Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 21 of 1960

Attorney(S)

P.B.Patvari
J.M.Thakor

Judges

Hon'ble Mr. Justice Prafullachandra Natverlal Bhagwati

Acts

provisions of section 16 (3) of the Income-tax Act
section 66 (1) of the Indian Income-tax Act, 1922,
provisions of the Indian Partnership Act, 1932.
section 16 (3) of the Income-tax Act
INCOME TAX ACT
provisions of section 26 (1)
Indian Partnership Act.

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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

This reference arises under section 66(1) of the Indian Income-tax Act, 1922. The assessee is the Hindu undivided family (HUF) of Seth Ashokbhai Chimanbhai (the karta), whose family comprised his wife Shobhanaben and a minor son Chirag. The assessment year is 1956-57, the HUF accounting period being Samvat year 2011 (27 October 1954 to 14 November 1955). Ashokbhai was a partner in the partnership firm Messrs. Amrit Chemicals with a five annas share in the partnership; that share was held by him as manager and karta of the HUF. The partnership's accounting year was the calendar year 1955 (1 January to 31 December 1955). A partial partition of some HUF assets was effected by a deed dated 12 November 1955, under which the five annas share and interest in Amrit Chemicals held by Ashokbhai on behalf of the HUF came to Ashokbhai, the individual, absolutely. The deed further provided that the account of profits and losses of the partnership from 1 January 1955 remained to be made up and that on making such accounts whatever profit or loss the partnership made, Seth Ashokbhai Chimanbhai would be the full owner and responsible for a five annas share.

The partnership continued after the partition and accounts for calendar year 1955 were made up. The firm was registered and profits for 1955 were divided among the partners; the share payable to Ashokbhai amounted to Rs. 21,385-2-3, which he returned as his income. The Income-tax Officer treated the whole of that income as income of the HUF and rejected the HUF's claim that the five annas share should be excluded from the HUF assessment on the ground that Ashokbhai was deemed to be a partner in his individual capacity with effect from 1 January 1955. The matter proceeded to the Appellate Assistant Commissioner (AAC), who held that there was a change in the constitution of the firm on the partition and applied section 26(1), treating only a proportionate share for the period 1 January to 12 November 1955 as assessable to the HUF. The Appellate Tribunal agreed with the AAC. The HUF, aggrieved, sought a reference of a question of law, and the Appellate Tribunal referred the following question:

"Whether on the facts and circumstances of this case the 5 annas share in the income of Amrit Chemicals or any part thereof for the year January 1, 1955, to December 31, 1955, accrued to the assessee and whether it could be charged in its hands?"

Legal Issues Presented

Whether, on the facts and circumstances of this case, the five annas share in the income of Amrit Chemicals (or any part thereof) for the year 1 January 1955 to 31 December 1955 accrued to the assessee (the Hindu undivided family) and whether it could be charged in its hands.

Arguments of the Parties

Assessee's Arguments

Under the deed of partition, Ashokbhai, the individual, had become entitled to the five annas share in Amrit Chemicals from 1 January 1955; reliance was placed upon clauses of the deed (clause 4(a), clause 6(a), and clause 8) to support this contention.
Relying on Supreme Court authority (Sassoon & Co. Ltd. v. Commissioner of Income-tax and Bhogilal Laherchand v. Commissioner of Income-tax), the assessee argued that income accrues only when a right to receive payment (a debt) comes into existence; since the partnership's profits for the calendar year 1955 had to be ascertained at the end of the accounting year, no part of that profit could be said to have accrued to the HUF during the accounting year prior to ascertainment.
Under the Income-tax Act, a firm is an entity with its own accounting period; the profits for the firm’s accounting year must be ascertained for the whole accounting period (the calendar year), and the profits could not properly be apportioned and taxed for a part period (1 January to 12 November 1955).

