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TMI Blog1964 (10) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 shares 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. 8. 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 Asbokbhai Chimanbhai party of the First Part himself. Similarly, any liability under the said deed is to be borne and discharged by Seth Ashokbhai Chimanbhai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because on the date of accrual the assessee had no interest in those profits, and recorded a negative answer to the question referred. Ashokbhai represented the assessee in the firm, Messrs. Amrit Chemicals, till November 12, 1955, and thereafter he became by virtue of the deed of partition the sole owner of the five annas share in the firm. The beneficial interest of the assessee in the profits of Messrs. Amrit Chemicals therefore ceased only on the execution of the deed of partition and not before. The Appellate Assistant Commissioner and the Tribunal held that the share in the profits of the firm for the year 1955 was liable to be apportioned between the assessee and Ashokbhai as an individual---the assessee being entitled to a fraction of the profits equal to the fraction which the period January 1, 1955, to November 12, 1955, bears to the calendar year 1955. It was also held by the revenue authorities that the settlement of accounts of Mesrs. Amrit Chemicals did not give rise to a debt due by a third person to Ashokbhai. The argument assumes that in the gross receipts in respect of trading transaction carried on by an individual or a firm lies dormant some element of profit, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ept of accrual of profits of a business involves the determination by the method of accounting at the end of the accounting year or any shorter period determined by law. If profits accrue to the assessee directly from the business the question whether they accrue de die, in diem or at the close of the year of account has at best an academic significance, but when upon ascertainment of profits the right of a person to a share therein is determined, the question assumes practical importance, for it is only on the right to receive profits or income, profits accrue to that person. If there is no right, no profits will be deemed to have accrued. This principle was applied by this court in E. D. Sassoon & Co. Ltd. v. Commissioner of Income-tax. The material facts bearing on that principle were these : E. D. Sassoon & Co. Ltd.---called " Sassoons "---were the managing agents of at company which may be called the United Mills and were entitled to receive a percentage of the annual net profits of the company as their remuneration. On December 1, 1943, Sassoons assigned to Messrs. Agarwal & Co. their office as managing agents and all their rights and benefits under the managing agency agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r loss as the case may be at the end of every year so that on such calculation of net profits the managing agents may be paid their remuneration or commission at the percentage stipulated in the managing agency agreement and the shareholders also be paid dividends out of the net profits of the company. Counsel for the Commissioner submitted that the judgment in E. D. Sassoon and Co. Ltd.'s case 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 imposed by section 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 han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss 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 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 section 4(1) was immediately attracted also does not warrant the inference that the court intended to lay down that profits accrue to a taxpayer before the right thereto has come into existence. " Profits," as pointed out in E. D. Sassoon and 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 claim the profits. It is true that E. D. Sassoon and 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aymen concernning partnership, except for certain specific purposes it is established that a firm is not an entity or person in law but is merely an association of individuals, a firm name being only a collective name of those individuals who have agreed to carry on business in partnership ; and therefore when income accrued to the firm in respect of each transaction, it must be deemed to accrue to the individual partners of the firm as well, and accrual is not postponed till the making up of accounts. Counsel relied upon the observations made by this court in Dulichand Laxminarayan v. Commmissioner of Income-tax. In Dulichand's case it was held that a deed evidencing a partnership of which the partners were an individual, a joint Hindu family and three firms could not be registered under section 26A of the Income-tax Act. But it cannot be inferred therefrom that whenever the partnership receives gross receipts in respect of its business transaction in which is embedded some profit or loss of the partnership, that profit or loss results immediately on the gross receipts reaching the partnership to the individual partners in their aliquot shares. Normally, for profit to accrue or ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee 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 owed to him by some body. There must be as is otherwise expressed debitum in praesenti, solven dum in futturo ...... 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 was urged by counsel for the Commissioner that between the partners collectively and an individual partner there can be no relation of a debtor and creditor and, therefore, the principle enunciated by this court in E. D. Sassoon and Co. Ltd.'s case has no application to cases where a partner receives his share of the profits of the firm on making up the accounts of the partnership. But the principle of E. D. Sassoon and Co. Ltd.'s case is that income 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 compe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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