TMI Blog1964 (10) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... d:- 20-10-1964 - Judge(s) : K. SUBBA RAO., J. C. SHAH., S. M. SIKRI JUDGMENT 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 partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stant Commissioner held that on November 12, 1955, Ashokbhai ceased to represent the Hindu undivided family and the share of profits received from the firm had to be apportioned between the assessee and Ashokbliai. This order was confirmed by the Income-tax Appellate Tribunal. The Tribunal subminitted a statement of case on the following question to the High Court of Gujarat : " Whether, on the facts and circumstances of this case, the five annas share of the income of Amrit Chemicals or any part thereof for the year January 1, 1951, to December 31, 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 before, but upheld the alternative contention that no part of the share of profits which accrued to Ashokbhai on December 31, 1955, 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 referred. Ashokbhai represented the assessee in the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting Co. Ltd. observed at page 98 : " The word 'profits' 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. '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." In the gross receipts of a business day after day or from transaction to transaction lies 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 cannot be equated with profits charged to tax under sections 3 and 4 of the Income-tax Act. The concept 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " it would be absurd to suggest that the profits of the company could accrue from day to day or even fron month to month ". The 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 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 fart of the year may show profit or loss and in the latter part of the year may show loss or profit which would go to counter-balance the profit or loss as the case may be in the earlier part 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 sti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part thereof attributable to thee 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(1)(a) were immediately attracted and the income profits and gains so received became chargeable to tax under section 3 of the Act." These observations were, it may be noticed, made in rejecting the contention raised by counsel for the taxpayer 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 regarded 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 gross 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o on the day on which they arose. If the assessee acquired no right in the share of profits received by Ashokbhai, the taxing authorities could not claim that the profits should still be apportioned between the assessee and Ashokbhai and tax should be levied on the apportioned income. In our judgment, income becomes taxable on the footing of accrual only after the right of the taxpayer to the income accrues or arises, and in the case of an agreement which makes profits receivable at or on the happening 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 to receive it on the date on which it is actually received or became receivable. Counsel for the Commissioner contended that under the Indian system of law a partnership is not body distinct from the members composing it and that whatever may be the outlook of laymen 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y profit or loss, on any date prior to the date of Divali in any year and as the right to receive a share of the profits arose on the death of Arvind, the share of profit could not be treated as income which arose directly or indirectly to Arvind during his minority so as to make it liable to be included under section 16(3) in the assessment of the father. Chagla C. J., in delivering the judgment of the court, referred to. E. D. Sassoon and Co. Ltd.'s case and observed that though income may accrue or arise to an assessee before he actually receives it, income cannot accrue or arise to him until he acquires a right to receive it ; and 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. In so holding, the learned Chief Justice quoted a passage from the judgment of Bhagwati J. in E. D. Sassoon and Co. Ltd.'s case to the effect that " income may accrue to an assessee without the actual receipt of the same. If the 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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