate th at 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 fun4s had belonged to a stranger.
They let the firm use these funds of theirs, because they had interest in the profits of the firm. The fa~ts 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 com~rted 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 ~dmitted 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 s. j6(3)(a)(i) and (ii) of the Income-tax
Act.
In this connection, learned counsel for the appellant relied on
a decision of the Bombay High Coort in Bhogila/ Laherchand v.
Commissioner of Income-Tax, Bombay City(1). It was held in
that case that interest earned by minors on deposits maintained
in the firm could not be held to be a benefit which the minors received from their admission to the partnership of the firm. The
case is inapplicable, because, as we have indicated above, in this
case the interest arising to the wife and the minor sons of the
(1)2S 1.T.R. Sl3.
A
B
r
c
•
D
E
F
G
H
A
B
c
D
E
F
G
H
•
SRINIVASAN v. C.l.T. (Bhargava, /.)
731
appellant was not the result of any deposits made by them with the
firm.
Chouthmal Kejriwal v. Commissioner of Income-tax, Assam,(1)
and Akula Venkatasubbaiah v. Commissioner of Income-tax(2}
were cases where interest was paid to the minors on the capital
provided by them for the business of the partnership. In those
cases, it was held that the interest on the capital contributed by the
minor sons was benefit arising from the admission of the minors
to the benefits of the partnership, and consequently, that interest
had to be included in the total income of the father in his assessment. These two cases are of no assistance, because the nature
of the amount on which interest has accrued to the wife and the
minor sons of the appellant is different and is not on capital
advanced by them or on their behalf.
Reference was also made by learned counsel to a decision of
the Allahabad High Court in L. Ram Narain Garg v. Commissioner
of Income-tax, U.P.('), in which case also it was held that interest
paid to a minor son admitted to the benefits of a partnership on
his capital investment is income derived directly or indirectly by him
from the admission and is includible in the income of the father
under s. l6(3)(a)(ii) of the Income-true Act. It was further held
that it cannot be stated as a matter of law that interest paid by a
partnership to a minor admitted to its benefits can never be said
to be connected even indirectly with the fact of his admission. It
is connected with the fact if the interest paid is on capital investment by the minor or on a loan advanced to the partnership
by the minor and the partnership deed forbids the raising of a
loan from any person other than a partner or a person admitted
to its benefits. It is not connected with the fact if the interest is
paid on a deposit made, or loan advanced by the minor, and the
partnership was free to accept a deposit or a loan from any person
even if not connected with it. The principle enunciated by the
Allahabad High Court does not envisage all circumstances in which
interest may be earned by a minor on his moneys with the firm.
The cases when interest is earned on a deposit or a loan differ
from a case of the type before us where interest was earned on
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 the circumstances, the answer
returned by the High Court to the second question was also correct.
The appeal fails and is dismissed with costs.
V.P.S.
Appeal dismissed.
(1) 41 I.T.R. S10.
(2) 47 I.T.R. 4sa.
(3) SS I.T.R. 43S.