Revenue / Appellate Authorities' Position

The Income-tax Officer treated the whole of the five annas share of the partnership income as income of the HUF on the ground that Ashokbhai was deemed to be a partner of the firm in his individual capacity with effect from 1 January 1955.
The Appellate Assistant Commissioner held that there was a change in the constitution of the firm on the partition of the HUF property and applied the provisions of section 26(1), concluding that what could be assessed as income of the HUF was only the proportionate income for the period 1 January 1955 to 12 November 1955 (i.e., up to the date of partition).
The Appellate Tribunal agreed with the AAC and included the proportionate income from Amrit Chemicals in the income of the HUF for the period 1 January 1955 to 12 November 1955.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Sassoon & Co. Ltd. v. Commissioner of Income-tax (Supreme Court)	The meaning of "profits" as the gain made during a year determined by comparison of assets at two dates; and that income accrues only when a right to receive payment (a debt) is created — i.e., remuneration became due only on completion of a definite period of service and a debt in praesenti must exist even if payable in futuro.	The court relied on this principle to stress that income accrues only when a right to receive payment has arisen; applied to conclude that profits of a partnership accounting year cannot be said to have accrued to another party (here the HUF) before the partnership's accounts for that year were made up and rights to payment crystallised.
Bhogilal Laherchand v. Commissioner of Income-tax (Supreme Court)	Where partnership profits are ascertainable only on a specified accounting day (Divali), it is impossible to predicate whether profit or loss existed on dates prior to that accounting day; income does not accrue until a right to receive it has arisen.	The court treated this decision as supporting the view that profits for the partnership accounting year 1955 could only be ascertained at the end of that year and that no right to receive a share of those profits had accrued to the HUF prior to ascertainment.
Pichhappa Chettiar v. Chokalingam Pillai (Privy Council)	Under Hindu law, when the karta of a joint family enters into partnership with outsiders, the other family members do not ipso facto become partners vis-à-vis outsiders.	The court referred to this authority to support the proposition that the partnership with outsiders remained Ashokbhai's partnership and that the family did not become partners in the eyes of the firm or outsiders.
Commissioner of Income-tax v. Kalu Babu Lal Chand (Supreme Court)	It is well settled that a Hindu undivided family cannot as such enter into a partnership; the karta alone, vis-à-vis outsiders, is recognised as the partner and the other family members cannot exercise rights of a partner against outsiders.	The court relied on this statement to emphasise that Ashokbhai, as karta, alone was the partner vis-à-vis the firm and that the constitution of the firm remained unchanged for the calendar year 1955 in relation to outsiders.

Court's Reasoning and Analysis

The court's analysis proceeded in two linked strands: (A) construction of the deed of partition and the date of vesting of the five annas share, and (B) the question of accrual of income and taxability of partnership profits for the relevant accounting period.

(A) Construction of the Deed of Partition:

The court examined clause 8 of the deed (and related clauses) and noted the use of the word "henceforth" in the clause stating that "Seth Ashokbhai Chimanbhai has become the full owner of the said share henceforth." The court interpreted "henceforth" to mean from the date of the deed (12 November 1955) and not from 1 January 1955.
The deed expressly acknowledged that accounts of profit and loss of the partnership from 1 January 1955 remained to be made up and that on the making of such accounts whatever profit or loss might be thereout, Seth Ashokbhai would be the full owner and responsible for the five annas share. Reading the document as a whole, the court found it impossible to accept the assessee's contention that Ashokbhai became the full owner from 1 January 1955.

(B) Accrual of Income and Tax Consequences:

The court considered authorities (Sassoon & Co. and Bhogilal Laherchand) establishing that income accrues only when a right to receive payment has arisen and a debt has come into existence; where profits are ascertainable only at the end of an accounting period, it is not possible to claim that part of those profits had accrued earlier.
The court observed that for tax purposes a firm is an entity assessed with reference to its accounting period. The partnership Amrit Chemicals had the calendar year as its accounting period (1955), and being registered, the profits for the calendar year were to be ascertained and then divided among the partners for assessment purposes.
The partnership continued throughout calendar year 1955 without any change in constitution as far as the firm and outsiders were concerned; Ashokbhai (the individual) remained a partner throughout that calendar year. Therefore, the profits of the firm could only be ascertained on expiry of the calendar year and, upon ascertainment, were distributable to partners and assessable in their hands.
Consequently, on 31 December 1955 Ashokbhai, the individual, became the beneficial owner of the profits of the firm for 1 January to 31 December 1955 attributable to his five annas share and was the legal owner of that amount. The court held that that amount was not liable to be apportioned between the HUF and Ashokbhai individually and that no part of the profit for calendar year 1955 accrued to the HUF.

Holding and Implications

Holding: The court answered the referred question in the negative: no part of the five annas share in the income of Amrit Chemicals for the year 1 January 1955 to 31 December 1955 accrued to the assessee (the Hindu undivided family), and no part of that income could be charged in its hands.

Implications and immediate effects:

Direct effect on the parties: The profits attributable to the five annas share for calendar year 1955 belonged to Ashokbhai, the individual, and were not assessable to the HUF. The Commissioner was ordered to pay the costs of the reference to the assessee.
Broader implications: The opinion applies established principles on accrual of income and the treatment of partnership profits with reference to the accounting period; the court did not announce or discuss any new precedent beyond applying existing authorities (as cited). No broader new precedent was set by this decision beyond its application to the facts of this case.

