V.S Desai, J.:— In this reference under section 66(1) of the Indian Income-tax Act, the following three questions are referred to this court by the Income-tax Appellate Tribunal:
“(1) Whether, on the facts and in the circumstances of the case, the assessment made on ‘Associated Commercial Corporation’ is valid in law?
(2) In view of the fact that Valia and Kharas had already been assessed in respect of their shares in the profits of the firm, whether it was competent to the department to initiate proceedings and make an assessment subsequently on the firm itself?
(3) Whether, on the facts and in the circumstances of the case, the profits were assessable in the assessment year 1952-53 and, if not, whether they were assessable in the assessment year 1947-48 or 1953-54?”
2. Of these three questions, questions Nos. 1 and 3 have been raised at the instance of the department and question No. 2 at the instance of the assessee. The assessee is an unregistered firm. It was constituted under an oral agreement of partnership sometime in March, 1946, between three persons, namely, Amin, Valia and Kharas. The business of the firm was to deal in lacquer and oil paints and it was agreed between the three partners constituting the firm that, in the profits of the business, Amin was to get eight annas share and Valia and Kharas, four annas share each. The firm made a purchase of a consignment of paints for a sum of Rs. 1,79,000, and that was the only business purchase made by the firm. Sometime in September, 1946, Amin, who was to manage the business of the firm, represented to Kharas that the paints which they had purchased would not be profitably sold since the prices were falling down. He was, however, willing to purchase the goods from the firm at the cost price in order to save Kharas and Valia from incurring any further losses. He also suggested that the firm may be dissolved after the goods had been purchased by him from the firm. These representations of Amin to Kharas were believed in by the latter and, as a consequence, he agreed to the proposals made by Amin. On the 18th September, 1946, Amin recorded the terms, of the agreement arrived at by him with Kharas on a stamp paper of Rs. 50. In this agreement, it was stated that it was agreed between Amin and Kharas that the firm should be dissolved as from that date and that he should purchase from the firm for the price of Rs. 1,79,000 the goods already delivered to the firm by the Western Textile Corporation, together with all rights of the firm against the Corporation under the contract for purchase. Valia denied having received a copy of this agreement. Subsequently, in October, 1946, Kharas came to know that Amin had secured the agreement by fraudulent misrepresentation and that Amin had actually sold the goods at Rs. 3,41,649, thus making a considerable profit in the transaction. This led to the institution of criminal proceedings by Kharas against Amiii for cheating and also to a suit by Valia in the High Court of Bombay, praying for rendition of accounts and dissolution of the firm. This suit, which was numbered as Suit No. 2120 of 1946, was filed on or about 12th November, 1946. The criminal proceedings which Kharas had instituted came to be dropped and a consent order was taken from the court in the suit filed by Valia on the 22nd March, 1951. The minutes of this consent order as well as the award, which was made by the commissioner appointed under this order, are on the record of the present case, though they have not been annexed to the statement of the case drawn up by the Tribunal and made a part of it. We have allowed these two documents to go on the record of this reference and to be treated as a part of the statement of the case. The consent order states the terms on which the parties had agreed that accounts should be taken for the purposes of the suit. Under these terms, so far as they are material, the parties agreed that the partnership should be deemed to have been dissolved from the 12th November, 1946, and that the commissioner should ascertain the amount realised by the sale made by Amin to Andrew Gruenberg as if it was a sale by the partnership and credit this amount in the partnership account. It was further provided that, for the purposes of taking accounts, the commissioner should ignore the agreement of dissolution dated the 18th September, 1946. The commissioner appointed under the consent order made his award on the 24th April, 1951. According to the operative part of the award, Valia was declared entitled to a sum of Rs. 25,092 from the partnership, Amin to a sum of Rs. 32,237 and Kharas to a sum of Rs. 27,040, subject to the payment of costs of the suit, etc., including the costs of the arbitration. In pursuance of the award, payments were received by the parties during the accounting year 1952-53. The amounts which were alleged to have been received by the respective partners as stated in the statement furnished to the income-tax authorities were at variance with the amounts awarded under the award, but the Tribunal has not found it necessary to have the figures reconciled as it was not necessary to do so in view of the decision arrived at by it on the points involved in the case. In the return which Valia made for the assessment year 1953-54 on 4th November, 1953, he did not include his share of the profit from the partnership of Associated Commercial Corporation which he had received under the award in the accounting year 1952-53; but, in the return filed by M/s. Anantrai Jadhavji & Co., in which Valia was a partner, a sum of Rs. 13,202 was mentioned as the share of the profit of that firm in the firm of M/s. Associated Commercial Corporation. Neither Valia nor the firm of M/s. Anantrai Jadhavji & Co. had declared in the relevant Part III of the return that Valia was a partner in the firm of Associated Commercial Corporation., What was disclosed in the return filed by M/s. Anantrai Jadhavji & Co. was merely the fact that Valia had a share of profit in a joint venture business described in the statement of accounts furnished along with the return by M/s. Anantrai Jadhavji & Co. as “share of profit in the joint business of Associated Commercial Corporation”.
