# COMMISSIONER OF INCOME-TAX, GUJARAT v. ASHOKBHAI CHIMANBHAI

- **Citation:** [1965] 1 S.C.R. 758
- **Court:** Supreme Court of India
- **Decided:** 1964-10-20
- **Bench:** K. Subba Rao, ]. C. SHAH ANDS. M. SiKRI
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-gujarat-v-ashokbhai-chimanbhai-3249
- **Pages:** 12

## Headnote

Income-lax Act, (11 of 1922), ss. 3 and 4--Trading fim1--Profits of
individual p"r/ners-Time of accrual.
The assessce \\.'as a ffindu undivided family.
Its manager v.-as a partner
in a firm and the family was entitled to his
of lhc profi1s.
The
partnership agreement ;lrovided that the accounls of the firm should be
adjusted c\"ery caJendar year, that is, on the 31st December of each year.
On November 12, 1955, by a deed of partition, the family and its properly
were divided and it v;as declared that the manager became exclusively
entitled to the profits in the parlnership from 1st January 1955.
Jn proceedings for assessment for 1955-56, the corresponding previous year for
the assessee being 27th October 1954 to 14th !'<ovcmbcr 1955. the assesscc
contended that the share in the profi1s of 1hc partnership should not he
included in ils taxable income because (i) under the partition deed the
protils belonged to the quondam manager exclusively from Jst January
1955 and, (ii) since the partnership made up ils accounts at the end of the
cctlendar year, the assessee had no interest in the share of the profits which
accrued exclusively to its quondam manager al the end of the )'car.
The
lncon1e-tax Officer rejocted the contentions. The Appell<1tc Assistant Commissioner and the Appellate Tribunal held that since there was a disruption
in the family only oa 12th November 1955, the profits had to he apportioned be1"'·een the assessee and its manager.
The J-ligh Court on a reference. held in favour of the assessee accepting the second contention. The
c·on11nic;sioner
to the Supreme Court.
HELD : The profits accrued to the quondam manager only on 31st
December 1955, though they were the resu1t of transactions spread over
the entire period of the c;1Jcndar year 1955.
Since on that elate the
assessec had, because of the parti1ion deed, no interest in the profits or any
part thereof, the assessee was not liable to pay any tax on those profi1s.
[766 C-D; 769 D-El
Jn the grOss receipts of a business day after day or from transaction to
transaction lie embedded or dormant profit or loss.
On such dormant
profits or loss, undoubtedly, tar.able profits_ if any, of the business will be
computed.
But dormant profits cannot be equated with accrued profits
charged to tax under ss. 3 and 4 of the Income-tax Act, 1922.
The concept
of accrual of profits of a business involves the determiaation by the method
of accounting at the end of the accounting year or any shorrer period
determined by lav.·; and unless a right to the profits comes into existence,
there is no accrual of profits.
Jn the case of a partnership, v.·hcrc, by a
covenant binding between the parties, the accounts arc to be made at
intervals. the right of a partner to demand his share of the profits docs not
arise until the contingency under the covenant which gi\·es rise to that right,
has arisen. [762 E-F; 765 H, 766 A]
E. D. Sa.r.'ioon & Ca. Ltd., v. Com1nissioner of Income-tax, Bombay
City, [1955], I S.C.R. 313, followed.
In re: The Spanish Pro.<pec1i111? Co. Ltd. [191 l] 1 Ch_ 92 and Bho11llal
Laherchand v. Comn:issioner of Income-tax, Bombay City, 28 J.T.R. 919,
referred to.
A
B
c
D
E
F
G
h
A
B
c
D
E
F
C.I.T. v. ASHOKBHAI (Shah /.)
759
Turner Morrison &: Co. Ltd. v. Commissioner of
West
Bengal [1953] S.C.R. 520 and Du/ichand Laxminarayan v. Commissioner of
ln•ome-tax, Nagpur, [1956] S.C.R. 154, explained.
CML APPELLATE °JURISDICTION: Civil Appeal No. 817 of
1963.
Appeal from the judgment and order dated April 17, 1961
of the Gujarat High Court in l.T.R. 21 of 1960.
