Commissioner of Income Tax vs Anand Das Gupta and Sons

Arijit Pasayat, C.J.—At the instance of revenue, following question, pertaining to the assessment year 1969-70, has been referred by the Tribunal, Delhi Bench ''A'', u/s 256(1) of the income tax Act, 1961 (''the Act'') for opinion of this Court : Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in deleting the addition of Rs. 1,33,334 from the assessment of the assessee ?

Brief reference to the factual aspects would suffice :

Assessee, during the relevant assessment year, was a firm of advocates and solicitors. Originally, there were three partners, namely, Shri H.L. Anand, Shri B.C. Das Gupta and Shri V. Sagar, as evidenced from the deed of partnership dated 30-6-1960. Subsequently, on retirement of Shri V. Sagar on 30-6-1967, a new deed of partnership was executed on 1-7-1967 between the remaining two partners. A settlement was also arrived at on the same date between the aforesaid three partners. As per the settlement, it was found that the net assets of the firm as on 30-6-1967 were Rs. 2,56,000 and outstanding bills were to the extent of Rs. 3,50,000. It were decided that bills amounting to Rs. 1 lakh would belong to the newly constituted firm of Shri H.L. Anand and Shri B.C. Das Gupta while bills belonging to some clients amounting to Rs. 3,50,000 would be collected by the retiring partner, Shri V. Sagar. On finalisation of the accounts it was noticed that a sum of Rs. 1,31,000 was payable to Shri V. Sagar. After adjustment, it was determined that he was to pay Rs. 1,19,000 to the two partners, namely, Shri H.L. Anand and Shri B.C. Das Gupta. Since the pending bills amounting to Rs. 3,50,000 related to all the partners, share of retiring partner came to Rs. 1,16,666 while the balance of Rs. 2,33,334 belonged to the continuing partners. Out of this, the newly constituted firm accounted for receipts of Rs. 1 lakh. So far as the balance is concerned, it was accounted for in the profit and loss account in the following manner :

Sale to Mr. Sagar of the

share of Mr. Anand and

Mr. Das Gupta of ''Fee

recoverable on retirement of Mr. Sagar''

Rs. 1,66,667

Less

Purchase of Sagar''s

share of pending bill,

on his retirement

Rs. 33,333

Rs. 1,33,334.

The assessee originally included the amount of Rs. 1,33,334 in its return of income. Subsequently, it filed a revised return claiming that the amount was not taxable in its hands and it was taxable in the individual assessment of the continuing partners. This plea was not accepted by the ITO. The assessee carried the matter in appeal before the AAC. The AAC noticed that the assessee was maintaining books of account on cash basis. It was observed by him that there was only a change in the constitution of the firm as on 1-7-1967 and it was entitled to receive the amounts which could have formed income of the old firm before its reconstitution. It was also noticed that Mr. Sagar had made a payment of Rs. 90,000 in cash and an adjustment of goodwill to the extent of Rs. 52,000 was made. In this view of the matter it was held that ITO''s view was in order. The assessee preferred an appeal before the Tribunal. It was held by the Tribunal that though the retiring partner had agreed to take over the pending bills amounting to Rs. 2,50,000 leaving other bills amounting to Rs. 1 lakh to be realised by the assessee-firm, it cannot lead to the conclusion that there was any constructive or otherwise receipt of the amount of Rs. 2,50,000 by the assessee. It was also noticed that remaining sum of Rs. 1 lakh was received and included in the profit and loss account and the assessee treated it as its income. So far as the sum of Rs. 1,33,334 was concerned, it was treated as adjustment. It was also noticed that the amount had been separately offered to tax and had been taxed in the hands of continuing partners, namely, Shri H.L. Anand and Shri B.C. Das Gupta. Therefore, the amount of Rs. 1,33,334 was deleted from the total income of the assessee. On being moved for reference, question as stated above has been referred.

We have heard the learned counsel for the revenue. There is no appearance on behalf of the assessee in spite of service of notice. We find that few relevant aspects have been lost sight of by the Tribunal. They related to payment by Shri Sagar of Rs. 90,000 in cash and adjust ment of goodwill amounting to Rs. 52,000. Admittedly, the assessee was following cash system of accounting. It is to be noted that the effect of receipt of these two amounts during the assessment year in question has great significance and relevance. The Tribunal has not given any finding as to the effect of these two receipts thought it had noted factually about the said receipts. In the circumstances, we remit the matter back to the Tribunal for the consideration. While doing so, the effect of amounts having been offered to tax and levy of tax, if any, in the hands of Shri H.L. Anand. Shri B.C. Das Gupta has also to be taken note of.

The reference stands disposed of.