3. Kharas also filed his return for the assessment year 1953-54, on 29th January, 1954. In this return, he included his share of profit in the sum of Rs. 12,981, but he also, in the relevant Part III of the return, did not state that he was a partner in the firm of Associated Commercial Corporation. The amount of Rs. 12,981 included by him in his return was described as “net profit from the business of Associated Commercial Corporation as per the award of Mr. K.N Vakil”. The assessment proceedings in the case of Valia and Kharas for the assessment year 1953-54 terminated on the 29th October, 1954,.and 28th December, 1954, respectively. In both these cases the assessment had been made by the same Income-tax Officer. Subsequently, on the 27th September, 1955, the said Income-tax Officer issued a notice under section 34(i)(a) for the assessment year 1947-48 to the firm of Associated Commercial Corporation. The said notice was duly served on Amin on the 20th October, 1955. Since Valia and Kharas happened to be out of Bombay at that time, the notice could not be served on them also. No return was filed by the firm in pursuance of this notice. After several notices under section-22(4) had proved infructuous, the Income-tax Officer wrote three letters separately to Amin, Valia and Kharas, on the 16th January, 1956, bringing to their notice that return of income had not been made in spite of a notice under section 34 and informing them further that, if they failed to file a return within a week, ex parte assessment would be made and tax collected. Amin did not respond to this intimation either. But, a letter was written to the Income-tax Officer on the 23rd January, 1956, on behalf of Valia and Kharas by their chartered accountants, informing him that the partnership had been dissolved on the 12th November, 1946, that as per the arbitrator's award, Valia and Kharas had each received a sum of Rs. 12,980-5-0 as their share of the net profit of the business of the partnership firm and that the same was included by them in their returns of the total income and total world income for the assessment year 1953-54. The letter also further stated that Valia and Kharas had no previous knowledge of any notice served on Amin under section 34 of the Indian Income-tax Act and that they would be contacting their solicitors for the necessary documents and other proof, which would enable them to file a return of the total income of the partnership firm for the assessment year 1947-48 in response to the notice under section 22(2) read with section 34. After having obtained further extension of time for filing the said return, it was thereafter submitted on the 4th April, 1956. In this return, the amount of profit falling to the share of Valia was shown to be Rs. 13,202 and that falling to the share of Kharas was shown as Rs. 12,981. These figures were stated as arrived at after deducting the legal costs in connection with the arbitration proceedings. It was also further stated that the total profit of the partnership firm was Rs. 52,366. These assessment proceedings were completed by the Income-tax Officer on the 27th September, 1956, on a total sum of Rs. 1,31,025. This assessment was confirmed in appeal by the Appellate Assistant Commissioner.
4. In the appeal before the Income-tax Appellate Tribunal, several contentions were raised on behalf of the assessee. It was contended that the partnership firm had been dissolved by the order passed by the High Court on the 12th November, 1946, which was long before the notice under section 34, which was issued to the firm on the 27th September, 1955, and served on Amin on the 20th October, 1955, and, consequently, the notices under section 34 as well as the subsequent notices under sections 22(4) and 23(2) were all issued to the firm and the assessment was also made of the firm after it had been dissolved and had discontinued business. It was contended that, since the notices had been issued to the firm, after it had been dissolved and after it had discontinued its business, and the assessment too had been made on the dissolved firm in the name of the firm, the entire assessment proceedings as well as the order of assessment passed were bad in law. This contention was accepted by the Tribunal, relying on the case in R.N Bose v. Manindra Lai Goswami [1958] 33 I.T.R 435..