K. N. Rajagopal Sastri, R. H. Dhebar and R. N. Sachthey for
the appellant.
The respondent did not appear.

## Text

758
COMMISSIONER OF INCOME-TAX, GUJARAT
v.
ASHOKBHAI CHIMANBHAI
October 20, 1964
(K. SUBBA RAO,]. C. SHAH ANDS. M. SiKRI JJ.)
Income-lax Act, (11 of 1922), ss. 3 and 4--Trading fim1--Profits of
individual p"r/ners-Time of accrual.
The assessce \\.'as a ffindu undivided family.
Its manager v.-as a partner
in a firm and the family was entitled to his
of lhc profi1s.
The
partnership agreement ;lrovided that the accounls of the firm should be
adjusted c\"ery caJendar year, that is, on the 31st December of each year.
On November 12, 1955, by a deed of partition, the family and its properly
were divided and it v;as declared that the manager became exclusively
entitled to the profits in the parlnership from 1st January 1955.
Jn proceedings for assessment for 1955-56, the corresponding previous year for
the assessee being 27th October 1954 to 14th !'<ovcmbcr 1955. the assesscc
contended that the share in the profi1s of 1hc partnership should not he
included in ils taxable income because (i) under the partition deed the
protils belonged to the quondam manager exclusively from Jst January
1955 and, (ii) since the partnership made up ils accounts at the end of the
cctlendar year, the assessee had no interest in the share of the profits which
accrued exclusively to its quondam manager al the end of the )'car.
The
lncon1e-tax Officer rejocted the contentions. The Appell<1tc Assistant Commissioner and the Appellate Tribunal held that since there was a disruption
in the family only oa 12th November 1955, the profits had to he apportioned be1"'·een the assessee and its manager.
The J-ligh Court on a reference. held in favour of the assessee accepting the second contention. The
c·on11nic;sioner
to the Supreme Court.
HELD : The profits accrued to the quondam manager only on 31st
December 1955, though they were the resu1t of transactions spread over
the entire period of the c;1Jcndar year 1955.
Since on that elate the
assessec had, because of the parti1ion deed, no interest in the profits or any
part thereof, the assessee was not liable to pay any tax on those profi1s.
[766 C-D; 769 D-El
Jn the grOss receipts of a business day after day or from transaction to
transaction lie embedded or dormant profit or loss.
On such dormant
profits or loss, undoubtedly, tar.able profits_ if any, of the business will be
computed.
But dormant profits cannot be equated with accrued profits
charged to tax under ss. 3 and 4 of the Income-tax Act, 1922.
The concept
of accrual of profits of a business involves the determiaation by the method
of accounting at the end of the accounting year or any shorrer period
determined by lav.·; and unless a right to the profits comes into existence,
there is no accrual of profits.
Jn the case of a partnership, v.·hcrc, by a
covenant binding between the parties, the accounts arc to be made at
intervals. the right of a partner to demand his share of the profits docs not
arise until the contingency under the covenant which gi\·es rise to that right,
has arisen. [762 E-F; 765 H, 766 A]
E. D. Sa.r.'ioon & Ca. Ltd., v. Com1nissioner of Income-tax, Bombay
City, [1955], I S.C.R. 313, followed.
In re: The Spanish Pro.<pec1i111? Co. Ltd. [191 l] 1 Ch_ 92 and Bho11llal
Laherchand v. Comn:issioner of Income-tax, Bombay City, 28 J.T.R. 919,
referred to.
A
B
c
D
E
F
G
h
A
B
c
D
E
F
C.I.T. v. ASHOKBHAI (Shah /.)
759
Turner Morrison &: Co. Ltd. v. Commissioner of
West
Bengal [1953] S.C.R. 520 and Du/ichand Laxminarayan v. Commissioner of
ln•ome-tax, Nagpur, [1956] S.C.R. 154, explained.
CML APPELLATE °JURISDICTION: Civil Appeal No. 817 of
1963.
Appeal from the judgment and order dated April 17, 1961
of the Gujarat High Court in l.T.R. 21 of 1960.
K. N. Rajagopal Sastri, R. H. Dhebar and R. N. Sachthey for
the appellant.
The respondent did not appear.
