1. This appeal filed by the revenue is against the order of the AAC, Ernakulam, dated 8-9-1983 for the assessment year 1978-79, for which the previous year ended on 31-3-1978.
2. According to the ITO the assessee who was a partner in the firm, Peetees Agencies, retired from the firm on 2-9-1977 and that she has not admitted any income from the firm till her date of retirement. So the ITO brought into her assessment the amount of Rs. 14,845 as the share of profit from the firm till the date of retirement.
3. 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 31-3-1978 and the profits of the firm for the entire year, i.e., from 1-4-1977 to 31-3-1978 were ascertained on 31-3-1978 and the same was allocated to the persons who were partners of the firm as on that date, viz., Miss Kochuthresia Antony, Miss Etty Antony and Shri P.A. Jose. The assessee further contended before the AAC that as per the original partnership deed as well as the new deed, the profits were to be ascertained only on the normal date of closing the accounts and the persons who were partners at that point of time alone had a right to share of profit and that the partners who retired during the course of the accounting year had no right to any share of profit in respect of the relevant financial year. 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. The partner has not claimed any share in the profits till her date of retirement. The firm has not allocated any profits to her. Therefore there is no income received or receivable by her from this firm. Accordingly the share income so included in the assessment will be deleted.
As against this order of the AAC, the revenue preferred the present appeal.
4. At the time of hearing, the departmental representative filed a paper book of three pages containing the extract from the partnership deed dated 31-3-1975 and copy of the assessment order dated 31-1-1981 for the assessment year 1978-79 in the case of the firm, Peetees Agencies, Cochin. 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 Jaw and the facts of the case. He should have appreciated that the share income has been adopted according to the order under Section 158 of the Income-tax Act, 1961 ('the Act') in the case of the firm. In the absence of any express stipulation in the deed of partnership entered into between the assessee and others on 31-3-1975 that the right to the share of profits accrues to the partners only when the accounts are finally closed on the normal closing date, the AAC should not have directed deletion of the share income included in the assessment.
5. The assessee's counsel filed a copy of the partnership deed dated 31-3-1975, additional agreement dated 27-4-1977, partnership deed dated 2-9-1977 and copy of the profit and loss account of the firm for the year ended 31-3-1978. His arguments were to the following effect : The assessee retired from the firm on 31-8-1977 as can be seen from the partnership deed dated 2-9-1977 between the partners P.A. Jose, Miss Etty Antony and Miss Kochuthresia Antony. The governing deed of the partnership firm as on 31-8-1977, when the assessee retired, is the partnership deed dated 31-3-1975 read with the additional agreement dated 27-4-1977. According to clause 11 of the partnership deed dated 31-3-1975, annual profit and loss account and the balance sheet shall be prepared as on 31st day of March each year. Books of account have not been closed to profit and loss on 31-8-1977 when the assessee retired from the partnership. As per clause 31 of the partnership deed supra the profit and loss account was drawn on 11-3-1978 only, i.e., at the end of the full accounting year. The resultant profit was apportioned between the new partners only. The assessee was not given any share of profit in the same. So the AAC has rightly deleted the amount of Rs. 14,845 following the decision of the Supreme Court in CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42.
6. In reply, the departmental representative submitted as under : The decision of the Supreme Court in Ashokbhai Chimanbhai's case (supra) applies only to a continuing firm and not to a firm which has become extinct by the retirement of a partner. Further, the appeal filed by the assessee before the AAC is not maintainable as per Section 247 of the Act. Moreover, the ITO in his assessment order dated 31-1-1981 in the case of the firm, Peetees Agencies allocated Rs. 14,845 to the assessee as per Clause (i) of proviso to Section 187(1) of the Act.
7. We have considered the rival submissions. 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 v.Patel Bhailal Narandas AIR 1968 Guj. 157. Section 247 provides that any partner of such firm may appeal against the assessment/allocation of the firm's income, but such appeal has to be preferred not against his individual assessment but against the assessment of the firm itself.
Beyond the two questions, viz., the determination of the total income or loss of the firm and its apportionment between the partners, a partner is not precluded from agitating any other point, if arises in his individual assessment, in an appeal filed against his own individual assessment. Under Section 246(1)(c) of the Act an assessee is entitled to object to the amount of income assessed in his/her hands, Here this appeal is filed under Section 246(1 )(c) before the AAC. So the A AC was perfectly justified in entertaining the appeal and deciding the issue. According to Clause (j) of the proviso to Section 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. [Emphasis supplied] The argument of the departmental representative was that because the apportionment was done by the ITO in the assessment of the firm this amount of Rs. 14,845 has to be necessarily assessed in the hands of the assessee. This argument cannot be accepted because for apportioning the ITO has to decide as to who were the partners that were entitled to receive the same. It is exactly at this juncture, the ITO has failed to appreciate the law laid down by the Supreme Court in Ashokbhai Chimanbhai's case (supra). The firm Peetees Agencies came into existence from 1-4-1975 with three partners as under :Name of partner Share of Share of profit lossMrs. Mary Antony 50 per cent 80 per centShri P.A. Jose 10 per cent 20 per centMiss Etty Antony (minor) 40 per cent nil The terms and conditions of this partnership were incorporated in the partnership deed executed on 31-3-1975. When Miss Etty Antony attained majority and elected to become a partner, an additional agreement was executed on 27-4-1977. According to the said additional agreement the shares of the partners in the profit and loss of the partnership were as under:Mrs. Mary Antony 50 per centShri P.A. Jose 10 per centMiss Etty Antony 40 per cent The existing articles of partnership embodied in the deed of partnership dated 31st March, 1975, notwithstanding the present agreement, shall have full force and effect, bind and regulate, the relation of the partnership and shall be subject to the same terms, covenants, stipulations and conditions as expressed and contained in the said deed of partnership dated 31st March, 1975 except so far as the same shall necessarily be modified or affected by this agreement.
When the assessee retired from the partnership on 31-8-1977 a new partnership was executed on 2-9-1977 between Shri P.A. Jose, Miss Etty Antony and Miss Kochuthresia Antony. Unaware of the law laid down by the Supreme Court in Ashokbhai Chimanbhai's case (supra) the ITO held that the assessee was also entitled to Rs. 14,845 out of the income of the firm for the assessment year 1978-79. So the mere fact of apportionment under Section 187(1) cannot fasten a liability on the assessee. Now we have to look whether the assessee is entitled to any share of profit when he retired on 31-8-1977 and when the books of account were not closed to profit and loss on that date. Clause 11 of the partnership deed dated 31-3-1975 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 the Supreme Court in Ashokbhai Chimanbhai's case (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 accounts are closed only on 31 3-1978 and the net profit of Rs. 73,197.36 was apportioned by the firm in its profit and loss account as under:Mrs. Kochuthresia 21,959.19Miss Etty Antony 43,918.44Shri P.A. Jose 7,319.73 From the above it will be seen that the assessee was not given any share of profit in the said firm. According to the ratio laid down by the Supreme Court in the case mentioned supra the assessee is not entitled to any share of profit in the profits ascertained on 31-3-1978. Hence, she is not liable to be assessed on the amount of Rs. 14,845 for the assessment year 1978-79. We, therefore, confirm the order of the AAC.