Disposition recorded in the opinion: "Question answered in the negative."

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Ashokbhai Chimanbhai v. Commissioner Of Income-Tax.

1. This reference under section 66 (1) of the Indian Income-tax Act, 1922, raises an interesting question of law. The assessee in this case is the Hindu undivided family of Ashokbhai Chimanbhai. The assessment year is 1956-57, the accounting period being Samvat year 2011, i.e., the period commencing from October 27, 1954, and ending with November 14, 1955. Ashokbhai is the karta of this joint family. He has a wife by name Shobhanaben and a minor son by name Chirag. These three constitute the aforesaid joint family. At all material times, Ashokbhai was a partner in the partnership firm of Messrs. Amrit Chemicals. He had a five annas share in the partnership. This share was held by him as the manager and karta of the aforesaid Hindu undivided family. The partnership was a partnership at will. The relevant accounting year of the partnership was the calendar year 1955, i.e., the year commencing from January 1, 1955, and ending with December 31, 1955. There was a partial partition of some of the assets of this Hindu undivided family effected by a deed of partition dated November 12, 1955. Under the terms of this deed of partition, the five annas share and interest in the aforesaid firm which was held by Ashokbhai on behalf of the aforesaid Hindu undivided family came to the share of Ashokbhai, the individual, in his own right absolutely. At the time when the deed of partition was executed, the accounts of the partnership firm of Amrit Chemicals had been made up to the end of the calendar year 1954. In connection with the amount claimable in respect of the business done by the partnership after January 1, 1955, the deed of partition provided as under :

"The account of profit and loss of the said partnership firm from January 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."

2. The business of the partnership continued after the date of the deed of partition. The account of the profits of the partnership was made up for the partnership's accounting year 1955. The firm was a registered firm, and being a registered firm, the profits made by the firm were divided amongst all the partners for the purpose of assessing the same to tax. To the share of Ashokbhai came the sum of Rs. 21,385-2-3. Ashokbhai, the individual, showed this sum in his return as constituting his income. The Income-tax Officer was unable to accept the claim of the assessee Hindu undivided family that the 5 annas share of the income of the firms of Amrit Chemicals should be excluded from the assessment of the Hindu undivided family on the ground that Ashokbhai was deemed to be a partner of the firm in his individual capacity with effect from January 1, 1955. He treated the whole of this income as being the income of the assessee Hindu undivided family. The matter was carried to the Appellate Assistant Commissioner and thereafter the matter was taken in further appeal before the Appellate Tribunal. The Appellate Assistant Commissioner took the view that there was a change in the constitution of the firm on the partition of the Hindu undivided family properly and that the provisions of section 26 (1) would become applicable. He held that what could be assessed as income of the assessee joint family would only be the proportionate income for the period January 1, 1955, to November 12, 1955, and not for the full year from January 1, 1955, to December 31, 1955. The Appellate Tribunal held that the view of the Appellate Assistant Commissioner was correct when he included the proportionate income from the firm of Amrit Chemical in the income of the Hindu undivided family of the assessee for the period January 1, 1955, to November 12, 1955. The assessee Hindu undivided family, being aggrieved by that decision, applied to the Appellate Tribunal to refer a question of law that arose out of the order of the Appellate Tribunal to us. The Appellate Tribunal has accordingly referred to us the question following :

"Whether on the facts and circumstances of this case the 5 annas share in the income of Amrit Chemicals or any part thereof for the year January 1, 1955, to December 31, 1955, accrued to the assessee and whether it could be charged in its hands ?"

3. It was contended on behalf of the assessee that under the terms of the deed of partition, Ashokbhai, the individual, had become entitled to the five annas share in the firm of Amrit Chemicals from January 1, 1955. Reliance in this connection was placed upon some of the clauses of the said deed of partition. Clause 4 of the deed of partition is in the following terms :

"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 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 January 1, 1955, of the value of about Rs. 70,001."

4. By clause 6 (a) it is provided that the aforesaid property came on partition to the share of Seth Ashokbhai Chimanbhai, the individual. Clause 8 of the deed of partition is material for the purpose of considering this question. It runs as under :

"The partnership firm of the Amrit Chemicals has been in existence from January 1, 1946, and a deed of partnership dated August 14, 1946, has been made in respect of the said partnership and according to the said deed there is a share of five annas in a rupee of sixteen annas in the profit and loss of the said firm in the name of Seth Ashokbhai Chimanbhai.

Seth Ashokbhai 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 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 First Part.

The account of the profit and loss of the said partnership firm from January 1, 1955, remains to be made up and on the making of such accounts whatever profit or loss the partnership firm may made thereout Seth Ashokbhai Chimanbhai shall be the full owner and responsible for a five annas share out of the rupee of sixteen annas."