The Judgment of the Court was delivered by
Shah J. 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 Ashokbhai
belonged to the undivided family.
The year of account of the
Hindu undivided family was the Samvat year-1st of Kartika to
30th Ashwin.
The year of account of Messrs Amrit Chemicals
was the calendar year according to the Gregorian calendar.
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 of partition:-
"4. There 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 whereof are as
follows:-
( a) in the Partnership Firm in the name of the Amrit
Chemicals five annas share out of sixteen annas in
the rupee including goodwill together with the beneG
fit 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.
H
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
760
SUPRl!MI! COURT Rl!PORn
(I 96SJ I S.C.R.
is a share of five annas in a rupee of sixteen annas in the
profit and loss of the said Finn in the name of Seth
Ashokbhai Chimanbhai.
Seth Ashokbhai Chimanbhai has become the full
owner of the said share henceforth and all !he rights
under the said deed of partnership are to be enjoyed
by Seth Ashokbhai 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 rirst Part.
The account of the profit and Joss of the said part·
nership Firm from 1-1-1955 remains to be made up and
on the making of such accounts whatevi;r 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
for 1955-56--the corresponding
previous year being October 27, lg54 to November 14, 1955the Hindu undivided family-hereinafter called "the assessee .. -
<:ontended that the share in the profits of Messrs. Amrit Chemicals
A
B
c
D
for the calendar year which accrued on or after December 31,
1955 belonged to Ashokbhai in his individual capacity and was
E
not liable to be included in the taxable income of the assesscic,
because it had been declared under the partition deed to belong
el\clusively to Ashokbhai as from January 1, 1955, and that in
any event since the firm made up its accounts at the end of the
<:alendar year, the assessee had no interest in the share of profits
for the calendar year 1955 which accrued at the end of that
F
year to Ashokbhai in his individual capacity.
The Income-Lal\
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
G
ot profits received from the firm had to be apportioned between
the assessee and Ashokbhai.
This order was confirmed by the
Income-tu Appellate Tribunal.
The Tribunal submitted a statement of case on the following
question to the High Court of Gujarat :
H
''Whether on the facts and circumstances of this case
the 5 annas share of the income of Amrit Chemical£
C.I.T. v. ASHOKBHAI (Shah !.)
761
A
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 hands?"
The High 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
B before, but upheld the alternative contention that no part of the
share of profits which accrued to Ashokbhai on December 31,
J 955 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
c
referred.
Ashokbhai represented the assessee in the firm Me5srs. Amrit
Chemicals till November 12, 1955, and thereafter he became by
virtue of the deed of partition the sole owner of the five annai
share in the firm.
The beneficial interest of the assessee in the
profits of Messrs. Amrit Chemicals therefore ceased only on the
D 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 the year 1955 was liable to be apportioned between the assessee and Ashokbhai as an individualthe assessee being entitled to a fraction of the profits equal to
J:
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 Ashokbhai.
The argumP,nt assumes that in the gross receipts
in respect of any trading transaction carried on by an individual
F
or a firm lies dormant some element of profit, and to that element
of profit attaches immediately the. charge to tax and it is not
deferred till the date on which profits as a result of the transactions of the accounting year are ascertained after taking into conthe business outgoings at the end of ihe year on maldni
up accounts.
This argument raises an important question about
G
the time of accrual of profits to individual partners in a trading
firm.
Do the profits in a trading venture carried on by a firm
accrue to the partners of the firm from day to day or from tranto transaction, or when the accounts are made, and a
right to receive the profits arises under the covenants of the deed
II
of partnership?
Under the Income-tax Act, income is taxable when it acl'TUCll,
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
7 ll 2
SUPREME COURT
REPORTS
[1965) l S.C.R.
of chargeability to tax; if income accrues or arises it may become
A
liable to tax.
For the purpose of this case it is unnecessary
dilate upon the distinction between income "accruing" and "arising".
But there is no doubt that the two words are used to
contradistinguish the word "receive''.
