1. This reference under s. 256(1) of the I.T. Act, 1961, by the Income-tax Appellate Tribunal, Bombay Bench 'A', at the instance of the Commissioner, referring to us the following question for our opinion :
'Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the sum of Rs. 21,439 paid by M/s. Bhaishanker Kanga and Girdharlal as a share of the earnings of the assessee for the period he was a partner in the firm is to be excluded from the total income of the assessee is in law justified ?'
2. The assessee, who is an attorney and an advocate of this court, was a partner in the firm of M/s. Bhaishanker Kanga and Girdharlal, attorneys-at-law, from March 1, 1961, till May 31, 1968, under a deed of partnership dated April 25, 1961, varied from time to time, the last of such variation being made of March 16, 1968. He retired from the firm on March 31, 1968. The accounts of the firm were maintained on cash or receipt basis, its accounting year being the calendar year from January 1 to December 31.
3. Under cl. 10 of the deed of partnership dated March 16, 1968, which was in operation at the time of retirement of the assessee, on December 31, 1968, the outstandings of several partners of the said firm under the previous partnerships agreements were to be recovered and realised by the new partners of the said firm for and on behalf of the parties respectively entitled thereto under the said various agreements of partnership. The amounts so recovered were to be divided and credited to the respective accounts of the partners in proportion to their shares therein, when such outstandings were earned.
4. On December 17, 1970, the assessee executed an indenture of settlement under which, out of love and affection, he irrevocably settled his right of outstanding from March 1, 1916 to May 31, 1968, from M/s. Bhaishanker Kanga and Girdharlal in favour of his two sons, Dinesh and Rohit. The recital in the said deed of settlement expressly, inter alia, stated that during the period from March 1, 1961, to May 31, 1968, when the assessee was a partner in the said firm, he was entitled to receive, recover and realise from the said firm his share of outstandings according to the deed of partnership dated April 25, 1961, as varied subsequently, and it was this right of his which he had irrevocably settled on his two sons for their benefit. Clause 2 of the said indenture of settlement specifically provided that the trustees were to receive, recover and realise the trust property from the said firm every year and to utilise in the manner set out in the said indenture of transfer. A copy of the said indenture was endorsed by the assessee to the said firm.
5. During the calender year 1970 the said firm made recoveries of professional fees due from its clients for a period prior to calendar year 1970. The statement of account for the calendar year 1970 in respect of the said recoveries was finalised on August 23, 1971, and the assessee's share therein as per the deed of partnership was worked out at Rs. 21,439. Against the said amount that had come to the share of the assessee and against the amount that may come to the share of the assessee thereafter from the firm, the firm paid to the assessee two sums of Rs. 10,000 on January 15, 1971, and Rs. 15,000 on November 19, 1971, with the excess to be adjusted against the further amounts coming to the share of the assessee.
6. The assessee claimed to exclude the said two amounts in his hands as his income in his assessment as under the said indenture of settlement, the said amounts were the income of the trust for the purpose of assessment. The ITO, rejected the assessee's said contention. According to him, the fact that the assessee had settled his right to receive the amounts from the firm showed that the assessee was aware of the income accruing to him from the firm which he had quantified in the indenture. Although the said amounts were received on January 15, 1971, and November 19, 1971, he held that the said income was in existence on December 17, 1970, when the indenture of settlement was executed. He, therefore, included the said two amounts in the total income of the assessee as share of his profits in the firm of M/s. Bhaishanker Kanga and Girdharlal.
7. In an appeal to the AAC against the said order, the AAC confirmed the order of the ITO on the ground that though the money was paid subsequently to the trust, it was earned by the assessee during the period he was the partner in the said firm and that the assessee had in law no right to assign his right to receive the share from an erstwhile firm in any manner. The AAC held that the income of Rs. 21,439 had in the first instance accrued to the assessee as a partner and thereafter he had transferred the same to the settlement for the benefit of his sons.
8. The Tribunal, in appeal against the said order of the AAC, disagreed with the findings of the AAC and the ITO. Before the Tribunal the assessee had contended that the right to receive his share of the professional fees due to the firm while he was a partner was merely an actionable claim, capable of being assigned, and under the said indenture of settlement dated December 17, 1970, he had transferred the said actionable from M/s. Bhaishanker Kanga and Girdharlal had ceased to be his income. The Tribunal accepted the contention of the assessee. It firstly held that capable of being assigned as any other property. It further held that the only on accounts being settled. In this case in respect of the assessee's said share of Rs. 21,439 the accounts were settled only on December 31, had, a few days prior thereto, by the said indenture of settlement dated December 17, 1970, irrevocably assigned the said right to his sons who alone thereafter had a right to receive the said amount and not the assessee. The Tribunal, therefore, set aside the orders of the ITO and the AAC and directed the said amount of Rs. 21,439 to be excluded from the total income of the assessee.
