Case: Commissioner Of Income-Tax, Gujarat Vs. Ashokbhai Chimanbhai

to be taken and the profit or loss was to be ascertained on the Divali day of each samvat year. Arvind died on August 31, 1950, and his share in the profits as ascertained on August 31, 1950 was sought to be added under S. 16 (3) of the Income-tax Act, 1922, to the income of his father on the footing that the amount constituted income of a minor child of the assessee which arose from the admission of that minor child to the benefits of the partnership. The Court held that as Arvind had agreed to remain a partner after attaining majority and under the terms of the partnership profit or loss was to be ascertained only on the Divali day of each year it was impossible to predicate whether the partnership had made any profit or loss, on any date prior to the date of Divali in any year and as the right to receive a share of the profits arose on the death of Arvind the share of profit could not be treated as income which arose directly or indirectly to Arvind during his minority so is to make it liable to be included under S. 16 (3) in the assessment of the father. Chagla, C. J. in delivering the judgment of the Court referred to E. D. Sassoon Co. Ltd.s case, 1954-26 ITR 27 : (AIR 1954 SC 470 ), and observed that though income may accrue or arise to an assessee before he actually receives it, income cannot accrue or arise to him until he acquires a right to receive its and unless and until there is created in favour of the assessee a debt due by somebody, it cannot be said that he has acquired a right to receive the income. In so holding, the learned Chief Justice quoted a passage from the judgment of Bhagati, J., in E. D. Sassoon Co. Ltd.s case, 1954-26 ITR 27 (AIR 1954 SC 470 ), to the elect that"Income may accrue to an assessee,without the actual receipt of the same. If the asseassee acquires a right to receive the income the income can be said to have accrued to him thought it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody,. There must be as is otherwise expressed debitumi in praesenti solvendum in future.... unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him?12. It was urged by counsel for the Commissioner that between the partners collectively and an individual partner there can be no relation of a debtor and creditor and, therefore, the principle enunciated by this Court, in E. D. Sassoon Co. Ltd.s,. case, 1954-26 ITR 27 ; (AIR 1954 SC 470 ), has no application to cases where a partner receives his share of the profits of the firm on making up the account of the partnership. But the principle of E. D. Sassoon Co. Ltd.s case, .1954-18 ITR 27 (AIR 1954 SC 470 ), is that income accrues or arises when a right thereto comes into existence and not before. If that be the correct ratio, and we think it is, the argument that a partnership is nothing but a compendious name for partners involving the corollary that a partner cannot be a creditor of the partnership will have no practical impact.13. In Bhogilals case, 1955-28 ITR 919 ; (AIR 1956 Bom 411 ), the position was substantially the same as in the present case. On Arvind attaining the age of majority and electing to continue as a partner he became entitled to all the rights and obligations of a partner since he was admitted to the benefits of the partnership and also to receive his share of profits computed at the end of the year as regulated by the partnership deed. On the death of Arvind the partnership stdod dissolved and accounts had to be made up on August 31, 1950. But the earliest date on which Arvinds estate became entitled to a share in the profits was after he attained the age of majority; it was, therefore, not income which arose directly or indirectly in favour of a minor child so as to attract the application of S. 16 (3) of the Incometax Act. It must be noticed that in Bhogilals case, 1955-28 ITR 919 : (AIR 1956 Bom 411 ), income was earned by the firm in Samvat year 2006 and Arvind attained the age of majority before the end of that year, The Revenue authorities sought to apportion the share of Arvind in the income, and sought to render the father liable for that part of the income which it was claimed was properly attributable to the part of the year during which Arvind was a minor, but that claim was rejected and the entire share of Arvind in the profits was held not taxable under S. 16 (8) as part of the income of his father.14. In the present case at the date when Ashokbhai acquired the right to receive a share of profits, there was no subsisting joint family and his share of the profits was not received by him on behalf of the assessee.15. There was in this case no assignment of the profits which had already accrued to the assessee, Profits accrued to Ashokbhai and on the date on which they accrued the assessee had because of the deed of partition no interest in the profits. The Revenue authorities could not claim that profits which under the instrument of partition did not accrue or arise to Ashokbhai as representing the Hindu undivided family must for purposes of taxation be so deemed. The High Court was, therefore, right in answering the question in the negative.16.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]In Bhogilals case, 1955-28 ITR 919  ; (AIR 1956 Bom 411  ), the position was substantially the same as in the present case. On Arvind attaining the age of majority and electing to continue as a partner he became entitled to all the rights and obligations of a partner since he was admitted to the benefits of the partnership and also to receive his share of profits computed at the end of the year as regulated by the partnership deed. On the death of Arvind the partnership stdod dissolved and accounts had to be made up on August 31, 1950. But the earliest date on which Arvinds estate became entitled to a share in the profits was after he attained the age of majority; it was, therefore, not income which arose directly or indirectly in favour of a minor child so as to attract the application of S. 16 (3) of the Incometax Act. It must be noticed that in Bhogilals case, 1955-28 ITR 919  : (AIR 1956 Bom 411  ), income was earned by the firm in Samvat year 2006 and Arvind attained the age of majority before the end of that year, The Revenue authorities sought to apportion the share of Arvind in the income, and sought to render the father liable for that part of the income which it was claimed was properly attributable to the