Income is s'!id to be
received when it reaches the assessee: when the right :to receive
II
the income becomes vested in the assessee, it is said to accrue
or arise. Fletcher Moulton L.J., in In re The Spanish Prospecting Co. Ltd.(') observed at p. 98:
"The word 'profit' has . . . . a well-defined legal
meaning and this meaning coincides with the fundamental conception of profits in general parlance;
although in mercantile phraseology the word may at
times bear meanings indicated by the special context
which deviate in some respects from this fundamental
signification.
Profit implies a comparison between· the
state Qf a business at two specific dates usually separated by an interval of a year.
The fundamental meaning is the amount of gain made by the business during
the year.
This can only be ascertained by a comparison of the
at the two dates."
In the 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 j:annot
be equated with profits charged to tax under ss. 3 and 4 'of the
Income-tax Act.
The concept of accrual of profits of a business
involved 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 & Co. Ltd. v. The Commissioner of
Income-tax Bombay-City('). The material facts bearing on that
principle were these: E.D. Sassoon & Co. Ltd.--<:alled 'Sassoons'
-were the managing agents of a Company which may be called
(1) (1911! 1 Ch. 92.
(2) (1955! 1 S.C.R. 311.
c
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C.I.T. v. ASHOKBHAI (Shah J.)
763
A "the United Mills" and were entitled to receive a percentage of
annual net profits of the Company as their remuneration.
On
December I, 1943 Sassoons assigned to Messrs. Agarwal & 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 agerits for the
B calendar year 1943 were made up in 1944 and commission for
the whole year was paid to Messrs. Agarwal & Co., thereafter. In
the course of assessment proceedings· 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
C Messrs. Agarwal & Co. or by Sassoons or it was liable to be
apportioned between Messrs.
Agarwal & Co. and
Sassoons.
This Court held (Jagannal(lhadas J. dissenting) that Messrs.
Agarwal & 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 indiviD sible, 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
E 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 the Spanish
Prospecting Co. Ltd.'s case(') Bhagwati J., observed that "it
would be absurd to suggest that the profits o( the company could
accrue from day to day or even from month to month". The
F 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 do so at stated intervals of one year and
G that would be a reasonable period to be adopted for the purpose.
In the case of large business concerns 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
H the year may show loss or profit which would go to counterbalance the profit or loss as the case may be iii the earlier part
(1) [1911] I Ch. 92.
794
SUPREME COURT REPORTS
[ l 965] 1 s.c.1t.
·of the year.
It would therefore be reasonable to 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
also be paid dividends out of the net profits of the company.
Counsel for the Commissioner submitted that the judgment
in E.D. Sassoon Co. Ltd.'s case( 1) proceeded upon the special
character of a managing agency agreement and did not purport
to lay down a general rule that accrual of income depends on
quantification, or that right to payment of an
ascertainable
amount does not arise till accounts are made. Counsel also submitted that in sale transactions of a trading venture profits accrue
to the trader from transaction to transaction and are embedded
in each transaction carried on by the trader, and the charge impmC(] by s. 4(1 )(a) is not deferred till settlement of accounts.
On that premise, counsel said, that profits dormant or embedded
in the transactions carried on by Messrs. Amrit Chemicals accrued
from transaction to transaction till November 12, 1955
and
properly belonged to the assessee and were liable to be taxed in
the hands of the osscsscc notwithstanding any subsequent disposition of those profits by the assessee.
In support of his contention counsel relied upon Turner Morrison & Co. I.rd. v. Commissioner of Income-tax, West Bengul(')-a case decided by
this Court. In that case an Indian company received collllllission
on sales effected in India of goods received from a foreign company.
The Indian Company handled the cargo arnving at Calcutta and made disbursements in connection therewith, collected
and after deducting expenses including their commission remitted
the balance to the foreign principal. It was held by this Court
lhat the income, profits and gains derived from sale of goods by
the Indian Company in British India were assessable to tax undccs. 4 ( I )(a) as income, profits and gains received in the taxable
territories by the company on behalf of the foreign principal. The
Court in that case observed at pp. 529-530 :
· "There can, therefore, be no question that when the
gross sale proceeds were received by the agen!S io:India
they necessarily received whatever income, profits· and
P.ains were lying dormant or hidden or otherwise emherlded in them. Of course, if on the taking of accounts
it be found that there was no prpfit during the year
(I) (195SJ I S.C.R. 313.
