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Moti Lal Shyam Sunder Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference Nos. 142, 143 and 146 of 1967
Judge
Reported in[1972]84ITR186(All)
AppellantMoti Lal Shyam Sunder
RespondentCommissioner of Income-tax
Appellant AdvocateP.N. Pachauri, Adv.
Respondent AdvocateB.L. Gupta and ;R.R. Misra, Advs.
Excerpt:
.....a profit or suffered a loss during the year. if profits accrued to the assessee directly from the business the question whether they accrue de die, in diem or at the close of the year of account has at best an academic significance, but when upon ascertainment of profits the right of a person to a share therein is determined, the question assumes practical importance, for it is only on the right to receive profits or income, profits accrue to that person. ). the learned judges went on to observe that the working of the company from day-to-day could certainly not indicate any profit or loss and even the working of the company from month to month could not be taken as a reliable guide for the purpose. if the profit or loss has got to be ascertained by a comparison of the assets at two..........dated september 25, 1962, was made claiming that a partial partition had taken place in the hindu undivided family on july 31, 1961. the income-tax officer recorded the statement of shyam sunder. the statement was to the effect that there was a partnership firm, m/s. moti lal shyam sunder consisting of two partners, shyam sunder and moti lal, with equal shares. shyam sunder represented his hindu undivided family in that firm. on july 31, 1961, the credit balance in the' accounts of the hindu undivided family maintained in the books of the firm amounted to rs. 3,45,769 and this amount was divided in eight equal parts in consequence of which a sum of rs. 43,221 was transferred to the credit of smt. shanta devi and also to the credit of each of the six sons of shyam sunder. a sum of.....
Judgment:

Pathak, J.

1. The assessee is a Hindu undivided family of which Shyam Sunder is the karta. The other members included the karta's wife, Smt. Shanti Devi, and six minor sons and one unmarried daughter.

2. In proceedings for the assessment year 1962-63 an application dated September 25, 1962, was made claiming that a partial partition had taken place in the Hindu undivided family on July 31, 1961. The Income-tax Officer recorded the statement of Shyam Sunder. The statement was to the effect that there was a partnership firm, M/s. Moti Lal Shyam Sunder consisting of two partners, Shyam Sunder and Moti Lal, with equal shares. Shyam Sunder represented his Hindu undivided family in that firm. On July 31, 1961, the credit balance in the' accounts of the Hindu undivided family maintained in the books of the firm amounted to Rs. 3,45,769 and this amount was divided in eight equal parts in consequence of which a sum of Rs. 43,221 was transferred to the credit of Smt. Shanta Devi and also to the credit of each of the six sons of Shyam Sunder. A sum of Rs. 43,221 was allowed to remain in the account of Shyam Sunder. Smt. Shanta Devi also sent a written note to the Income-tax Officer affirming that her husband had effected a partial partition of the capital contributed by the Hindu undivided family in the firm, that partition had taken place in equal shares and that she had received Rs. 43,221 as her share. The Income-tax Officer did not accept the claim of partial partition put forward by the assessee and rejected it. The assessee appealed to the Appellate Assistant Commissioner, and he allowed the appeal and accepted the claim. Now the Income-tax Officer appealed to the Income-tax Appellate Tribunal. By its order dated May 26, 1964, the Tribunal allowed the appeal and restored the order of the Income-tax Officer. Before the Tribunal it was urged on behalf of the Income-tax Officer that the entire capital and profits belonging to the Hindu undivided family had not been partitioned inasmuch as the profits earned by the Hindu undivided family for the part of the year up to July 31, 1961, had not been included for the purposes of partition. The assessee relied on clause 3 of the partnership deed, which provided that the accounts should be made up at the end of each calendar year. He urged that it was only at the end of the year that it could be known what was the share of profits of the Hindu undivided family. In the circumstances, on July 31, 1961, the profits for the period up to that date could not be made the subject of partition. The Tribunal accepted the contention of the Income-tax Officer and observed that there was nothing to prevent the Hindu undivided family from getting its profits up to July 31, 1961, ascertained for the purposes of partition, and held that the partition of a part of an asset could not be envisaged in law and, therefore, the partial partition claimed by the assessee was invalid. At the instance of the assessee the Tribunal has referred the following question :

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that there was no valid partial partition in law on July 31, 1961, as claimed by the Hindu undivided family?'

3. In income-tax reference No. 142 of 1967, the assessee is the partnership firm, M/s. Moti Lal Shyam Sunder, and the assessment year is 1962-63. The firm paid interest on the sums credited to the wife and six sons of Shyam Sunder, consequent upon the partial partition of July 31, 1961. The Income-tax Officer, who did not accept the plea of partial partition, treated the interest as a payment made to the Hindu undivided family and holding that the family was a partner in the firm he did not allow the deduction of the interest. The Appellate Assistant Commissioner gave effect to his order in the appeal of the family for the assessment year 1962-63, and accepting the partial partition, allowed the deduction claimed in the view that the interest was paid to the wife and minor sons of Shyam Sunder, and the firm was entitled to a deduction of the same. The Tribunal held that there was no valid partial partition and that the Hindu undivided family continued to be a partner in the firm and that, therefore, the interest paid on the amounts standing in the name of the wife and sons of Shyam Sunder was rightly disallowed by the Income-tax Officer. Upon this the Tribunal has referred the question :

' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the interest of Rs. 7,482 paid by the assessee-firm to the wife and minor sons of Sri Shyam Sunder was rightly added back to the income of the assessee-firm on the ground that there was no valid partial partition in law on July 31, 1961, in the Hindu undivided family of Shri Shyam Sunder '