5. From this clause, it is clear that Ashokbhai Chimanbhai, the individual, became the full owner of the five annas share in the Partnership firm from the date of the deed, namely, November 12, 1955. The word "henceforth" appearing in sub-clause (2) of clause 8 can bear no other meaning. If this share was to belong to him from January 1, 1955, it would not have been stated that he had become the full owner of that share "henceforth" but it would have been stated that he had become such owner from January 1, 1955. On the date of this deed of partition, the accounts of the partnership had not been made up from January 1, 1955. In order to enable Ashokbhai Chimanbhai to get the benefit of the profit that may be made by the said partnership from and after January 1, 1955, it has been specifically stated that the accounts of the firm had remained to be made up from January 1, 1955, and that on the making up of the accounts, whatever profit or loss the partnership firm might have made, Ashokbhai Chimanbhai was to be the full owner thereof, and if there was a loss, he was to be responsible for the same. Reading the document as a whole, it is not possible for us to accept the contention urged on behalf of the assessee that Ashokbhai Chimanbhai the individual became full owner of the five annas share in the partnership from January 1, 1955.

6. It was next urged that even if Ashokbhai Chimanbhai, the individual, became full owner of the five annas share in the partnership as from the date of the deed of partition, namely, November 12, 1955, it cannot be said that any income had accrued to the Hindu undivided family of Ashokbhai Chimanbhai from and after January 1, 1955.

7. Strong reliance was placed on behalf of the assessee on a decision of the Supreme Court, Sassoon & Co. Ltd. v. Commissioner of Income-tax. In that case, an agreement was entered into with E. D. Sassoon United Mills Ltd., by Sir E. D. Sassoon and others carrying on business in partnership in the name and style of Messrs. E. D. Sassoon & Co., whereunder E. D. Sassoon & Co. were appointed the managing agents of E. D. Sassoon United Mills Ltd. Under the terms of the agreement, E. D. Sassoon & Co. and their assigns were appointed agents of the company for a period of thirty years and thereafter until any resigned or were removed from office by a special resolution of the company, Under clause 2 the remuneration of the Sassoon and their assigns was fixed at a commission of 7 1/2 per cent. per annum of the annual net profits of the company after making all proper allowances and deductions from revenue for working expenses chargeable against profits, with a proviso that if in any year no such commission was earned or it fell short of Rs. 1,20,000, the company was to pay to them a sum sufficient to make up the minimum remuneration of Rs. 1,20,000 per annum on account of such commission. Justice Bhagwati at page 46 of his judgment in that case, in dealing with the question of profits, quotes with approval the remarks of Lord Justice Fletcher Moulton at page 98 in In re Spanish Prospecting Co. Ltd. :

"The word 'profits' has in my opinion 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. 'Profits' implies a comparison between the state of 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 assets of the business at the two dates."

8. In dealing with the contract before them, the Supreme Court observed that the managing agency agreement, on its true construction, represented a contract of service and that the same was entire and indivisible and that the remuneration became due by the company to the managing agents only on the completion of a definite period of service and at stated periods and that it was a condition precedent to the recovery of any wages or salary in respect thereof that the service or duty should be completely performed, that such remuneration constituted a debt only at the end of such period of service and that no remuneration or commission was payable to the managing agents for the broken periods. Dealing with the question as to the time when such income accrued, it was observed that income could be said to have accrued to or earned by the assessee when the assessee must have contributed to its accruing or arising by rendering service or otherwise and 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 payment. Unless and until his contribution or parenthood was effective in bringing into existence a debt or a right to receive payment or in other words a debitum in praesenti, solvendum in futuro, it cannot be said that any income had accrued to him. Placing reliance upon this case, it was argued that, in the present case, no income had accrued to the assessee Hindu undivided family of Ashokbhai Chimanbhai after January 1, 1955. Under the provisions of the Income-tax Act, a firm is regarded is an entity assessable for income-tax purposes. Tax is payable in respect of the profits of a firm, having regard to the accounting period of the firm. During the continuance of a firm for the full accounting period, tax is not liable to be separately assessed and paid in respect only of a part of the accounting period. The accounting period in connection with the firm of Amrit Chemicals was the calendar year. The amount of profits made by the firm for the whole of the calendar year 1955 would have to be ascertained before the same could be subjected to tax. Under the provisions of the Income-tax Act, the profits of the firm of Amrit Chemicals were not liable to be ascertained from January 1, 1955, up to November 12, 1955, and subjected to tax.

