INCOME TAX OFFICER v. MRS. MARY ANTONY
[Citation -1986-LL-0904]

Citation 1986-LL-0904
Appellant Name INCOME TAX OFFICER
Respondent Name MRS. MARY ANTONY
Court ITAT
Relevant Act Income-tax
Date of Order 04/09/1986
Assessment Year 1978-79
Judgment View Judgment
Keyword Tags share of profit • share income
Bot Summary: According to the ITO the assessee who was a partner in the firm, Peetees Agencies, retired from the firm on 2nd Sept., 19 77 and that she has not admitted any income from the firm till her date of retirement. On appeal before the AAC the assessee explained that she was given only the capital and other balances to her credit in the accounts of the firm as on the date of retirement and the books of account have been closed on 31st March, 19 78 and the profits of the firm for the entire year, i.e., from 1st April, 19 77 to 31st March, 19 78 were ascertained on 31st March, 19 78 and the same was allocated to the persons who were partners of the firm as on that date, viz. The AAC deleted the amount of Rs. 14,845 included in the assessee's hands observing as under : When the intention of the partners of a firm is to ascertain the profits for the entire year on the closing of the accounts on the normal date of closing as provided in the deed and when it is also provided in the deed that the right to the share of profits accrues to the partners only when the accounts are finally closed on the normal closing date as provided in the deed, the ITO will not be justified to allocate any share of profits to a partner who retired during the course of the accounting year. His arguments were to the following effect : The order of the AAC insofar as it directed deletion of the assessee's share income in the firm of Peetees Agencies, till the date of her retirement from the firm is against law and the facts of the case. In reply, the Departmental Representative submitted as under : The decision of the Supreme Court in Ashokbhai Chimanbhai's case applies only to a continuing firm and not to a firm which has become extinct by the retirement of a partner. Retirement of a partner from a firm does not dissolve the firm or exinct the firm as laid down by the Gujarat High Court in the case of Keshavlal Lallubhai Patel vs. Patel Bhailal Narandas AIR 19 68 Guj. Of the proviso to s. 187(1) when a change in the constitution of the firm occurs, the assessment shall be made on the firm as constituted at the time of making the assessment and that the income of the previous year shall, for the purposes of inclusion in the total incomes of the partners, be apportioned between the partners, who in such previous year were entitled to receive the same.


A. SATYANARAYANA, A.M. ORDER This appeal filed by Revenue is against order of AAC, Ernakulam, dt. 8th Sept., 19 83 for asst. yr. 19 78-79, for which previous year ended on 31st March, 19 78. 2 . According to ITO assessee who was partner in firm, Peetees Agencies, retired from firm on 2nd Sept., 19 77 and that she has not admitted any income from firm till her date of retirement. So ITO brought into her assessment amount of Rs. 14,845 as share of profit from firm till date of retirement. 3. On appeal before AAC assessee explained that she was given only capital and other balances to her credit in accounts of firm as on date of retirement and books of account have been closed on 31st March, 19 78 and profits of firm for entire year, i.e., from 1st April, 19 77 to 31st March, 19 78 were ascertained on 31st March, 19 78 and same was allocated to persons who were partners of firm as on that date, viz., Miss Kochuthresia Antony, Miss Etty Antony and Shri P. A. Jose. assessee further contended before AAC that as per original partnership deed as well as new deed, profits were to be ascertained only on normal date of closing accounts and persons who were partners at that point of time alone had right to share of profit and that partners who retired during course of accounting year had no right to any share of profit in respect of relevant financial year. AAC deleted amount of Rs. 14,845 included in assessee's hands observing as under : "When intention of partners of firm is to ascertain profits for entire year on closing of accounts on normal date of closing as provided in deed and when it is also provided in deed that right to share of profits accrues to partners only when accounts are finally closed on normal closing date as provided in deed, ITO will not be justified to allocate any share of profits to partner who retired during course of accounting year. partner has not claimed any share in profits till her date of retirement. firm has not allocated any profits to her. Therefore there is no income received or receivable by her from this firm. Accordingly share income so included in assessment will be deleted." As against this order of AAC, Revenue preferred present appeal. 4 . At time of hearing, Departmental Representative filed paper book of three pages containing extract from partnership deed dt. 31st March, 19 75 and copy of assessment order dt. 31st Jan., 19 81 for asst. yr. 19 78-79 in case of firm, Peetees Agencies, Cochin. His arguments were to following effect : order of AAC insofar as it directed deletion of assessee's share income in firm of Peetees Agencies, till date of her retirement from firm is against law and facts of case. He should have appreciated that share income has been adopted according to order under s. 158 of IT Act, 19 61 ('the Act') in case of firm. In absence of any express stipulation in deed of partnership entered into between assessee and others on 31st March, 19 75 that right to share of profits accrues to partners only when accounts are finally closed on normal closing date, AAC should not have directed deletion of share income included in assessment. 5 . assessee's counsel filed copy of partnership deed dt. 31st March, 19 75, additional agreement dt. 27th April, 19 77, partnership deed dt. 2nd Sept., 19 77 and copy of profit and loss account of firm for year ended 31st March, 19 78. His arguments were to following effect : assessee retired from firm on 31st Aug., 19 77 as can be seen from partnership deed dt. 2nd Sept., 19 77 between partners P. A. Jose, Miss Etty Antony and Miss Kochuthresia Antony. governing deed of partnership firm as on 31st Aug., 19 77, when assessee retired, is partnership deed d t . 