4. Finally, we come to Income-tax Reference No. 143 of 1967. It arises out of the case of the Hindu undivided family and relates to the assessment year 1962-63. The Income-tax Officer, proceeding on the view that the partial partition claimed by the assessee had not been proved, assessed the income from the share in the partnership firm in the hands of the Hindu undivided family. On appeal by the assessee the share income was excluded by the Appellate Assistant Commissioner, who, as we have pointed out, accepted the claim of partial partition. On appeal by the Income-tax Officer, the Income-tax Appellate Tribunal, held that the Income-tax Officer was justified in assessing the half share in the firm in the hands of the Hindu undivided family. It also held that the property which had been purchased by Smt. Shanti Devi from out of the share received by her on the alleged partition must be treated as the property of the Hindu undivided family. At the instance of the assessee, three questions have been referred by the Tribunal in this case :

' 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that there was no valid partial partition in law on July 31, 1961, as claimed by the Hindu undivided family ?

2. Whether, on the facts and in the circumstances of the case, the half share in the profits of the firm of M/s. Moti Lal Shyam Sunder was rightly assessed in the assessment of the assessee, Hindu undivided family ?

3. Whether on the facts and in the circumstances of the case the income of Rs. 341 from property held by Smt. Shanti Devi has been rightly included in the assessment of the assessee ?'

5. In all the three references before us, the central question is whether there was a valid partial partition. The only ground upon which the Tribunal has declined to accept the partial partition is that, although the credit balance in the capital account of the Hindu undivided family in, the books of the firm had been partitioned, the profits accruing up to July 31, 1961, had not been made the subject of partition. In our opinion, the Tribunal has plainly erred in law. We think it beyond dispute that the Hindu undivided family could have taken only such property for the purposes of partition as was available to it at the time. The credit balance in the capital account of the partnership firm was partitioned between the members. As regards the profits earned up to July 31, 1961, it was not possible on that date to ascertain what was the amount of profits for that period. Under paragraph 3 of the partnership deed, it was stipulated that the accounts were to be made up at the end of the calendar year. According to the contract of partnership, it was not open to either partner to insist upon the accounts being made up before that date. So long as clause 3 of the partnership deed continued in its original terms, the partners were bound by it and had to await the end of the calendar year before the accounts could be made up. It was only upon the accounts being made up that it could be ascertained whether the firm had enjoyed a profit or suffered a loss during the year. It was, therefore, only at the end of the calendar year that either partner could assert a right to the profits. In Bhogilal Lakerchand v. Commissioner of Income-tax, [1955] 28 I.T.R. 919 (Bom.), Chagla C. J. of the Bombay High Court observed:

'.. . it is entirely fallacious to contend that it could ever be said of a partnership that there were profits in that partnership on any particular day.'

6. He pointed out that it was only when the year of account had come to a close that a claim to the profits could arise. That decision received the approval of the Supreme Court in Commissioner of Income-tax v. Ashokbhai Chimanbhai, [1965] 56 I.T.R. 42 (S.C.). It was pointed out there :

' 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 accrued to the assessee directly from the business the question whether they accrue de die, in diem or at the close of the year of account has at best an academic significance, but when upon ascertainment of profits the right of a person to a share therein is determined, the question assumes practical importance, for it is only on the right to receive profits or income, profits accrue to that person. If there is no right, no profits will be deemed to have accrued.'

7. Reference was made to the decision of the Supreme Court in E.D. Sassoon & Co. Ltd. v. Commissioner of Income-tax, [1954] 26 I.T.R. 27, [1965] 1 S.C.R. 313 (S.C.). The learned judges went on to observe that the working of the company from day-to-day could certainly not indicate any profit or loss and even the working of the company from month to month could not be taken as a reliable guide for the purpose.

'If the profit or loss has got to be ascertained by a comparison of the assets at two stated periods, the most business-like way of doing it would be to do so at stated intervals of one year and that would be a reasonable period to be adopted for the purpose.'

8. The reason for proceeding on the basis of a stated unit or period of time was the unpredictability of the business earning a profit or loss during any part of that period.

' 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 part 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.'

9. It seems to us that for the revenue to insist upon the determination of the profits as on July 31, 1961, is unreasonable inasmuch as it could not have been ascertained with reference to that date whether any profits had at all accrued to the firm. The Tribunal was wrong in holding that for the purpose of the partial partition on July 31, 1961, the Hindu undivided family could have ascertained from the firm what was the share of its profits as on that date. It was also wrong in holding that a part of a whole asset could not be the subject of partition. In Brij Mohan Lal Rameshwar Lal v. Commissioner of Income-tax, I.T.R. No. 443 of 1965 decided by Oak, C.J. & H.N. Seth, J. on December 17, 1970. - [1971] 82 I.T.R. 173 (All.) a Bench of this court rejected the contention that when a Hindu undivided family owns an asset, that asset must in all cases be divided as a whole or not at all.

10. We are of opinion that the Tribunal was in error in holding that there was no valid partial partition in law on July 31, 1961.

11. The question referred in Income-tax Reference No. 146 of 1967 is answered in the negative. Consequently, the question referred in Income-tax Reference No. 142 is answered as follows :

'As there was a valid partial partition in law on July 31, 1961, in the Hindu undivided family, the Tribunal was not justified in holding that the interest of Rs. 7,482 paid by the firm to the wife and minor sons of Shyam Sunder was rightly added back to the income of the firm. The question is answered in the negative.'

12. As regards the questions in Income-tax Reference No. 143 of 1967, they are answered as follows:

Question No. 1. In the negative.

Question No. 2. In the negative.

Question No. 3. In the negative.

13. The assessees in all the references are entitled to their costs which we assets at Rs. 200 in each case. Counsel's fee is assessed at the same figure.


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