(2) (1951) S.C.R. sn
A
B
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G
II
A
B
C.!.T. V. ASHOKBHAI (Shah J.)
then the question of receipt of income, profits and gains
would not arise but if there were income, profits and
gains, then the proportionate part thereof attributable
to the sale proceeds received by the agents in India
were income, profits and gains received by them at the
moment the gross sale proceeds were received by them
in India and that being the position the provisions of
section 4 (l )(a) were immediately attracted and the
income profits and gains so received became chargeable
to tax under section 3 of the Act."
765
These observations were, it may be noticed, made in rejecting the
c contention raised by Counsel for the tax-payer that in the gross
sale proceeds received by him in India, there was no income at
alL
Counsel for the Indian company said that the gross sale
proceeds were merely credit items in the account and that several
amounts were to be debited in the same account and if there
remained any credit balance, such balance alone could be regardD od as stamped with the formal impress of income capable of being
dealt with as such: income could therefore be said to have been
received only at that stage. The Court did propound that when
sale proceeds are received in which is embedded income,
that income will enter the ultimate computation of the
total
profits assessable to tax. But that is not to say that the profits
E
accrue or arise to a trader from day to day or from transaction to
transaction. The observation that to the income, profits and gains
embedded in the gross receipts s. 4 ( 1) was immediately attracted
also does not warrant the inference that the Court intended to lay
down that profits accrue to a tax-payer before the right thereto has
come into existence.
"Profits" as pointed out in E. D. Sassoon
F Co. Ltd.'s case(') do not accrue from day to day or even from
month to month and have to be ascertained by a comparison of
assets at two stated points. The Court also pointed out in that
case that the test for ascertaining whether profits have accrued or
arisen is whether the person who is entitled thereto has a right to
G claim the profits.
It is true that E. D. Sassoon Co. Ltd.'s case(') related to a
managing agency transaction and the Court said that the managing agency being "a service contract one and indivisible" until the
entire contract is performed, no right to remuneration arises. But
the principle of the case is that unless a right to profits comes into
H
there is no accrual of .profits. In the case of a partnership, where by a covenant binding between the partners the
(I) (1955] I S.C.R. 313.
766
SUPREME COURT REPORTS
[1965) l S.C.R.
accounts are to be made at stated intervals, the right of a partner A
to demand his share of the profits does not arise until the contingency which by operation of law or under a covenant of the
partnership deed gives rise to that right has arisen. In the present
case by cl. 11 of the partnership agreement the accounts Jf the
firm had to be adjusted every year, and accounts for the calendar
year 1955 were not and could not be adjusted before December B
31, 1955. By the covenant in the deed of partnership Ashokbh11i
was entitled to receive the share of profits at the time when the
accounts were adjusted.
Before the agreed date, he had, under
the deed of partnership, no right, unless the other partners agreed,
to claim that the accounts be adjusted. H the profits arose on
the settlement of accounts on December 31, 1955, Ashokbhai
C
alone was the owner of those profits and the assessee had no right
therein.
Those profits were undoubtedly the result of transactions spread over the entire period of the calendar year 1955, but
if the profits did not arise from day to day or from transaction to
transaction, destination of the profits must be determined by the D
title thereto on the day on which they arose.
H the a%essee
ae<1uired no right in the share of profits received by Ashokbhai,
the taxing authorities could not claim that the profits
still
be apportioned between the assessee and Ashokbhai and
tax
'hould be levied on the apportioned income.
In our judgment,
income becomes taxable on the footing of accrual only after the
E
right of the tax.-payer to the income accrues or arises, and in the
case of an agreement which makes profits receivable at or on the
harpening of a contingency, the fact that the profits are the result
of transactions spread over a period which covers a period preceding the happening of that contingency would not make the receipt
liable to be paid to persons other than those who are entitled IO
F
receive it on the date on which it is actually received or became
receivable.
Counsel for the Commissioner contend that under the Indian
system of law a partnership is not a body distinct from the members composing it and that whatever may be the outlook of layG
men concerning partnership, except for certain specific purposes
it is established that a firm is not an entity or person m law but
is merely an association of individuals, a firm name being only a
collective name of those individuals who have agreed IC' carry on
business in partnership; and therefore when income accrued to
the firm in respect of each transaction it must be deemed to accrue
H
to the individual partners of the firm as well, and accrual is not
postponed till the making up of accounts.
