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Commissioner of Income-tax Vs. Raj Brothers - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberReferred Case No. 307 of 1982
Judge
Reported in[1987]165ITR720(AP)
ActsPartnership Act - Sections 40 and 43; Income Tax Act, 1961 - Sections 187 and 188; Income Tax (Amendment) Act, 1984 - Sections 33
AppellantCommissioner of Income-tax
RespondentRaj Brothers
Appellant AdvocateM. Suryanarayana Murthy, Adv.
Respondent AdvocateA. Satyanarayana, Adv.
Excerpt:
.....of income tax (amendment) act, 1984 - two returns filed before income tax officer for partnership firms for assessment year 1977-78 - first return filed by partnership firm related to period 01.04.1976 to 31.12.1976 - second return filed by partnership firm for period 01.01.1977 to 31.03.1977 - income tax officer was of opinion that retirement of partner on 31.12.1976 did not bring about dissolution of firm and it was a only change in constitution of firm - consequently one single assessment has to be made on partnership for entire period from 01.04.1976 to 31.03.1977 - there was mutual agreement between parties to dissolve firm - once a partnership statutorily dissolved under section 40 or under section 43 it ceases to be in existence for all statutory purposes - held, two partnership..........we may notice a few facts. a partnership consisting of four partners came into existence under a deed of partnership dated october 20, 1969. the terms of the partnership would indicate that the partnership was 'at will', that is to say, the partnership will continue subject to the mutual consent of all the partners. the assessment year concerned is 1977-78 and the corresponding accounting period was april 1, 1976, to march 31, 1977. on december 31, 1976, one of the partners retired from the partnership. pursuant to the retirement of one of the partners, the parties mutually agreed to dissolve the partnership and a deed of dissolution was executed on january 4, 1977, evidencing the dissolution with effect from december 31, 1976, of the partnership constituted under the deed dated.....
Judgment:

Anjaneyulu, J.

1. This reference made at the instance of the Commissioner of Income-tax under section 256(1) of the Income-tax Act, 1961 (for short 'the Act'), was disposed of by us, by our judgment dated October 22, 1984. Learned Standing Counsel for the Income-tax Department brought to our notice through a letter dated January 30, 1985, that the reference was answered on the basis that one of the partners died during the accounting year relevant to the assessment year 1977-78 while in fact there was only a retirement of the partner. Learned standing counsel submitted that the application of section 187 of the Act will have a different effect in the event of there being only a retirement of a partner instead of death. Learned counsel for the respondent, Sri A. Satyanarayana, agreed that we may recall the judgment already delivered, hear arguments afresh and answer the question referred to us in the light of correct facts. We recall our judgment dated October 22, 1984, accordingly. We have heard the submissions of learned standing counsel, Sri. M. Suryanarayana Murthy, and also learned counsel for the respondent, Sri A. Satyanarayana.

2. The following question of law is referred by the Income-tax Appellate Tribunal for our consideration :

'Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in concluding that two assessments should be made for the two periods, viz., from April 1, 1976, to December 31, 1976, and from January 1, 1977, to March 31, 1977 ?'

