Somnath Iyer, J.
1. In this reference sought by the Commissioner of Income-tax under section 66(1) of the Income-tax Act, 1922, the question before us is whether two sets of income derived during the same accounting year by firms which purported to be distinct firms, could be added to one another for the purpose of assessment.
2. The assessment year was 1958-59. There was a partnership which was first constituted under an instrument of partnership on May 7, 1951. There were three partners and one of them retired from the partnership on July 31, 1957. According to the statement of the case submitted to us by the Appellate Tribunal, the remaining two partners 'formed a partnership' under an instrument of partnership executed on August 1, 1957. What the Income-tax Officer did was to add to the income of the period antecedent to August 1, 1957, the subsequent income, and to make an assessment in respect of the aggregate income. This the Income-tax Officer did on the postulate that what happened in consequence of the retirement of one of the partners, was no more than a mere change in the constitution of the old firm.
3. But, in appeal, the Appellate Assistant Commissioner recorded a finding that there were two distinct firms and according to him, the income earned prior to August 1, 1957, was earned by the old firm and that which was earned during the period subsequent to August 1, 1957, was earned by the new firm of which two of the partners of the old firm were partners.
4. That finding was also affirmed by the Income-tax Appellate Tribunal and so in consequence of the orders made by the Appellate Assistant Commissioner and the Appellate Tribunal, the Income-tax Officer had to proceed to make a new assessment on the basis that they were two distinct firms. It is in this situation that the Commissioner of Income-tax sought a reference and the question referred to us, reads :
'Whether, on the facts and in the circumstances of the case, the aggregation of the income from August 1, 1957, to March 31, 1958, with that of the income from April 1, 1957, to July 31, 1957, was justified ?'
5. It seems to us that we should answer this question in favour of the assessee.
6. It is a familiar principle of partnership law that if one of the partners in the firm retires and the firm continues with the remaining partners, the partnership continues to exist notwithstanding the change in the composition of the firm. It is equally well-settled that when a partner of the firm retires from partnership, the remaining partners have an option to continue to remain in the old firm and to continue it or to dissolve that firm and enter into a new partnership. If a are partnership is so formed by the remaining partners, that firm which is so brought into being is a firm distinct from the old firm, and that would be the position notwithstanding the nature of the business of the two firms being similar or identical.
7. The question whether there was a new partnership or whether the old partnership continued is a question of fact. It may sometimes happen that, although the remaining partners purport to form a new partnership, the old partnership nevertheless continues to exist and that the new partnership masquerades as a new partnership although it is not one.
8. So the question whether the old partnership became extinct and a new partnership came into being, is a question the answer to which must depend upon a multitude of factors including those such as the covenants, the terms conditions of the old partnership and those of the new. It is on the assessment of these relevant factors that the consolation has to be deduced whether the old partnership indeed perished, or whether the formation of the new partnership was nothing more than a stratagem or artifice for the circumvention of the law.
9. Mr. Rajasekhara Murthy appearing for the department urged before us that the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal gave no reasons in support of the conclusion reached by them that the two firms were distinct. But he had to admit that the Income-tax Officer likewise gave no reasons in support of his conclusion that there was no more than a mere change in the constitution of the old firm. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal did record a finding that why were two distinct firms and that partnership was formed by the remaining two partners is what we find in the reference before us. The clear meaning of that statement is that the two remaining partners constituted themselves into a new firm on August 1, 1957. It was not urged before the Tribunal or before the Appellate Assistant Commissioner that the formation of the new firm was a mere cloak or that the new partnership was a mere sham. In a case like this where the Appellate Tribunal records a finding of fact that the new partners formed into a new partnership under an instrument of partnership, what should follow is that in the absence of there being any fact or circumstance on the basis of which we can say that the conclusion reached by the Appellate Assistant Commissioner and the Appellate Tribunal rested on no material or upon no evidence, we should not accede to the proportion that there was no new partnership. The execution of the instrument of partnership on August 1, 1957, between the two remaining partners is, prima facie, evidence and proof that a new partnership came into being, and, in the absence of any reason for discarding the recital in the instrument of partnership that a new partnership was formed as a dictates or artificial wrestle, we should not be justified in thinking that the conclusion reached by the Appellate Assistant Commissioner and the Appellate Tribunal was unjustified.
10. Our answer, therefore, to the question before us is that the aggregation of the income from August 1, 1957, to March 31, 1958, with that of the income for the period from April 1, 1957, to July 31, 1957, was not justified. The assessee will get his costs in this reference. Advocate's fee Rs. 250.