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

1. The respondent was a Hindu undivided family consisting of Ashokbhai the manager-his wife Shobhana and his minor son Chirag. Ashokbhai was a partner in a firm styled Messrs Amrit Chemicals with a share of five annas in every rupee in the profit and loss. It is common ground that the beneficial interest in the profits of the firm falling to the share of Ashokbai belonged to the undivided family. The year of account of the Hindu undivided family was the Samvat year - 1st of Kartika to 30 Ashwin. The year of account of Messrs Amrit Chemicals was the calendar year according to the Gregorian calendar.2. By deed dated November 12, 1955, the Hindu undivided family was disrupted, and the property of the family was divided. The following are the material clauses of the deed ofThere is joint family property of the joint family of Seth Ashokbhai Chimanbhai of the First Part. Out of that we are making a partial partition of the property as hereinafter stated, particulars hereof are as follows:-(a) in the Partnership Firm in the name of the Amrit Chemicals five As. share out of sixteen annas in the rupee including goodwill together with the benefit and liability in respect of the profit and loss relating to five annas share in a rupee of sixteen annas made by the said firm from 1-1-1955 of the value of about Rs. 70,001.8. The Partnership Firm of the Amrit Chemicals has been in existence from 1-1-1946 and a Deed of Partnership dated 14-8-1946 has been made in respect of the said Partnership and according to the said Deed there it a share of five annas in a rupee a sixteen annas in the profit and loss of the said Firm in the name or Seth Ashokbhai Chimanbhai.Seth Ashokbahi Chimanbhai has become the full owner of the said share henceforth and all the rights under the said Deed of Partnership are to be enjoyed by Seth Asokbhai Chimanbhai party of the First Part himself. Similarly, any liability under the said Deed is to be borne and discharged by Seth Ashokbhai Chimanbhai party of the First Part.The account of the profit and loss of the said Partnership Firm from 1-1-1955 remains to be made up and on the making of such accounts whatever profit or loss the Partnership Firm may have made thereout Seth Ashokbhai Chimanbhai shall be the full owner and responsible for a five annas share out of the rupee of sixteen annas.In proceedings for assessment for 1955-56 - the corresponding previous year being October 27, 1954 to November 14, 1955 - the Hindu undivided family-hereinafter called the assessee contended that the share in the profits of Messrs. Amrit Chemicals for the calendar year which accrued on or after December 31, 1955 belonged to Ashokbhai in his individual capacity and was not liable to be included in the taxable income of the assessee, because it had been declared under the partition deed to belong exclusively to Ashokbhai as from January 1, 1955, and that in any event since the firm made up its accounts at the end of the calendar year, the assessoe had no interest in the share of profits for the calendar year 1955,which accrued at the end of that year to Ashokbhai in his individual capacity. The Income-tax Officer ordered that Rs. 21,051 received by Ashokbhai as five annas share in the profits of the firm be included in the computation of the total income of the assessee. In appeal the Appellate Assistant Commissioner held that on November 12, 1955 Ashokbhai ceased to represent the Hindu undivided family and the share of profits received from the firm had to be apportioned between the assessee and Ashokbhai. This order was confirmed by the Income-tax Appellate Tribunal.4. The Tribunal submitted a statement of case on the following question to the High Court ofon the facts and circumstances of this case the 5 annas share of the income of Amrit Chemicals or any part thereof for the year 1-1-1955 to 31-12-1955 accrued to the assessee and whether it could be charged in its handsHigh Court agreed with the Revenue authorities that Ashokbhai had become full owner of the five annas share in Messrs Amrit Chemicals with effect from November 12, 1955 and not before, but upheld the alternative contention that no part of the share of profits which accrued to Ashokbhai on December 31, 1955 was liable to be included in the income of the assessee, because on the date of accrual the assessee had no interest in those profits, and recorded a negative answer to the question referred.5. Ashokbhai represented the assessee in the firm Messrs Amrit Chemicals till November 12, 1955, and thereafter he became by virtue of the deed of partition the sole owner of the five annas share in the firm. The beneficial interest of the assessee in the profits of Messrs Amrit Chemicals therefore ceased only on the execution of the deed of partition and not before. The Appellate Assistant Commissioner and the Tribunal held that the share in the profits of the firm for year 1955 was liable to be apportioned between the assessee and Ashokbhai as an individual - the assessee being entitled to a fraction of the profits equal to the fraction which the period January 1, 1955 to November 12, 1955 bears to the calendar year 1955. It was also held by the Revenue authorities that the settlement of accounts of Messrs Amrit Chemicals did not give rise to a debt due by a third person to Ashohbhai.

Reasoning: 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.