1. This appeal by the department relates to the assessment year 1977-78, for which the accounting period ended on 31-3-1977.
2. The ITO clubbed the share income of the husband of the assessee from a firm known as Chelur Corporation with the income of the assessee under Section 64(1)(i) of the Income-tax Act, 1961 ('the Act'). The accounting period of the firm was from 1-6-1975 to 31-5-1976. The assessee had ceased to be a partner of the firm on 1-1-1976. The Commissioner (Appeals) held that as the assessee was not a partner of the firm at the end of the previous year, namely, on 31-5-1976, Section 64(1)(i) was not attracted to the case. He, therefore, held that the income of the husband of the assessee cannot be clubbed with her income. Aggrieved by the same, the department has come up in appeal.
3. For a proper appreciation of the dispute involved in the case, some more facts, which were ascertained at the time of the hearing of the appeal, have to be stated. As already stated, the accounting period of the firm was from 1-6-1975 to 31-5-1976. During the period from 1-6-1975 to 30-11-1975 the partners were the assessee, her husband, A.C. Raghava Menon, and Shri A.C.G. Menon. There was a reconstitution of the firm with effect from 1-12-1975. On account of this, the accounts of the firm were closed on 30-11-1975 and profit and loss account and balance sheet were drawn as on 30-11-1975. The share of profits of the partners were credited to the respective accounts of the partners on 30-11-1975. The partners during the period from 1-12-1975 to 31-12-1975 were the assessee, her husband, Shri R. Nandagopal, and Shri R. Jayasankar. The assessee ceased to be a partner with effect from 1-1-1976 and the remaining partners carried on the business. The accounts were not closed on 31-12-1975 on the occasion of the retirement of the assessee. The accounts were closed and the profit and loss account was prepared only at the end of the accounting period on 31-5-1976. It has also to be borne in mind that under Section 3(1)(f) of the Act, the previous year of the assessee with regard to the share income will be the previous year for the assessment of the income of the firm.
4. The assessee had a contention that consistent with the assessment made in some of the earlier years the income of the husband of the assessee should not be clubbed with the income of the assessee and that even if clubbing was justified, the income of the assessee should be clubbed with that of her husband. This contention was negatived by the Commissioner (Appeals) and the assessee has accepted the same. The only ground on which the assessee resisted the clubbing of the income was that the income of the firm accrued due to the husband of the assessee only on 31-5-1976 when the accounts of the firm were closed, that on this date the assessee was not a partner of the firm, as she had retired from the firm on 1-1-1976 and that Section 64(1)(i) was not, therefore, attracted to the case. It was this contention that was accepted by the Commissioner (Appeals). The department now questions the correctness of this finding.
5. The arguments advanced by the learned departmental representative were to the following effect. The question, whether the assessee was a partner of the firm when the accounts of the firm were closed, is totally irrelevant in deciding the applicability of Section 64(1)(i).
The only requirement of the section is that the husband of the assessee should have a share income from the firm in which the assessee was a partner during any portion of the accounting period. In the present case, during the accounting period, the assessee herself had income from the firm, although she was a partner in the firm only for a portion of the accounting period. The husband of the assessee had also income from the firm. This is sufficient to attract Section 64(1)(i).
Under the section, the share income of the husband from the firm is to be included in the total income of the assessee. The term 'total income' has been defined in Section 2(45) of the Act as the total amount of income referred to in Section 5 of the Act computed in the manner laid down in the Act. It is, therefore, not necessary that the assessee should have been a partner of the firm on the date on which the firm closed its accounts. It is also not necessary that the assessee should have been a partner of the firm during the whole of the accounting period. It was, therefore, claimed by the learned departmental representative that the Commissioner (Appeals) erred in holding that the share income of the husband of the assessee cannot be clubbed with the income of the assessee.
6. On the other hand, it was contended by the learned representative for the assessee that to attract the provisions of Section 64(1)(i), the assessee should have been a partner of the firm, when the share income, which is now sought to be clubbed, accrued to the husband of the assessee. In support of the contention, the learned representative for the assessee relied upon the dictum laid down by the Supreme Court in CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42, that profits do not accrue from day to day or even from month to month and have to be ascertained by a comparison of assets at two stated points, that unless the right to profits comes into existence there is no accrual of profits, that the destination of profits must be determined by the title thereto on the day on which they arise and that in the case of a partnership, where the accounts are to be made at stated intervals, the right of a partner to demand his share of the profits does not arise until the contingency, which by operation of law or under a covenant of the partnership deed gives rise to that right, has arisen. Reliance was also placed on the decision of the Bombay High Court in Arvind Bhogilal v. CIT [1976] 105 ITR 764.
7. In reply it was contended by the learned departmental representative that the dictum laid down by the Supreme Court is that the share income accrued due whenever accounts are settled and that the decision in the case of Arvind Bhogilal (supra) does not apply to the facts of the present case as in that case, the minor partner whose income was sought to be clubbed, had died before the closing of the accounts.