part of the year during which Arvind was a minor, but that claim was rejected and the entire share of Arvind in the profits was held not taxable under S. 16 (8) as part of the income of his father.14. In the present case at the date when Ashokbhai acquired the right to receive a share of profits, there was no subsisting joint family and his share of the profits was not received by him on behalf of the assessee.15. There was in this case no assignment of the profits which had already accrued to the assessee, Profits accrued to Ashokbhai and on the date on which they accrued the assessee had because of the deed of partition no interest in the profits. The Revenue authorities could not claim that profits which under the instrument of partition did not accrue or arise to Ashokbhai as representing the Hindu undivided family must for purposes of taxation be so deemed. The High Court was, therefore, right in answering the question in the negative.x Act, income is taxable when it accrues, arises or is received, or when it is by, fiction deemed to accrue, arise or is deemed to be received.Receipt is not the only test of chargeability to tax; if income accrues or arises it may become liable to tax. For the purpose of this case it is unnecessary to dilate upon the distinction between income "accruing and "arising". But there is no doubt that the two words are used in contradistinguish the word "receive".Income is said to be received when it reaches the assessee; when the right to receive the income becomes vested in the assessee, it is said to accrue orthe gross receipts of a business day after day or from transaction to transaction lie embedded or dormant profit or loss; on such dormant profit or loss undoubtedly taxable profits; if any, of the business will be computed. But dormant profits cannot be equated with profits charged to tax under Ss. 3 and 4 of theAct. The concept of accrual of profits of a business involves the determination by the method of accounting at the end of the accounting year or any shorter period determined by law. If profits accrue to the assessee directly from the business the question whether they accrue de die in diem or at the close of the year of account has at best an academic significance, but when upon ascertainment of profits the right of a person to a share therein is determined, the question assumes practical importance, for it is only on the right to receive profits or income, profits accrue to that person. If there is no right, no profits will be deemed to have accrued. This principle was applied by this Court in E. D. Sassoon and Co. Ltd. v. The Commissioner ofITR 27: (AIR 1954 SC 470  ). The material facts bearing on that principle were these: E. D. Sassoon and Co. Ltd., calledthe managing agents of a Company which may be called the United Mills and were entitled to receive a percentage of annual net profits of the Company as their remuneration. On December 1, 1943 Sassoons assigned to Messrs Agarwal and Co. their office as managing agents and all their rights and benefits under the managing agency agreement. Accounts of the managing agency commission payable to the managing agents for the calendar year 1943 were made up in 1944 and commission for the whole year was paid to Messrs Agarwal and Co. thereafter. In the course of assessment proceeding of Sassoons it was debated whether in respect of commission earned by the managing agency, tax was payable on the entirety of the commission by Messrs Agarwal and Co. or by sassoons or it was liable to be apportioned between Messrs Agarwal and Co. and Sassoons. This Court held (Jagannadhadas, J., dissenting) that Messrs Agarwal and Co, alone were liable to pay tax on the whole of the remuneration received under the contract of service between the United Mills, because the managing agency was entire and indivisible, and the remuneration or commission fell due to the managing agents, only on completion of a definite period of service and at stated periods it being a condition of recovery of wages or salary that the service or duty should be completely performed, Remuneration as managing agents constituted according to the Court "a debt only at the end of each such period of service and no remuneration or commission was payable to the managing agents for broken periods After referring to the observations of Fletcher Moulton, L. J., in Spanish Prospecting Co. Ltds. ; case.Ch 92 (already set out), Bhagwati, J., observed that "it would be absurd to suggest that the profits of the company could accrue from day to day or even from month to month". The working of the company from day to day could certainly not indicate any profit or loss, even the working of the company from month to month could not be taken as a reliable guide for this purpose. If the profit or loss has to be ascertained by a comparison of the assets at two stated points, the most businesslike way would be to so do at stated intervals of one year and that would be a reasonable period to be adopted for the purpose. In the case of large business concern the working of the company during a particular month may show profits and the working in another month may show loss. The business during the earlier part of the year may show profit or loss and in the later part of the year may show loss or profit which would go tothe profit or loss as the case may be in the earlier part of the year. It would, therefore, be reasonable determine the profit or loss as the case may be at the end of every year so that on such calculation of net profits the managing agents may be paid their remuneration or commission at the percentage stipulated in the managing agency agreement and the shareholders also be paid dividends out of the net profits of theit cannot be inferred therefrom that whenever the partnership receives gross receipts in respect of its business transaction in which is embedded some profit or loss of the partnership that profit or loss results immediately, on the gross receipts reaching the partnership to the individual partners in their aliquot shares. Normally, for profits to accrue or arise, there should be a right either under the statute or under contract between theand others which entitles the former to make a demand for thosethat be the correct ratio, and we think it is, the argument that a partnership is nothing but a compendious name for partners involving the corollary that a partner cannot be a creditor of the partnership will have no practical impact.