Commissioner of Income Tax vs Kanchanlal L. Talsania

Rege, J.—This is a reference u/s 256(1) by the 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. Bhaishankar Kanga & Girdharilal 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?

The assessee, who is an attorney and an advocate of this Court, was a partner in the firm of Bhaishankar Kanga & Girdharilal attorneys-at-law from 1-3-1961 till 31-5-1968 under a deed of partnership dated 25-4-1961, varied from time to time, the last of such variation being made on 16-3-1968. He retired from the firm on 31-5-1968. The accounts of the firm were maintained on cash or receipt basis, its accounting year being the calendar year from 1st January to 31st December.

Under clause 10 of the deed of partnership dated 16-3-1968, which was in operation at the time of retirement of the assessee, on 31-5-1968, the outstandings of several partners of the said firm under the previous partnership 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.

On 17-12-1970, the assessee executed an indenture of settlement under which, out of love and affection, he irrevocably settled his right of recovery of outstandings from 1-3-1961 to 31-5-1968 from Bhaishankar Kanga & Girdharilal, 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 1-3-1961 to 31-5-1968 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 deeds of partnership, dated 25-4-1961 as varied subsequently and it was this right of his, which he had irrevocably settled on his two sons for their benefits. 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.

During the calendar year 1970, the said firm made recoveries of professional fees due from its clients for period prior to calendar year 1970. The statement of account for the calendar year 1970 in respect of the said recoveries was finalised on 23-8-1971 and the assessee''s share therein as per the deed of partnership was work ed 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: Rs. 10,000 on 15-1-1971 and Rs. 15,000 on 19-11-1971, with the excess to be adjusted against the further amounts coming to the share of the assessee.

The assessee claimed to exclude the said two amounts in his hand 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 15-1-1971 and 19-11-1971, he held that the said income was in existence on 17-12-1970 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 Bhaishankar Kanga & Girdharilal.

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 said 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.

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 17-12-1979 he had transferred the said actionable claim irrevocably in favour of his sons, the amounts recovered from Bhaishankar Kanga & Girdharilal had ceased to be his income. The Tribunal accepted the contention of the assessee. It firstly held that in this case assessee''s right to share in profits was an actionable claim, capable of being assigned as any other property. It further held that the assessee''s right to his share of profit arose under the deed of partnership 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 31-12-1970 when the assessee was no longer a partner of the firm and when he had a few days prior thereto by the said indenture of settlement dated 17-12-1970 irrevocably assigned the said right to his sons who alone thereafter had right to receive the said amount and not the assessee. The Tribunal, therefore, set aside the order 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.

The said finding of the Tribunal has given rise to the reference of the said question to this Court.

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 Bhaishankar Kanga & Girdharilal, who 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 31-12-1970, i.e., 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 to his sons irrevocably under the said indenture of settlement dated 17-12-1970 and his sons alone were thereafter entitled to receive the said amount and not the assessee. The said amount was, therefore, not liable to be assessed in the hands of the assessee as his income.

A reference in that connection be made to the decision of this Court in the case of Surajratan Damani Vs. Commissioner of Income Tax, Bombay City-I, 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 company F 71/2 per cent of the managing agency commission receivable by company F from company S. Company F was managing company of company S. On 20-10-1955, 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 and 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."

Company F was informed of the said execution of the gift deed by the assessee by his letter dated 25-10-1955. The assessee before the income tax 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:

...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 71/2 per cent 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 before the income had accrued in any of the accounting years, such income could not be regarded the income of the assessee for any of the relevant assessment years." (p. 577) 12.

The ratio of the said decision squarely applies to the facts of this case. In this case the right to the share in the firm''s profits had accrued to the assessee only when the accounts were settled on 31-12-1970, 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.

The learned counsel for the revenue relied upon a decision of the Supreme Court in the case of K.A. Ramachar and Another Vs. Commissioner of Income Tax, Madras, . 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 1/4th of the share in the profit 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 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 31-12-1970, when the assessee was no longer a partner of the firm and when he had already assigned the said right to his sons.

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. In the result, we answer the question referred to us in the affirmative and in favour of the assessee. Revenue to pay costs of the reference.