5. The next contention urged was that since two of the three partners of the firm, namely, Valia and Kharas, had been assessed in respect of their shares of the profits in the firm, it was not competent to the department to start proceedings against the firm subsequently and make assessment on the firm. This contention, however, was not accepted by the Tribunal, which took the view that the assessment could validly be made against the firm, which was a distinct legal entity under the Indian Income-tax Act even if some of the partners of the firm had already been assessed in respect of their shares of the profits of the firm.
6. The third contention urged on behalf of the assessee before the Tribunal was that the notice which the Income-tax Officer had issued under section 34(i)(a) was not valid inasmuch as the Income-tax Officer had already known the existence of the firm when he assessed a share of the profit of Kharas on the return submitted by him and was not, therefore, entitled to proceed under section 34(i)(a) against the firm on account of an omission or failure to disclose fully and truly all material facts necessary for the assessment. This contention also was not accepted by the Tribunal.
7. It was then urged that: the profits were not the profits of the firm and that, at any rate, even if they were the profits of the firm, they had not accrued to the firm in the assessment year 1947-48 and could not, therefore, be assessed to tax in the said assessment. The Tribunal did not think it necessary to decide the question as to whether the profits were of the firm or of the individual partners, because it was of the view.that, even if the profits were assumed to be the profits of the partnership, they had not accrued in the assessment year 1947-48 but in the assessment year 1952-53.
8. A further contention was raised on behalf of the assessee that the Income-tax Officer had also erred in not allowing certain expenses incurred in the litigation in the High Court for establishing the title of the firm or the partners to such profits. The Tribunal thought it unnecessary to consider this question in view of its decision that the profits did not relate to the assessment year 1947-48.
9. The department applied under section 66(1) for a reference on certain questions of law arising out of the Tribunal's order and, in the reply which the assessee filed to this application, it also raised a question of law for reference to this court. The Tribunal thereafter drew up the statement of the case and referred to this court three questions, which we have already set out above questions Nos. 1 and 3 at the instance of the department and question No. 2 being at the instance of the assessee.
10. So far as the first question is concerned, it has been fairly conceded by Mr. Palkhivala, learned counsel appearing for the assessee, that the answer to the said question must be in the affirmative and in favour of the department, in view of the decision of this court in Ramniwas Hanumanbux Somani v. S. Venkataraman, Income-tax Officer, C-III Ward, Bombay, which follows the Supreme Court decision in C.A Abraham v. Income-tax Officer, Kotiayam [1961] 41 I.T.R 425. Without, therefore, entering into any discussion with regard to the said question, we answer the first question in the affirmative.
11. We will then proceed to deal with question No. 3 first before dealing with question No. 2, because, if the said question is answered against the department, question No. 2 will be unnecessary to be considered. Before dealing with the said question, however, we will like to reframe the said question. The question as it is framed requires a determination as to which of the three assessment years specified therein was the year in which the profits were assessable. Now, what is necessary to be decided, so far as the case before us is concerned, is whether the profits were assessable in the assessment year 1947-48, in which they were sought to be assessed by the department. If they were not assessable in the said year the assessment was bad. If they were not assessable in the year 1947-48, whether they would be assessable in the assessment year 1952-53 or in the year 1953-54 is not necessary to be further determined in the present case. In order, therefore, that the question may be confined only to the dispute which arises in the present case, we would reframe question No. 3 as follows:
“Whether, on the facts and in the circumstances of the case, the profits were assessable in the assessment year 1947-48?”
