TMI Blog1984 (11) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... there is a change in the constitution of the firm or succession by another firm? " The assessee is a partnership firm constituted under a deed of partnership dated January 15, 1970. The firm consisted initially of nine partners. Partner Sri P. Thatamma died on January 14, 1970. On January 15, 1970, the present assessee-firm came into existence. Apart from the eight surviving partners of the previous firm, another person, K. S. Venkateswar, was admitted as a partner. The assets and liabilities of the previous partnership were taken over as a going concern by the present assessee firm. The assessee filed a return for the period January 15, 1970, to July 31, 1970, corresponding to the assessment year 1971-72 and claimed separate assessment of its income for the above period. It was claimed that there was dissolution of the previous firm on the death of the partner, Sri P. Thatamma, on January 14, 1970, and that the assessee-firm constituted under the deed of partnership dated January 15, 1970, should be held to be a separate firm succeeding to the business carried on by the previous firm. It appears, the previous firm also filed a return of its income for the period August 1, 1969, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner questioning the correctness of the inclusion of the sum of Rs. 1,69,456 in the assessee's total income. It was claimed that the expenditure was incurred by the dissolved firm and the compensation in question was referable to the business carried on by the dissolved firm. It was further claimed that the provisions of section 41 of the Act are not applicable in the facts and circumstances of the assessee's case. The Appellate Assistant Commissioner held that the amount of compensation could be considered as income only in the hands of the dissolved firm. The Appellate Assistant Commissioner noticed the provisions of section 170(1) of the Act and held the view that the income accruing to the predecessor firm was liable to be taxed in the hands of the predecessor firm alone and the assessment of the same in the hands of the assessee-firm was not proper. In that view, the Appellate Assistant Commissioner deleted the sum of Rs. 1,69,456 from the assessment made in the hands of the assessee. He observed that the Income-tax Officer may consider the inclusion of the above said sum in the hands of the predecessor firm. The assessee's appeal was accordingly allowed. The Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome. The Tribunal had also dealt at considerable length with the assessee's contention that the sum of Rs. 1,69,456 was not assessable as income in the hands of the predecessor firm also. The Tribunal found fault with the direction given by the Appellate Assistant Commissioner to consider inclusion of the income in the hands of the predecessor firm. The Tribunal held that the predecessor firm cannot be taxed on the above mentioned sum either under section 41 of the Act or otherwise. The appeal filed by the Income-tax Officer was accordingly rejected by the Tribunal. The application filed by the Commissioner under section 256(1) of the Act for reference of certain questions of law to this court was rejected by the Tribunal. The Commissioner thereupon moved this court under section 256(2) of the Act and obtained a direction to the Tribunal to refer the questions of law to this court for its opinion. It is pursuant to this direction that the Tribunal has now referred the above-mentioned questions of law to this court. It is convenient to dispose of the second question first. It is certainly improper on the part of the Tribunal to go into the question whether the predecessor firm w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled one return for the assessment year 1971-72 declaring income up to the period January 14, 1970. The assessee firm filed a return for the same assessment year 1971-72 declaring income for the period January 15, 1970, to July 31, 1970. The claim that there was a dissolution of the predecessor firm and that the assessee-firm succeeded to the predecessor firm was accepted by the Income-tax Officer and two separate assessments were made-one on the predecessor firm on income up to the date of dissolution and another on the assessee firm from January 15, 1970, when it came into existence. The Income-tax Officer passed orders of assessment on that basis and also registered the present firm by his order dated October 20, 1973. These facts would clearly indicate that the Revenue accepted that the assessee-firm is a successor to the predecessor firm within the meaning of section 188 of the Act. The assessee filed an appeal before the Appellate Assistant Commissioner and it merely related to the assessability of the sum of Rs. 1,69,456 in the assessee's hands. The Income-tax Officer did not make any claim before the Appellate Assistant Commissioner that the assessee-firm is not a successor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the firm on January 14, 1970, and the assessee-firm succeeded to the business carried on by the predecessor firm within the meaning of section 188 of the Act. Indeed, that was the assessee's claim and on a scrutiny, the Income-tax Officer accepted it. We accordingly, answer the third question to the effect that the assessee-firm succeeded to the business carried on by the predecessor firm and there was dissolution of the predecessor firm on January 14, 1970. Having disposed of questions Nos. 2 and 3, we now address ourselves to the first question referred, namely, whether, on the facts and in the circumstances of the case, the receipt of the sum of Rs. 1,69,456 is a capital receipt. In our opinion, the real question that arises for consideration is whether the sum of Rs. 1,69,456 is liable to be taxed as income in the hands of the assessee. We have already set out the facts in detail and it is not necessary to restate them. Section 170 of the Act deals with cases of succession and the relevant principles governing the assessability of the income in the hands of the predecessor and in the hands of the successor. The Income-tax Officer was obviously unaware of the statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... postponement of the quantification and the right already vested in the predecessor firm and that right, when it was taken over by the assessee firm during the course of succession, constituted an asset in the assessee's hands. Learned counsel further proceeded to state that indeed the right to receive reimbursement of the expenditure incurred by the predecessor firm vested in it in the years in which the expenditure was incurred. We are unable to accept the latter part of the submission of the learned counsel for the assessee. If the predecessor firm had incurred some expenditure on some works unconnected with the agreement, it was not automatically entitled to receive reimbursement. On the contrary, the facts would show that some disputes have arisen, although it is not clear from the record whether such disputes are in connection with the reimbursement or in the matter of quantification. The authorities below including the Tribunal had not referred to the nature of disputes, the matters which were referred to arbitration and the eventual decision of the arbitrator under the award dated January 24, 1970. The award is also not made part of the record and we have, therefore, not bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income had accrued to him in the year 1954 itself. The assessee accordingly urged that the sum of Rs. 44,000 paid in July, 1955, could not be included in the assessment for the year 1956-57. Rejecting the assessee's contention, this court held that income could be said to have accrued only on the date when the claim was accepted. In Lakshman Prakash v. CIT [1973] 92 ITR 492 (All), the Allahabad High Court, dealing with an identical situation, held that income could be said to have accrued only on the date when the claim for payment is accepted. We may also refer to the decision of the Allahabad High Court in CIT v. Kalicharan Jagannath [1961] 41 ITR 40. (This was approved by the Supreme Court in CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (at pp. 121122), where it was held that " income can be held to arise or accrue to an assessee only when the assessee obtains a right to receive that income. If an amount is to be taxable as income of the relevant previous year the right to receive it must come into existence in that year ". Obviously realising the above basic principles regarding accrual of income, learned counsel for the assessee, Shri. Ch. Sreerama Rao, urged that the right t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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