Counsel relied upon
,
I
C.I.T. v. ASHOKBHAI (Shah J.)
767
A the observations made by this Court in Dulichand Laxmmarayan
v. Commissioner of Income-tax, Nagpur('). In Dulichand's
case(') it was held that deed evidencing a partnership of which
the partners were an i_ndividual, a joint Hindu family and three
firms could not be registered under s. 26-A of the Income-tax Act.
But it cannot be iμferred therefrom that whenever the partnership
B receives gross receipts in respect of its tmsiness 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 profit to accrue or arise, there should be a right
C either under the statute or under contract between the tax-payer
and others which entitles the former to make a demand for those
profits.
Bhogilal Laherchand v. Commissioner of Income-tax BomblII/
City( 2 ) on which the High Court relied may be referred to. In
Bhogila/'s case('> under a deed of partnership a father carried on
D a business in partnership with his sons. Two of his minor sons
were admitted to the benefits of the partnership. One of the minor
sons named Arvind attained majority on August 22, 1950, and a
fresh partnership deed was executed on August 28, 1950. Under
the partnership deeds--Old as well as new-accounts were to be
E 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 Eought
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
F admission of that niinor 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
G any year and as the right to recei\'.e a share of the profits arose on
the death of Arvind the share of profit could not be treated a,
income which arose directly or -indfrectly to Arvind during his
minority so as 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( 1 )
H and observed that though income may accrue Q.r arise to an
(1) [1956] S.C.R. 154.
(2) (1955) 28 I.T.R. 919.
(3) (1955] 1 S.C.R. 313.
768
SUPREME COURT REPORTS
[1965] I S.C.R.
assessee before he actually receives it, income cannot accrue or A
arise to him until he acquires a right to receive it; and unless and
until there is created in favour of the asscssee a debt due by
somebody, it cannot be said that be has acquired a right
to
receive the income.
In so holding, the learned Chief
Justice
quoted a passage from the judgment of Bhagwati J., in £. D.
Sassoon Co. Lrd.'s
to the effect that "income may accrue
B
to an assessee without the actual receipt of the same. If the
acquires a right to receive the income, the income can
be said to have accrued to him though 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
C
owed to him by somebody.
There must be as is otherwise expressed debirum in praesenti, so/vendwn in futuro . ..... 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".
It \yas urged by Counsel for the Commissioner that between
D
the partners collectively and individual partner there can be no
relation of a debtor and creditor and therefore the principle enunciated by this Court in £. D. Sassoon Co. Ltd.'s case( 1 ) 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 easel'\ is that income
E
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.
In Bhogi/al's case( 2 ) the position was substantially the same
as in the present case.
On Arvind attaining the age of majority
F
and electing to continue as a partner be became entitled to all the
rights and obligations of a partner since be was admitted to the
benefits of the partnership and also to receive his share of profits
G
4Xlmputed at the end of the year as regulated by the partnership
deed.
On the death of Arvind the partnership stood dissolved
aild accounts had to be made up on August 31, 1950. But the
earliest date on which Arvind's 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
H
of a rninor child so as to attract the application of s. 16(3) of the
(t) [19SS1 I S.C.R. 313.
(2) (19SS) 28 I.T.R. 919.
C.I.T. v. ASHOKBHAI (Shah I.)
76&
A Income-tax Act. It must be noticed that in Bhogi/al's case('),
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 spare 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
B 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
oot taxable under s. 16(3) as part of the income of his father.
In the present case at the date when Ash'lkbhai acquired the
right to receive a share of profits, there was no subsisting joint
C family and his share of the profits was not received by him on
behalf of the assessee.
There was in this case no assignment of the profits which bad
already accrued to the assessee. Profits accrued to Ashokbhai
and on the date on which they accrued the assessee had because
D of the deed of partition no interest in the profits. The Revenue
authorities could not claim that profits which under the insti:ument 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.
E
The appeal fails and is dismissed.
A opeal dismissed.
(I} (195S) 28 LT.R. 919.