COMMISSIONER OF INCOME-TAX, GUJARAT versus ASHOKBHAI CHIMANBHAI

Citation: [1965] 1 S.C.R. 758 · Decided: 20-10-1964 · Supreme Court of India · Bench: K. SUBBA RAO · Disposal: Dismissed

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Judgment (excerpt)

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 
cctlendar year, the assessee had no interest in the share of the profits which 
accrued exclusively to its quondam manager al the end of the )'car. 
The 
lncon1e-tax Officer rejocted the contentions. The Appell<1tc Assistant Com-
missioner and the Appellate Tribunal held that since there was a disruption 
in the family only oa 12th November 1955, the profits had to he appor-
tioned be1"'·een the assessee and its manager. 
The J-ligh Court on a refer-
ence. held in favour of the assessee accepting the second contention. The 
c·on11nic;sioner 
to the Supreme Court. 
HELD : The profits accrued to the quondam manager only on 31st 
December 1955, though they were the resu1t of transactions spread over 
the entire period of the c;1Jcndar year 1955. 
Since on that elate the 
assessec had, because of the parti1ion deed, no interest in the profits or any 
part thereof, the assessee was not liable to pay any tax on those profi1s. 
[766 C-D; 769 D-El 
Jn the grOss receipts of a business day after day or from transaction to 
transaction lie embedded or dormant profit or loss. 
On such dormant 
profits or loss, undoubtedly, tar.able profits_ if any, of the business will be 
computed. 
But dormant profits cannot be equated with accrued profits 
charged to tax under ss. 3 and 4 of the Income-tax Act, 1922. 
The concept 
of accrual of profits of a business involves the determiaation by the method 
of accounting at the end of the accounting year or any shorrer period 
determined by lav.·; and unless a right to the profits comes into existence, 
there is no accrual of profits. 
Jn the case of a partnership, v.·hcrc, by a 
covenant binding between the parties, the accounts arc to be made at 
intervals. the right of a partner to demand his share of the profits docs not 
arise until the contingency under the covenant which gi\·es rise to that right, 
has arisen. [762 E-F; 765 H, 766 A] 
E. D. Sa.r.'ioon & Ca. Ltd., v. Com1nissioner of Income-tax, Bombay 
City, [1955], I S.C.R. 313, followed. 
In re: The Spanish Pro.<pec1i111? Co. Ltd. [191 l] 1 Ch_ 92 and Bho11llal 
Laherchand v. Comn:issioner of Income-tax, Bombay City, 28 J.T.R. 919, 
referred to. 
A 
B 
c 
D 
E 
F 
G 
h 
A 
B 
c 
D 
E 
F 
C.I.T. v. ASHOKBHAI (Shah /.) 
759 
Turner Morrison &: Co. Ltd. v. Commissioner of 
West 
Bengal [1953] S.C.R. 520 and Du/ichand Laxminarayan v. Commissioner of 
ln•ome-tax, Nagpur, [1956] S.C.R. 154, explained. 
CML APPELLATE °JURISDICTION: Civil Appeal No. 817 of 
1963. 
Appeal from the judgment and order dated April 17, 1961 
of the Gujarat High Court in l.T.R. 21 of 1960. 
K. N. Rajagopal Sastri, R. H. Dhebar and R. N. Sachthey for 
the appellant. 
The respondent did not appear. 
The Judgment of the Court was delivered by 
Shah J. The respondent was. a Hindu undivided family con-
sisting of Ashokbhai-the manager-his wife Shobhana and his 
minor son Chirag. 
Ashokbhai was a partner in a firm styled 
Messrs Amrit Chemicals with a share of five annas in every rupee 
in the profit and loss. It is common ground that the beneficial 
interest in the profits of the firm falling to the share of Ashokbhai 
belonged to the undivided family. 
The year of account of the 
Hindu undivided family was the Samvat year-1st of Kartika to 
30th Ashwin. 
The year of account of Messrs Amrit Che

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