Accrual of income depends on an enforceable right to receive partnership profits under the governing accounting arrangement.

Income is taxable on accrual only when the recipient acquires a present, enforceable right to receive it. Partnership profits do not accrue day by day merely because they arise from business receipts; they crystallise when the governing contract or accounting arrangement makes them payable. Under an annual accounting covenant, no partner can demand his share before the agreed accounting date. Where a Hindu undivided family was disrupted and a partition deed took effect, the coparcener became the sole owner of the partnership interest, and the family ceased to have a subsisting right in profits arising on settlement of accounts. The share of profits was therefore not includible in the family's taxable income.

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Issues: Whether the five annas share of profits of the partnership firm accrued to the Hindu undivided family and was taxable in its hands, or whether it accrued only to the coparcener after the partition deed took effect.

Analysis: Income becomes taxable on accrual only when the assessee acquires a present enforceable right to receive it. Profits of a trading concern are not treated as accruing from day to day or from transaction to transaction merely because they are embedded in business receipts; they crystallise when the right to receive them arises under the governing contract or legal arrangement. In a partnership governed by an annual accounting covenant, no partner acquires a right to demand his share of profits before the agreed accounting date. Once the Hindu undivided family was disrupted and the partition deed took effect, the coparcener became the sole owner of the partnership share, and the family ceased to have any subsisting interest in the profits when they arose on settlement of accounts.

Conclusion: The share of profits did not accrue to the Hindu undivided family on the relevant date and could not be included in its taxable income.

Ratio Decidendi: Income accrues for tax purposes only when the person taxable acquires an enforceable right to receive it, and partnership profits computed on an agreed accounting date are taxable in the hands of the person entitled to them when they crystallise.

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