Bhogilal Laherchand v Commissioner of Income Tax, Bombay

Bhogilal Laherchand v Commissioner of Income Tax, Bombay

AIR 1956 Bom 411

(minor, accounts when to calculate?)

Facts

The assessee (Bhogilal, B) who had started a partnership firm admitted his minor son A to the benefits of the partnership. The minor attained majority on August 22, 1950, and he elected to remain a partner of the firm. A fresh partnership deed was executed to this effect on 28 Aug. ‘A’ died after three days of this execution. The accounts of the firm were closed at Diwali every year. The Income-tax Officer calculated the proportionate profits coming to the share of A upto August 22, when he attained majority, and included the sum[1] in the assessment of the assessee for that Samvat Year.[2]

Issues

1. Whether the father was liable to pay tax on the income of his minor son?
2. Whether A could ever have claimed from the partnership the sum?

Contention (IT)

The sum constituted the income of A as a minor and therefore, the assessee, who was the father of A, should pay tax on the amount under Section 16(3) of IT Act, 1922[3], notwithstanding the fact that, had the partnership resulted in loss, A as a partner would have debited to him his share of the loss.

Judgement

Tribunal: The sum represented profits of the partnership to which A as a minor was entitled and therefore it can be included for IT assessment.

High Court (Bombay)

1. (w.r.t 2^nd issue) As soon as the partnership deed was executed (28 Aug) and A elected to continue as a partner, the only right that A had was to receive his share in the profits, when the accounts were made up at Diwali and not before. He had no right to receive the profits that may have arisen when he attained majority (22 Aug). A partnership may come to an end by operation of law; a partner may die or a partner may retire, in which case the law provides that accounts would have to be made up on that particular day, irrespective of the provision in the partnership deed for making up the accounts in the ordinary course(Diwali). In case of minor, the accounts would have to be made up on that particular day on which the minor elects not to be a partner. A (or his estate) acquired the right to receive the sum only on 31, when the debts and accounts were to be ascertained, because of his death.[4]
2. (w.r.t 1^st issue)Income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him. In this case, no debt was created in favour of A, nor the sum was a debt due at any time by the partnership to A. Therefore A had not acquired any right to receive the income as on 22 and hence the sum could not be included in the assessee’s total income.

Law Point

If a minor son attaining majority elects to continue as a partner, the partnership does not come to an end, the partner-ship continues, and the minor having become a partner he is entitled to his profits as computed at the end of the year regulated by the partnership deed. On the other hand, if the minor elects not to be a partner, he severs all his connection with the partnership and he becomes entitled to whatever amount is due to him at the date when he makes the election not to become a partner.