3. We may notice a few facts. A partnership consisting of four partners came into existence under a deed of partnership dated October 20, 1969. The terms of the partnership would indicate that the partnership was 'at will', that is to say, the partnership will continue subject to the mutual consent of all the partners. The assessment year concerned is 1977-78 and the corresponding accounting period was April 1, 1976, to March 31, 1977. On December 31, 1976, one of the partners retired from the partnership. Pursuant to the retirement of one of the partners, the parties mutually agreed to dissolve the partnership and a deed of dissolution was executed on January 4, 1977, evidencing the dissolution with effect from December 31, 1976, of the partnership constituted under the deed dated October 20, 1969. It was agreed that the balance standing to the credit of the retiring partner at the time of retirement shall be paid to him. With effect from January 1, 1977, the remaining three partners constituted themselves into a partnership firm. A fresh deed of partnership was executed on March 19, 1977, setting out the terms and conditions governing the partnership. It was specifically provided that the partnership constituted by the deed dated March 19, 1977, came into existence with effect from January 1, 1977. The new partnership has taken over all the assets and liabilities of the partnership dissolved on December 31, 1976, and has been carrying on the same business. For the income-tax assessment year 1977-78, two returns were filed before the Income-tax Officer. The first return was filed by the partnership evidenced by the deed dated October 20, 1969. In that return, income for the period April 1, 1976, to December 31, 1976, was declared. The second return was filed by the partnership firm constituted under the deed dated March 19, 1977. In the return filed, the firm declared its income for the period January 1, 1977, to March 31, 1977. The Income-tax Officer was of the opinion that the retirement of the partner on December 31, 1976, did not bring about a dissolution of the partnership. According to the Income-tax Officer, it was only a change in the constitution of the firm within the meaning of section 187(1) of the Act and consequently one single assessment has to be made on the partnership as constituted at the time of making the assessment on the entire income for the period April 1, 1976, to March 31, 1977. In the opinion of the Income-tax Officer, the partnership firm evidenced by the deed dated March 19, 1977, could not be considered to have succeeded to the predecessor partnership firm within the meaning of section 188 of the Act and, consequently, the claim that two separate assessments have to be made was found to be unsupportable. In that view, the Income-tax Officer aggregated the income for the entire period April 1, 1976, to March 31, 1977, and assessed the same for the assessment year 1977-78 in the hands of the assessee-partnership as constituted at the time of making the assessment. The assessee questioned the correctness of the Income-tax Officer's assessment of the entire income in one single assessment. The Commissioner of Income-tax (Appeals), the first appellate authority, affirmed the correctness of the assessment made by the Income-tax Officer. The assessee went in further appeal to the Tribunal. The Tribunal accepted the assessee's contention and held that two assessments have to be made as claimed by the assessee. In other words, the Tribunal accepted the assessee's contention that the partnership constituted under the deed dated March 19, 1977, is a successor to the earlier partnership firm constituted under the deed dated October 20, 1969 and, therefore, the provisions of section 188 of the Act were applicable and two separate assessments have to be made, one of the predecessor firm in respect of its income up to December 31, 1976, and another in respect of the successor-firm for the period January 1, 1977, to March 31, 1977. The Commissioner of Income-tax was aggrieved by the above decision of the Tribunal and, therefore, required the Tribunal to state a case to this court under section 256(1) of the Act. That is how the Tribunal referred the above question of law for the consideration of this court.

4. There is no dispute about the facts. Learned standing counsel for the Income-tax Department stated that the partnership firm evidenced by the deed of partnership dated October 20, 1969, was one at will. Therefore, the existence of the partnership can be brought to an end by any of the partners of the partnership, by giving notice in writing to all the other partners of his intention to dissolve the firm. If such a notice is given by any partner, the firm is dissolved as from the date mentioned in the notice as the date of dissolution or if no date is so mentioned, as from the date of the Indian Partnership Act. Under section 40 of the Partnership Act, a firm can be dissolved with the consent of all the partners. The Tribunal has found as a fact, and it is not disputed before us, that pursuant to the retirement of one of the partners on December 31, 1976, all the partners expressly agreed upon dissolving the partnership firm. Accordingly, a deed of dissolution was drawn up on January 4, 1977, setting out the factum of dissolution of the partnership with effect from December 31, 1976. The dissolution deed also evidences the settlement of account of the retiring partner.

