1964 (10) TMI 11 - SC - Income Tax

Partition deed distinguishes individual vs. HUF profits - Court rules in favor of individual's tax liability

Commissioner Of Income-Tax, Gujarat Versus Ashokbhai Chimanbhai

The High Court held that profits accrued to Ashokbhai individually after the partition deed, not to the Hindu undivided family (HUF). The court determined ... 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 ? Held that:- In the present case at the date when Ashokbhai acquired the right to receive a share of profits, there was no subsisting joint family and his share of the profits was not received by him on behalf of the assessee. There was in this case no assignment of the profits which had already accrued to the assessee. Profits accrued to Ashokbhai and on the date on which they accrued, the assessee had because of the deed of partition no interest in the profits. The revenue authorities could not claim that profits, which under the instrument of partition did not accrue or arise to Ashokbhai as representing the Hindu undivided family, must, for purposes of taxation, be so deemed. The High Court was, therefore, right in answering the question in the negative. Appeal dismissed. Issues Involved:1. Determination of the accrual of profits to the Hindu undivided family (HUF) or individual after the partition.2. Taxability of the share of profits from a partnership firm.3. The timing of the accrual of profits for tax purposes.4. The impact of the partition deed on the tax liability of the HUF.Issue-wise Detailed Analysis:1. Determination of the Accrual of Profits to the HUF or Individual After the Partition:The primary issue was whether the share of profits from Messrs. Amrit Chemicals for the year 1955 accrued to the Hindu undivided family (HUF) or to Ashokbhai in his individual capacity. The HUF was disrupted by a deed dated November 12, 1955, and the property was divided. The deed stated that Ashokbhai would become the full owner of the five annas share in the partnership firm from January 1, 1955. However, the High Court held that Ashokbhai became the owner of the share only from November 12, 1955, and not before. Therefore, the profits which accrued on or after December 31, 1955, belonged to Ashokbhai individually and were not liable to be included in the taxable income of the HUF.2. Taxability of the Share of Profits from a Partnership Firm:The Income-tax Officer included Rs. 21,051 received by Ashokbhai as the five annas share in the profits of the firm in the computation of the total income of the HUF. The Appellate Assistant Commissioner and the Tribunal held that the profits for the year 1955 should be apportioned between the HUF and Ashokbhai. The Tribunal submitted a case to the High Court, which agreed with the revenue authorities that Ashokbhai had become the full owner of the five annas share in the firm from November 12, 1955. However, it 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 HUF.3. The Timing of the Accrual of Profits for Tax Purposes:The judgment discussed whether profits in a trading venture carried on by a firm accrue to the partners from day to day or when the accounts are made and a right to receive the profits arises under the partnership deed. It was held that under the Income-tax Act, income is taxable when it accrues, arises, or is received. The court referred to the principle that profits do not accrue from day to day but are determined by the method of accounting at the end of the accounting year. The right to receive profits or income arises only when the accounts are made up, and the right to claim the profits is determined.4. The Impact of the Partition Deed on the Tax Liability of the HUF:The court held that the beneficial interest of the HUF in the profits of Messrs. Amrit Chemicals ceased only on the execution of the deed of partition on November 12, 1955. Therefore, the profits for the year 1955 were to be apportioned between the HUF and Ashokbhai. However, since the right to the profits arose on December 31, 1955, Ashokbhai alone was the owner of those profits, and the HUF had no interest in them. The revenue authorities could not claim that the profits should be apportioned between the HUF and Ashokbhai for tax purposes.The court concluded that income becomes taxable on the footing of accrual only after the right of the taxpayer to the income accrues or arises. In the case of an agreement that 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 covering a time before the contingency does not make the receipt liable to be paid to persons other than those entitled to receive it on the date it is actually received or becomes receivable.Conclusion:The High Court was right in answering the question in the negative, as the profits accrued to Ashokbhai individually after the partition deed, and the HUF had no interest in those profits. The appeal was dismissed.