COMMISSIONER OF INCOME-TAX, GUJARAT vs. ASHOKBHAI CHIMANBHAI

CIVIL APPEAL No. 817/1963Supreme Court[1965] 1 S.C.R. 75820 October 1964Bench: 3 JudgesAuthor: K. SUBBA RAO, J.C. SHAH, S.M. SIKRI COMMISSIONER OF INCOME12 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court held that profits accrued to the quondam manager (Ashokbhai) only on December 31, 1955, even though they resulted from transactions throughout the calendar year. Since, on that date, the assessee (HUF) had no interest in the profits due to the partition deed, it was not liable to pay tax on those profits. The Court clarified that "dormant profits" embedded in daily transactions cannot be equated with "accrued profits" under Sections 3 and 4 of the Income-tax Act, 1922. Accrual of profits involves determination by the method of accounting, and a right to profits must come into existence for accrual. In a partnership where accounts are made up at intervals, a partner's right to demand profits arises only when the contingency specified in the covenant occurs. The principle from E. D. Sassoon & Co. Ltd. v. Commissioner of Income-tax, Bombay City, that income accrues when a right thereto comes into existence, was applied. The appeal was dismissed.

What were the facts?

The assessee, a Hindu undivided family (HUF), was managed by Ashokbhai, who was a partner in the firm Messrs. Amrit Chemicals. The HUF was entitled to Ashokbhai's share of profits from the firm. The firm's accounts were adjusted annually on December 31st. On November 12, 1955, the HUF was partitioned, and a deed declared that Ashokbhai would be exclusively entitled to the firm's profits from January 1, 1955. For the assessment year 1955-56, the HUF (assessee) contended that its share of profits from the firm should not be taxed, as it belonged solely to Ashokbhai from January 1, 1955, and the firm's accounting year-end meant the HUF had no interest in profits accruing on December 31, 1955. The Income-tax Officer included the profits. The Appellate Assistant Commissioner and Appellate Tribunal held profits should be apportioned. The High Court ruled in favor of the assessee, agreeing that no part of the profits accruing on December 31, 1955, was taxable in the assessee's hands.

What were the issues?

1. Whether, on the facts and circumstances, the 5 annas share of the income of Messrs. Amrit Chemicals for the period January 1, 1955, to December 31, 1955, or any part thereof, accrued to the assessee and could be charged in its hands, under Sections 3 and 4 of the Income-tax Act, 1922? Assessee's contentions: - Under the partition deed dated November 12, 1955, the profits from January 1, 1955, belonged exclusively to Ashokbhai. - Since the partnership made up its accounts at the end of the calendar year (December 31), the assessee had no interest in the share of profits that accrued exclusively to Ashokbhai at the end of the year. Revenue's contentions: - The Appellate Assistant Commissioner and Tribunal held that profits had to be apportioned between the assessee and Ashokbhai as the disruption in the family occurred only on November 12, 1955. - The Revenue appealed to the Supreme Court after the High Court ruled in favor of the assessee.

Which sections of the Income-tax Act were involved?

Section 3,Section 4,Section 16(3)

AI-generated summary — verify with the full judgment below

758 COMMISSIONER OF INCOME-TAX, GUJARAT v. ASHOKBHAI CHIMANBHAI October 20, 1964 (K. SUBBA RAO,]. C. SHAH ANDS. M. SiKRI JJ.)

Income-lax Act, (11 of 1922), ss. 3 and 4--Trading fim1--Profits of individual p"r/ners-Time of accrual.

The assessce \\.'as a ffindu undivided family.

Its manager v.-as a partner in a firm and the family was entitled to his of lhc profi1s.

The partnership agreement ;lrovided that the accounls of the firm should be adjusted c\"ery caJendar year, that is, on the 31st December of each year.

On November 12, 1955, by a deed of partition, the family and its properly were divided and it v;as declared that the manager became exclusively entitled to the profits in the parlnership from 1st January 1955. Jn pro- ceedings for assessment for 1955-56, the corresponding previous year for the assessee being 27th October 1954 to 14th !'<ovcmbcr 1955. the assesscc contended that the share in the profi1s of 1hc partnership should not he included in ils taxable income because (i) under the partition deed the protils belonged to the quondam manager exclusively from Jst January 1955 and, (ii) since the partnership made up ils accounts at the end of the cc

The order continues below.

Read the full judgment

A free account opens 10 full judgments a month. Re-reading one you have already opened does not count again.

Create a free accountSign in

See plans and prices

The summary, the parties, the sections and the citations above are open to everyone and always will be. Only the text of the order and the PDF are metered.

More judgments on Section 3

All 288 judgments and leading authorities on Section 3 →

Recent GST High Court judgments

Search GST case law →