5. After bringing about the dissolution of the firm evidenced by the deed dated October 20, 1969, with effect from December 31, 1976, by mutual agreement, three of the continuing partners agreed to carry on business in partnership, taking over the assets and liabilities of the predecessor firm as a going concern. Accordingly, the three continuing partners constituted a firm with effect from January 1, 1977, and a deed of partnership was executed on March 19, 1977, setting out the terms and conditions governing the partnership which came into effect from January 1, 1977. There is also no dispute about the fact that the accounts of the partnership firm were closed on December 31, 1976, pursuant to the decision to dissolve the partnership, profits were ascertained and apportioned among the four partners in accordance with the deed of partnership dated October 20, 1969, and accounts were settled on that basis. It is again not in dispute that a new set of accounts was opened on January 1, 1977, by the partnership consisting of the three continuing partners. These accounts were closed on March 31, 1977, profits ascertained and credited to the accounts of the partners in accordance with the deed of partnership dated March 19, 1977. The two firms filed two separate returns before the Income-tax Officer and asked for separate assessments on the ground that the partnership evidenced by the deed dated October 20, 1969, was dissolved and a new firm succeeded to it within the meaning of section 188 of the Act with effect from January 1, 1977, and evidenced by the deed of partnership dated March 19, 1977. On these facts, we do not see how the Revenue can canvass the plea that there was no dissolution of the earlier partnership on December 31, 1976. We have earlier referred to the ingredients of section 40 and section 43 of the Partnership Act. Learned standing counsel does not fairly dispute that the partnership evidenced by the deed dated October 20, 1969, could be considered to have been dissolved within the meaning of both section 40 and section 43 of the Partnership Act. Even so, contends learned standing counsel, such a dissolution under section 40 or section 43 of the Partnership Act cannot be considered to be a dissolution for the purpose of income-tax and the provisions contained in section 187(2) of the Act would govern the situation and it must, therefore, be held that there was only a change in the constitution of the firm with effect from December 31, 1976, and, therefore, the Income-tax Officer was empowered to make one single assessment on the firm as constituted at the time of making the assessment as per provisions contained in section 187(1) of the Act. Learned counsel sought to support his contention by reference to the proviso added to sub-section (2) of section 187 of the Act by section 33 of the Taxation Laws (Amendment) Act, 1984. We extract the proviso for reference :

'Provided that nothing contained in clause (a) shall apply to a case where the firm is dissolved on the death of any of its partners.'

6. Clause (a) of sub-section (2) of sub-section 187 of the Act is in the following terms :

'(2) For the purposes of this section, there is a change in the constitution of the firm - (a) if one or more of the partners cease to be partners or one or more new partners are admitted, in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change.'