9. Reliance in this connection was placed on a decision of the Supreme Court, Bhogilal Laherchand v. Commissioner of Income-tax. In that case, there was a partnership deed whereunder Bhogilal Laherchand, the father, carried on business in partnership with his sons, some of whom were minors and were only admitted to the benefits of the partnership. One of the minor sons attained majority on August 22, 1950, and as he elected to continue as a partner, a fresh partnership deed was executed on August 28, 1950. Under both the partnership deeds accounts were to be taken and profit or loss was to be ascertained on the Divali day of each year. The minor son who had attained majority on August 22, 1950, died in an air crash on August 31, 1950. The share of this deceased son in the profits was ascertained on August 31, 1950, at Rs. 2,64,450. The income-tax authorities fixed a sum of Rs. 2,49,459 as being the proportionate profits coming to the share of the deceased up to August 22, 1950, and included the same in the assessment of the father under the provisions of section 16 (3) of the Income-tax Act on the ground that the same represented income of the minor child of the assessee which arose from the admission of that minor to the benefits of that partnership. It was held by the Supreme Court that as the profit and loss of the partnership were to be ascertained only on the Divali 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 of any year and that the deceased son had not acquired any right to receive the sum of Rs. 2,49,459 from the partnership at any time during the accounting year and that the said amount could not be treated as income which arose to him directly or indirectly within the meaning of section 16 (3) of the Income-tax Act in the accounting year and could not, therefore, be included in the assessment of the father. They further held that income cannot accrue or arise to a person until he acquires a right to receive the same and unless and until there accrued in favour of the assessee a debt due by somebody, it could not be said that he had acquired a right to receive the income. In coming to this conclusion the court in that case followed the decision of the Supreme Court in Sassoon & Co. Ltd. v. Commissioner of Income-tax. In the present case, Ashokbhai Chimanbhai who was the managing member and karta of the joint undivided Hindu family, had entered into a partnership with others and was carrying on business along with his other partners in the firm name and style of Amrit Chemicals and had a five annas share in that firm. Under the Hindu law, when a managing member of a joint family enters into a partnership with strangers, the other members of the family do not ipso facto become partners in the business so as to clothe them with any rights and obligations of a partner as defined by the Indian Partnership Act. In such a case, the family as a unit does not become a partner but only such member of the family as in fact enters into a contractual relation with strangers and the partnership that is constituted would be a partnership governed by the provisions of the Indian Partnership Act, 1932. In this connection, a reference may be made to a decision of the Privy Council, Pichhappa Chettiar v. Chokalingam Pillai. The Supreme Court, in the case of Commissioner of Income-tax v. Kalu Babu Lal Chand, held as follows :

"It is now well settled that a Hindu undivided family cannot as such enter into a contract of partnership with another person or persons. The karta of the Hindu undivided family, however, may and frequently does enter into partnership with outsiders on behalf and for the benefit of his joint family. But when he does so, the other members of the family do not, vis-a-vis the outsiders, become partners in the firm. They cannot interfere in the management of the firm or claim any account of the partnership business or exercise any of the rights of a partner. So far as the outsiders are concerned, it is the karta who alone is, and is in law recognised as, the partner."

10. In the present case, Ashokbhai Chimanbhai had entered into a partnership with outsiders with a five annas share. So far as the Partnership was concerned, Ashokbhai Chimanbhai, the individual, remained a partner throughout the calendar year 1955 and the firm of Amrit Chemicals continued without any change in the constitution thereof throughout the year. The profits of the firm of Amrit Chemicals for the calendar year 1955 could only be ascertained on the expiry of the calendar year. The firm being registered, the amount of profits of the firm for the calendar year 1955, was liable to be distributed amongst the Partners of the firm and then assessed to tax in the hands of the partners.

11. On December 31, 1955, Ashokbhai Chimanbhai, the individual, had become the beneficial owner of the profits of the firm from January 1, 1955, to December 31, 1955, coming to his share. He was also the legal owner of the amount of profits coming to his five annas share. This amount was not liable to be apportioned between the Hindu undivided family on the one hand and Ashokbhai, the individual, on the other. No part of the profit for the calendar year 1955 accrued to the Hindu undivided family of Ashokbhai Chimanbhai. No part thereof is liable to be charged in the hands of the said Hindu undivided family.

12. Our answer to the question is in the negative. The Commissioner will pay to the assessee the costs of the reference.

13. Question answered in the negative.

Ashokbhai Chimanbhai v. Commissioner Of Income-Tax.

Structured Summary of the Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Revenue / Appellate Authorities' Position

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Ashokbhai Chimanbhai v. Commissioner Of Income-Tax.

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