9. The said finding of the Tribunal has given rise to the reference of the said question to this court.
10. We find that the Tribunal's order was based on cogent reasons. It cannot be disputed that the assessee's right to a share in the professional fees to be recovered from the clients by the firm of M/s. Bhaishankar Kanga and Girdharlal, which kept its account on cash basis, was only an actionable claim assignable by him as any other property. Under the deed of partnership the right of the assessee to the share in profits accrued only when the accounts were settled, which in this case was on December 31, 1970, that is, long after the assessee had ceased to be a partner in the firm. At that time, however the assessee had already assigned his said right or source of income of his sons irrevocably under the said indenture of settlement dated December 17, 1970, and his sons alone were said amount was, therefore, not liable to be assessed in the hands of the assessee as his income.
11. A reference in that contention may be made to the decision of this court in the case of Surajratan Damani v. CIT : 106ITR576(Bom) , relied upon by the learned counsel for the assessee. In that case the assessee and his brother had entered into an agreement with a company, F, whereunder the assessee was entitled to receive from F-company 7 1/2% of the managing agency commission receivable by F, from another company S. F-company was the managing agency company of company S. On October 20, 1955, the assessee executed a gift deed in favour of his two daughters, K and SS, transferring his right to receive a share in the managing agency commission. The said gift deed provided, inter alia :
'donor doth hereby transfer, assign and assure unto the donees by way of absolute gifts in equal share all that his half share, right, title and interest....... in the managing agency commission payable every year..... shall henceforward remain vested in an be held by the donees in equal shares absolutely to the entire exclusion of the donor or of any benefit to him by contract or otherwise.'
12. Company F was informed of the said execution of the gift deed by the assessee by his letter dated October 25, 1955. The assessee before the I.T. authorities had contended that from the year 1957-58 the commission was not assessable in the hands of the assessee. The ITO, the AAC and the Tribunal did not accept the assessee's claim on the ground that it was a case of application of income and not diversion of income by overriding title. The court, negativing the said finding held (p. 577) :
'On a plain reading of the operative part of the gift deed, the effect of the gift deed is to transfer the source of income to the daughters before income has accrued or arisen to the assessee in a particular year. The operative part makes it clear that from and after the execution of the deed of gift, the right to receive 7 1/2% in the managing agency commission was vested for ever in the two daughters in equal shares absolutely. The effect of the gift deed was to transfer the source of income itself before the income either accrued or arose. In fact, after the deed of gift was executed and intimation thereof was given to F, the assessee would have no cause of action to institute any suit to recover any share in such commission. As the source of income was really transferred to the daughters could not be regarded as the income of the assessee for any of the relevant assessment years.
13. The ratio of the said decision squarely to the facts of this case. In the case the right to the share in the firm's profits had accrued to the assessee only when the accounts were settled on December 31, 1970, long after he had ceased to be a partner and when he had already irrevocably transferred to his sons the said source of income with no rights left in himself in respect thereof, with the result that the same could no longer thereafter be held as the assessee's income.
14. The learned counsel for the Revenue relied upon a decision of the Supreme Court in the case of K. A. Ramachar v. CIT : 42ITR25(SC) . In that case the assessee, while a partner of the firm, had by three deeds of gifts assigned to his wife and two daughters each one-fourth of his share in the profits of the firm. The Supreme Court held that on the facts the tenor of the deeds showed that the profits were first to accrue to the assessee and were thereafter to be applied to the beneficiaries and that under the law of partnership it was the partners alone who were entitled to the profits. Therefore, the court held that the dispositions were in law and fact the income of the assessee. The said decision has no application to the facts of this case. Unlike in that case, in this case the right to the share in the profits of the firm had accrued to the assessee only on settlement of accounts on December 31, 1971, when the assessee was no longer a partner of the firm and when he had already assigned the said right to his sons.
15. Under the circumstances, we hold that the said amount of Rs. 21,439 was not assessable in the hands of the assessee as his income.
16. In the result, we answer the question referred to us in the affirmative and in favour of the assessee.
17. Revenue to pay the costs of the reference.