12. We will now proceed to answer the said question in that reframed form. But, before dealing with the said question, it will be desirable to state a further clarification. As we have alreadv pointed out earlier, the contentions urged by the assessee before the Tribunal were, firstly, that the profits were not the profits of the firm but of the individual partners and, secondly, even if they were held to be profits of the firm, they had not accrued in the assessment year 1947-48 but in the assessment year 1953-54. The Tribunal did not consider the first part of the contention as to whether the profits were the profits of the firm or of the individual partners and stated that it was expressing no opinion on that contention. It only dealt with the second part of the contention and came to the conclusion that, even though the profits were assumed to be profits of the firm, they had not accrued in the assessment year 1947-48 but in the assessment year 1952-53. Mr. Palkhi-vala has urged before us that we should also follow the same course as has been followed by the Tribunal and consider the second part of the contention in answering the question framed, because if he succeeds on that part of the contention, it would not be necessary to go into the first part of the contention and the said contention may be left open to be agitated by the parties as and when occasion for raising the same arises. We have, therefore, proceeded to deal with question No. 3 on the footing that the profits were profits of the firm. We would, however, make it clear that the said assumption does not mean an admission by the assessee that the profits are of the firm or involve a finding by this court that the profits are of the firm.
13. The essential facts necessary to consider this question have been already stated. On the 18th September, 1946, an agreement was arrived at between two of the three partners of the firm, under which the goods of the firm were purchased by one of the partners from the firm and the firm was agreed to be dissolved as from that date. Subsequently, the partner, who had so purchased the goods, had sold the goods at a considerable profit in October, 1946. A suit was brought by the third partner for rendition of accounts and for dissolution of the firm, making the other two partners' defendants to the suit. The consent order obtained in this suit was to the effect that the agreement between the two partners of 18th September, 1946, was to be regarded as of no legal effect, that the partnership was to be deemed to be dissolved on the 12th November, 1946, when the suit was filed and the accounts of the dissolved partnership were to be taken on the basis that the subsequent sale by the partner-to a stranger was a sale by the partnership. The award which was made thereafter by the Commissioner appointed under the consent order was on taking accounts on these terms. It would thus be seen that, on the date when the sale by the partnership to Amin took place, it was a sale at the cost price which did not yield any profits. At the date when the subsequent sale was made by Amin to the German, Andrew Gruenberg, it was a sale at a considerable profit, but the sale, prima facie, was by Amin and not by the partnership firm. Now, the sale by the partnership to Amin was alleged to have been brought about on the basis of certain fraudulent misrepresentations which were made by Amin to Kharas who was the other party to the said transaction and it was for that reason sought to be avoided by the suit which Valia had subsequently filed. The agreement of 18th September, 1946, between Amin and Kharas had also purported to bring about a dissolution of the firm also on that date. Valia, however, contended that, since he was not a party to that agreement of dissolution of the firm, it was not a dissolution of the firm by the agreement of all the partners of the firm and that, since that agreement had not been conveyed to him, it could not amount to a notice in writing to him by the other two partners of their intention to dissolve the firm and could not have the effect of dissolving the same. Valia, therefore, in the suit, which he had filed, had asked the court to dissolve the firm and order taking accounts of the partnership. By the consent terms, the parties agreed that the agreement between Kharas and Amin should be ignored and, therefore, the sale by Kharas on behalf of the partnership firm to Amin, as well as the agreement to dissolve the firm, should be taken as of no legal effect. The parties also agreed that the firm should be deemed to be dissolved on the 12th November, 1946, which date was subsequent to the sale by Amin to the German, Andrew Gruenberg, and the parties further agreed that the said sale should be treated as a sale by the partnership, and accounts of the partnership be taken on that basis. Mr. Joshi, learned counsel appearing for the revenue, has argued that the profit arose when the transaction of sale by Amin to Andrew Gruenberg took place, namely, in October, 1946. The effect of the litigation and the consent order and the award passed therein is that this was a sale of the partnership and the partnership was entitled to the profit of the same. It must, therefore, be held, says Mr. Joshi, that the profit belonged to the firm when it arose on the transaction having taken place, namely, in October, 1946. The income-tax authorities were, therefore, right in holding that the profit had accrued to the firm in the assessment year 1947-48 and was taxable.
