1981 (9) TMI 14 - HC - Income Tax

Summary

Issues:
1. Whether the sum paid by a firm to a retired partner should be excluded from the total income of the assessee?
2. Whether the right to share in profits can be assigned by a partner?
3. Whether the income accrued to the assessee before or after his retirement from the firm?
4. Whether the settlement of rights to income affects the taxability of the income?

Detailed Analysis:
1. The case involved a reference under section 256(1) of the Income Tax Act, 1961, regarding the exclusion of a sum of Rs. 21,439 paid by a firm to a retired partner from the total income of the assessee. The firm made recoveries of professional fees due from clients for a period prior to 1970, and the assessee claimed to exclude the amounts paid to him as his income under an indenture of settlement. The Income Tax Officer (ITO) included the amounts in the assessee's total income, leading to an appeal and subsequent disagreement between the Appellate Authority and the Tribunal.

2. The Tribunal held that the right to share in profits was an actionable claim capable of being assigned, and the assessee had irrevocably transferred this right to his sons under the indenture of settlement. The Tribunal determined that the amounts recovered from the firm were no longer the income of the assessee but of the trust. The Tribunal set aside the orders of the ITO and the Appellate Authority, directing the exclusion of the sum from the total income of the assessee.

3. The High Court supported the Tribunal's decision, emphasizing that the assessee's right to a share in the professional fees only accrued when the accounts were settled, which occurred after the assessee had retired from the firm. The court noted that the assignment of the right to income to the sons before it accrued to the assessee was crucial in determining the taxability of the amount. The court referred to a similar case law to support the conclusion that the income could not be regarded as the assessee's income for the relevant assessment years.

4. The court distinguished a Supreme Court decision cited by the Revenue, highlighting that in the present case, the right to the share in profits had accrued to the assessee only after his retirement and after he had assigned the right to his sons. The court concluded that the amount in question was not assessable in the hands of the assessee as his income, ruling in favor of the assessee and directing the Revenue to pay the costs of the reference.