7. The proviso to section 187(2) inserted by section 33 of the Amendment Act of 1984 is given retrospective effect from April 1, 1975, that is to say, with effect from the assessment year 1975-76. The plain effect of the proviso now inserted is to the effect that from the assessment year 1975-76, if a firm is dissolved on the death of any partner, the resulting change after the death of the partner shall not be considered as a change in the constitution of the firm and, consequently, the provisions of section 187(1) of the Act do not come into operation to enable an assessment being made on the firm as constituted at the time of making the assessment. Learned standing counsel's contention is that the proviso inserted by section 33 of the Amendment Act, 1984, refers only to dissolution of the firm on the death of any partner and does not refer to dissolution by any other mode. According to learned standing counsel, if a firm is dissolved for any reason other than the death of a partner, such a dissolution is not saved for the purposes of section 187 of the Act and in all such cases of dissolution not referable to the death of a partner, the Income-tax Officer will be justified in treating the resulting change as only a change in the constitution of the firm and making an assessment accordingly under section 187(1) of the Act. We are unable to accept this submission. A partnership firm is essentially governed by the provisions of the Partnership Act and the dissolution of the partnership could be brought about statutorily under the Partnership Act by any of the modes referred to in sections 40 to 44 of the Partnership Act. Dissolution by death of any of the partners is governed by section 42(c) of the Partnership Act. The contention that by introducing the proviso after sub-section (2) to section 187 of the Act by the Amendment Act of 1984, the Income-tax Act sought to recognise only a dissolution brought bout by death of any of the partners within the meaning of section 42(c) of the Partnership Act and derecognise all other forms of dissolution envisaged by sections 40 to 44 of the Partnership Act is wholly unsupportable. The dissolution of a partnership firm by Act brings about the legal death of a partnership firm. From the date of dissolution, the partnership has to be treated as extinct for all purposes. It is difficult to accept the contention of learned standing counsel that a partnership which is dissolved otherwise than by the death of a partner shall be treated for the purpose of section 187 of the Act to be continuing in existence. In other words, learned standing counsel wants us to interpret the proviso inserted by the Amendment Act of 1984 as enunciating that nothing contained in clause (a) to sub-section (2) of section 187 of the Act shall apply to a case where the firm is dissolved on the death of any of its partners and to no other form of dissolution. We cannot construe the proviso in the manner suggested by learned standing counsel. It is also not difficult to see the reasons for the introduction of the proviso. There is a conflict of judicial opinion as to whether the death of a partner brings about merely a change in the constitution of the firm or there is also a dissolution bringing about the extinction of the old firm. We may refer to a Full Bench decision of this court in Addl. CIT v. Vinayaka Cinema : [1977]110ITR468(AP) wherein this court has taken the view that death of a partner brings about an automatic dissolution of the partnership firm unless there is a contract to the contrary among the partners. A contrary view was expressed by some other High Courts. Because of this conflict, the Legislature thought it fit to set at rest the controversy and state clearly that death of a partner brings about a dissolution of the firm and the effect of such a dissolution would be the non-application of section 187(1) of the Act. We cannot accept learned standing counsel's contention that the effect of the amendment made by the Legislature by inserting the proviso is to recognise only dissolutions with reference to death of the partners and to derecognise all other modes of statutory dissolutions. We, therefore, reject the contention of learned standing counsel that because of the proviso inserted with retrospective effect from 1975-76 assessment year, to sub-section (2) of section 187 of the Act, the assessment in the present case should be governed by section 187 of the Act. We may also refer to the decision of a Division Bench of this Court in R. C. No. 158 of 1976 dated July 4, 1979 [CIT v. Surana Trade Finance Corporation : [1987]165ITR728(AP) . In that case also, on the retirement of some partners, the partnership was dissolved by mutual consent, a dissolution deed was executed and a new partnership was formed between the continuing partners taking over all the assets and liabilities of the dissolved firm. This court held that the factum of dissolution by mutual consent of the parties evidenced by a deed of dissolution executed between them renders the provisions of section 187 of the Act inapplicable. This court held that the newly constituted firm after the retirement of some of the partners cannot be considered to be the same firm as was in existence prior to retirement and the consequent dissolution. In that view, this court held that two separate assessments to income-tax have to be made under section 188 of the Act, one on the predecessor firm on the income earned by it up to the date of dissolution and another on the successor-firm for the subsequent period. We are, therefore, fortified in our view by the above judgment of this court.

8. The undisputed fact in the present is that there was mutual agreement between the parties to dissolve the firm and, therefore, the dissolution is governed by section 40 of the Partnership Act. It is also a dissolution within the meaning of section 43 of the Partnership Act in view of the findings of the Income-tax Appellate Tribunal. Once the partnership is statutorily dissolved either under section 40 or under section 43 of the Partnership Act, it ceases to be in existence for all statutory purposes unless expressly saved by any provision in the Income-tax Act. We have already held that the proviso inserted by section 33 of the Amendment Act of 1984 does not have such an effect. We, therefore, hold that the Tribunal is justified in coming to the conclusion that there was a dissolution of partnership on December 31, 1976, that a new partnership came into existence on January 1, 1977, and that these two partnership firms are liable to be assessed separately under section 188 of the Act upon the income derived by them for the respective periods.

9. We accordingly answer the question referred to us in the affirmative, that is to say, in favour of the assessee and against the Revenue. The Revenue shall pay the assessee's costs. Advocate's fee Rs. 250.


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