14. Now, it is no doubt true that the transaction of sale in favour of Andrew Gruenberg took place in October, 1946. That transaction has never been challenged nor set aside. It is also true that the profit which arose, arose on the transaction having taken place. But the circumstance that the profit arose when the transaction took place is not sufficient to hold.that the profit which arose accrued to the partnership firm at the time when the transaction took place. As we have pointed out, on the date when the transaction took place, it was a transaction of Amin. It was subsequently claimed by Valia in the suit which he filed that the benefit of this transaction must go not to Amin but to the partnership firm and it was the partnership firm which was truly and legally entitled to the profit. Until this claim which was set up by the partnership to the profit arising from the said transaction was adjudicated and determined in favour of the partnership and the partnership was declared to be entitled to the said claim, the profit could not be said to have accrued to the partnership. In the suit, which Valia had filed, the claim of the partnership to the said profit was not admitted by Amin. Mere assertion of the claim by Valia on behalf of the partnership to the profit was not sufficient for the claim to accrue to the partnership firm. The right of the partnership to the profit which was not admitted by Amin was in jeopardy until the suit which Valia had filed to establish such a right had come to be decided in his favour or, at any rate, until by the consent order passed in the said suit, the jeopardy in which the right set up by Valia on behalf of the partnership firm was involved had vanished. As held by the Punjab High Gourt in Commissioner of Income-tax v. Jai Parkash Om Parkash Co. Ltd.:
“The scheme of the Income-tax Act showed that only those sums were taxable which accrued as incdme, i.e, they must have actually accrued or arisen. No amount could be said to accrue unless it was actually due. A claim to an amount was not tantamount to the amount being due or having accrued”
15. The learned judges observed in that case that the foundation of the claim was in jeopardy at the time when the claim was said to have accrued to the assessee, and included in his taxable income, and they pointed out that it was only when the claim was no longer in jeopardy as a result of having been decided in his favour that the amount could be said to have accrued to the assessee. In our opinion, a profit could be said to have accrued or a liability or loss could be said to have been incurred only when the profit is either actually due or the liability becomes enforceable., A mere claim to a profit or to a liability is not sufficient to make the profit to accrue or the liability to be incurred for the purposes of the Income-tax Act. In the case in Commissioner of Income-tax v. Mathulal Baldeo Prasad, which was a case of liability, the same principle has been laid down by the Allahabad High Court. The learned judges held that a mere assertion of a claim would not be sufficient to hold that the amount claimed had accrued. It is only at the stage when the claim was found to be correct by the arbitrator in that case that the claim could be said to have become an actual enforceable liability against the assessee. An enforceable liability would be deemed to have come into existence when and only when it was determined and fixed by the arbitrator. The same principle appears to follow from certain other decisions which have been cited by Mr. Palkhivala before us. But it does not appear' necessary to refer to all of them. We may, however, refer to certain observations of the Supreme Court in the case of E.D Sassoon & Company Ltd. v. Commissioner of Income-tax [1954] 26 I.T.R 27, 51, 52, to which Mr. Palkhivala has invited our attention. These observations are with reference to what is meant by accruing of profits under section 4 of the Indian Income-tax Act. Their Lordships observed:
“The word ‘earned’ even though it does not appear in section 4 of the Act has been very often used in the course of the judgments by learned judges both in the High Courts as well as the Supreme Court… It has also been used by the Judicial Committee of the Privy Council in Commissioners of Taxation v. Kirk. The concept, however, cannot be divorced from that of income accruing to the assessee. If income has accrued to the assessee it is certainly earned by him in the sense that he has contributed to its production or the parenthood of the income can be traced to him. But in order that the income can be said to have accrued to or earned by the assessee it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words a debilum in praesenti, solvendum in futuro it cannot be said that any income has accrued to him.”
16. In our opinion, therefore, Mr. Joshi's contention that the profit accrued to the firm in October, 1946, when the sale by Amin to Andrew Gruenberg took place, cannot be accepted. The transaction when it took place was not the transaction of the firm. As we have already stated, it was subsequently that it was claimed on behalf of the firm that the benefit of the transaction must go to it. Until this claim of the firm was determined in favour of the firm, it could not be said that the firm had any right to the profit which arose under the said transaction. Whether the point of time when this profit accrued to the firm was when the consent order was passed by the court or when the award was made by the Commissioner appointed under the said order or when the parties actually received the amounts in their hands in pursuance of the award, is not necessary to be determined in the present case, for all these dates are admittedly much after the end of the assessment year 1947-48. In our opinion, therefore, the answer to the third question in the reframed form is in the negative. In view of our answer to the third question, question No. 2 is unnecessary to be considered and we do not propose to answer the same.
17. The assessee will get the costs from the department.
18. Reference answered accordingly.