S. SRINIVASAN versus COMMISSIONER OF INCOME-TAX, MADRAS

Citation: [1967] 1 S.C.R. 727 · Decided: 04-10-1966 · Supreme Court of India · Bench: J.C. SHAH · Disposal: Dismissed

Judgment (excerpt)

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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 accumu-
late 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 ques-
tion 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 Income-
tax 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:..~- .. 
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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 consti-
tuting 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 

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