8. We have considered the matter. It has been clearly laid down by the Supreme Court in the case of Ashokbhai Chimanbhai (supra) that in the case of a partnership, the profits do not accrue to a partner from day to day or even from month to month and that it will accrue only when the accounts are closed. The closing of accounts may depend upon the contract between the parties or the operation of any law. But the profits accrue due only when the accounts are closed. In the present case, the assessee retired from the firm with effect from 1-1-1976. It is admitted by the department that the accounts were not closed on 31-12-1975. It is further admitted that the accounts were actually closed only on 31-5-1976 and by the same (sic) the proportionate profits of the partners as on 31-12-1975 were worked out on time basis, on the basis of the profit and loss account drawn up for the period from 1-12-1975 to 30-5-1976. It is, therefore, clear that the share income from the firm accrued to the husband of the assessee only on 31-5-1976. On this day, the assessee was not a partner of the firm.
Section 64(1)(i), so far as it is relevant for the present purpose, provides that in computing the total income of the assessee there shall be included the income arising to the husband of the assessee from his membership in a firm in which the assessee is a partner. In our view, for the section to apply, the assessee must have been a partner of the firm when the share income from the firm accrued to the husband of the assessee. This view is strengthened by the decision of the Bombay High Court in Bhogilal Laherchand v. CIT [1955] 28 ITR 919. The decision in the case of Arvind Bhogilal (supra), arises out of a fresh assessment made in pursuance of the decision in the case of Bhogilal Laherchand (supra). Bhogilal Laherchand and a major son were the partners of a firm. Two minor sons of Laherchand Bhogilal, namely, Arvind and Mahesh, were admitted to the benefits of partnership. Arvind attained majority on 22-8-1950 and elected to become a partner and a fresh deed of partnership was executed on 28-8-1950. He died three days later. This did not result in dissolution of the partnership, in view of the provision in the deed. The partnership was continued and the books of account of the firm were closed on 9-11-1950 and thereby a sum of Rs. 2,64,450 was credited to the account of Arvind as his share of profits.
The proportionate share income for the period of the minority of Arvind was sought to be clubbed with the income of his father Bhogilal Laherchand under Section 16(3) of the Indian Income-tax Act, 1922, which corresponds to Section 64(1)(iii) of the 1961 Act. It was held in the case of Bhogilal Laherchand (supra) that the share income of Arvind accrued to him only on the closing of the accounts which was much later to the attaining of majority by Arvind and his subsequent death. It was held that the share income did not accrue due to Arvind as a minor.
Consequently, it was held that the share income cannot be clubbed with the income of the father. Consequent on this decision, the income was sought to be assessed in the hands of the legal representative of Arvind. It was held in the case of Arvind Bhogilal (supra) that the income had not accrued to Arvind at the time of his death as the income accrued due to him only on the closing of the accounts of the firm which was later. The later decision in the case of Arvind Bhogilal (supra) is relevant only in considering the question whether the income accrued to the husband of the present assessee at any date earlier to the closing of the accounts. The earlier decision in the case of Bhogilal Laherchand (supra) also turned on the question whether the income had accrued to the minor for the purpose of clubbing the same with the income of his father. The question in the present form, namely, whether the income accruing to a spouse, when the other spouse is not a partner, could be clubbed with the income of the other spouse did not arise in the earlier case also.
9. But the decision of the Gujarat High Court in Vinodkumar Ratilal v.CIT [1975] 100 ITR 564, seems to have some bearing on the present issue. It was held in the above case that for the application of Section 64(1)(i) the share income of the spouse, which is sought to be clubbed, must have been received by the spouse while she continued to be a spouse. In that case, the share income of the wife of the assessee was sought to be clubbed with the income of the assessee. The assessee had died and the assessment was on the legal representatives. The firm was dissolved by operation of law on the death of the assessee. The share income of the wife was allocated thereafter. It was held that on the death of the assessee, the wife ceased to be a wife, that the income allotted to her after the death of the assessee was not the income of the wife of the assessee and that the same cannot be clubbed with the income of the assessee. The ratio of the decision is that for the operation of Section 64(1)(i) both the parties must be spouses at the time when the income accrued to one of them. Analogically it appears to be correct to say that when the income of one spouse is sought to be clubbed with that of the other, both the spouses must have been partners of the firm when the income sought to be clubbed accrued to the concerned spouse. It has also to be borne in mind that Section 64 creates an artificial income with regard to the person in whose hands it is assessed and that the section must, therefore, be construed strictly (vide Chaturvedi and Pithisaria's the Income-tax Law, Vol. 2, Third edn., p. 1840).
10. In view of what is stated above, the share income of the husband of the assessee for the period from 1-1-1976 to 31-5-1976 cannot be clubbed with the income of the assessee as the assessee had ceased to be a partner of the firm with effect from 1-1-1976. But the share income of the husband of the assessee for the period from 1-6-1975 to 30-11-1975 accrued to the husband of the assessee at a time when the assessee was a partner of the firm. As already stated, there was a closing of accounts and the crediting of the share income to the accounts of the respective partners on 30-11-1975. The share income of the husband of the assessee for the period from 1-6-1975 to 30-11-1975 is liable to be included in the income of the assessee.