31st March, 19 75 r/w additional agreement dt. 27th April, 19 77. According to cl. 11 of partnership deed dt. 31st March, 19 75, annual profit and loss account and balance sheet shall be prepared as on 31st March each year. Books of account have not been closed to profit and loss on 31st Aug., 19 77 when assessee retired from partnership. As per cl. 31 of partnership deed supra profit and loss account was drawn on 11th March, 19 78 only, i.e., at end of full accounting year. resultant profit was apportioned between new partners only. assessee was not given any share of profit in same. So AAC has rightly deleted amount of Rs. 14,845 following decision of Supreme Court in CIT vs. Ashokbhai Chimanbhai ( 19 65) 56 ITR 42. 6 . In reply, Departmental Representative submitted as under : decision of Supreme Court in Ashokbhai Chimanbhai's case (supra) applies only to continuing firm and not to firm which has become extinct by retirement of partner. Further, appeal filed by assessee before AAC is not maintainable as per s. 247 of Act. Moreover, ITO in his assessment order dt. 31st Jan., 19 81 in case of firm, Peetees Agencies allocated Rs. 14,845 to assessee as per cl. (i) of proviso to s. 187(1) of Act. 7. We have considered rival submissions. Retirement of partner from firm does not dissolve firm or exinct firm as laid down by Gujarat High Court in case of Keshavlal Lallubhai Patel vs. Patel Bhailal Narandas AIR 19 68 Guj. 157. Sec. 247 provides that any partner of such firm may appeal against assessment/allocation of firm's income, but such appeal has to be preferred not against his individual assessment but against assessment of firm itself. Beyond two questions, viz., determination of total income or loss of firm and its apportionment between partners, partner is not precluded from agitating any other point, if arises in his individual assessment, in appeal filed against his own individual assessment. Under s. 246(1) (c) of Act assessee is entitled to object to amount of income assessed in his/her hands. Here this appeal is filed under s. 246(1) (c) before AAC. So AAC was perfectly justified in entertaining appeal and deciding issue. According to cl. (i) of proviso to s. 187(1) when change in constitution of firm occurs, assessment shall be made on firm as constituted at time of making assessment and that income of previous year shall, for purposes of inclusion in total incomes of partners, be apportioned between partners, who in such previous year were entitled to receive same (Emphasis, italicised in print, supplied). entitled to receive same (Emphasis, italicised in print, supplied). argument of Departmental Representative was that because apportionment was done by ITO in assessment of firm this amount of Rs. 14,845 has to be necessarily assessed in hands of assessee. This argument cannot be accepted because for apportioning ITO has to decide as to who were partners that were entitled to receive same. It is exactly at this juncture, ITO has failed to appreciate law laid down by Supreme Court in Ashokbhai Chimanbhai's case (supra). firm Peetees Agencies came into existence from 1st April, 19 75 with three partners as under : Share of Share of Name of partner profit loss Mrs. Mary Antony 50 per cent 80 per cent Shri P. A. Jose 10 per cent 20 per cent Miss Etty Antony 40 per cent nil (minor) terms and conditions of this partnership were incorporated in partnership deed executed on 31st March, 19 75. When Miss Etty Antony attained majority and elected to become partner, additional agreement was executed on 27th April, 19 77. According to said additional agreement shares of partners in profit and loss of partnership were as under : Mrs. Mary Antony 50 per cent Shri P. A. Jose 10 per cent Miss Etty Antony 40 per cent In said additional agreement, cl. 4 reads as under : "The existing articles of partnership embodied in deed of partnership dt. 31st March, 19 75, notwithstanding present agreement, shall have full force and effect, bind and regulate, relation of partnership and shall be subject to same terms, covenants, stipulations and conditions as expressed and contained in said deed of partnership dt. 31st March, 19 75 except so far as same shall necessarily be modified or affected by this agreement." When assessee retired from partnership on 31st Aug., 19 77 new partnership was executed on 2nd Sept., 19 77 between Shri P. A. Jose, Miss Etty Antony and Miss Kochuthersia Antony. Unaware of law laid down by Supreme Court in Ashokbhai Chimanbhai's case (supra) ITO held that assessee was also entitled to Rs. 14,845 out of income of firm for asst. yr. 19 78-79. So mere fact of apportionment under s. 187(1) cannot fasten liability on assessee. Now we have to look whether assessee is entitled to any share of profit when he retired on 31st Aug., 19 77 and when books of account were not closed to profit and loss on that date. Clause 11 of partnership deed dt. 31st March, 19 75 clearly shows that annual profit and loss account shall be prepared as on 31st day of March each year. It has been laid down by Supreme Court in Ashokbhai Chimanbhai's case (supra) that in case of partnership profits do not accrue to partner from day to day or even from month to month and that it will accrue only when accounts are closed. closing of accounts may depend upon contract between parties or operation of any law. But profits accrue due only when accounts are closed. In present case accounts are closed only on 31st March, 19 78 and net profit of Rs. 73, 19 7.36 was apportioned by firm in its profit and loss account as under : Rs. Mrs. Kochuthresia 21,959. 19 Miss Etty Antony 43,918.44 Shri P. A. Jose 7,3 19 .73 From above it will be seen that assessee was not given any share of profit in said firm. According to ratio laid down by Supreme Court in case mentioned supra assessee is not entitled to any share of profit in profits ascertained on 31st March, 19 78. Hence, she is not liable to be assessed on amount of Rs. 14,845 for asst. yr. 19 78-79. We, therefore, confirm order of AAC. 8. In result, appeal filed by Revenue is dismissed. *** INCOME TAX OFFICER v. MRS. MARY ANTONY
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