Jeevan Reddy, J.
1. In this reference made by the Income-tax Appellate Tribunal in pursuance of a direction given by this court under s. 256(2) of the Act, the question for our consideration is :
'Whether, on the facts and in the circumstances of the case, the amount of Rs. 50,174 is liable to be taxed in the hands of the assessee firm ?'
2. It is necessary to state the relevant facts as they appear from the statement of case, and the orders annexed thereto.
3. The assessee-firm, consisting of 11 partners, was constituted under a deed of partnership dated October 21, 1968. Indeed, this firm, with certain changes in its composition from time to time, was in existence right from 1924-25. It was first registered under the Indian I.T. Act, 1922, for the year 1927-28. It then consisted of 10 partners. During the accounting year relevant to the assessment year 1962-63, the firm consisted of 13 partners. One of the partners retired, and a fresh partnership deed comprising of 12 partners, was drawn up on November 2, 1962. In the accounting year relevant to the assessment year 1965-66, one of the partners died and, in his place, his wife was taken as a partner. This change was also evidenced by a fresh partnership deed. Again, in the accounting year relevant to the assessment year 1967-68, one of the partners retired and two new partners were taken. Finally, on October 21, 1968, four of the erstwhile partners retired and, in their place, two persons were taken as partners. For the accounting year relevant to the assessment year 1970-71, the firm thus consisted of 11 partners.
4. During the assessment years 1962-63, 1963-64, 1964-65, and 1965-66, the firm was subjected to sales tax on certain transactions effected by it, and a total sum of Rs. 50,174 was collected from it. This amount was allowed as a trading liability of the assessee-firm in arriving at its taxable income for the relevant years. The firm was contesting its liability for the said sum, and it ultimately succeeded in its contention. In the accounting year relevant to the assessment year 1971-72, the sum of Rs. 50,174 was refunded to the assessee.
5. The ITO included the sum of Rs. 50,174 after deducting a sum of Rs. 13,906 (towards expenditure for establishing the right to, and obtaining the said refund), u/s. 41(1), in the income of the firm for the assessment year 1971-72. This was contested by the assessee by way of an appeal before the AAC, which was dismissed. On further appeal however, the Income-tax Appellate Tribunal took the view that the partnership as it was constituted in the accounting year relevant to the assessment year 1971-72 (when the refund was received), and the partnership firm which paid the sales tax during the assessment years 1962-63 to 1965-66 were different entities. In other words, it was of the opinion that the assessee, which was allowed certain deductions as trading liability during the assessment years 1962-63 to 1965-66, was not the same assessee as was in existence during the accounting year relevant to the assessment year 1971-72. It also laid considerable emphasis upon the averment of the assessee that the amount of refund received by it was not appropriated by the assessee-firm, but was distributed among those persons who were partners during the assessment years 1962-63 to 1965-66. The Tribunal observed that, whatever be the position about the continuity of the firm, or change in the constitution of the firm, etc., under the I.T. Act, the fact remains that different persons having paid the amount under the sales tax law, the provisions of s. 41(1) cannot apply.
6. Aggrieved with the view taken by the Tribunal, the Revenue applied to it under s. 256(1) for making a reference to this court, which was refused, whereupon it approached this court under s. 256(2) of the Act, and a direction was made. Accordingly, the above question is referred to us for our opinion.
7. Section 41(1) of the Act reads as follows :
'41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business of profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not.'
8. Accordingly to this provision, if an assessee has availed of a deduction as a trading liability in a particular assessment year, and subsequently it has obtained any amount or benefit in respect of such trading liability, whether by way of refund or remission, the amount so received shall be deemed to be profits and gins of business or profession, and shall be chargeable to income as the income of that previous year. Undoubtedly the assessee which availed of the benefit of deduction must be the same who has received the refund, as pointed out by the Tribunal. But, the question is, whether in this case it can be said that the assessee which availed of the deductions during the assessment years 1962-63 to 1965-66 is the same which received the refund during the accounting year relevant to the assessment year 1971-72. The Tribunal has taken the view that, because the composition of the assessee-firm was different on both these occasions, it cannot be said that the assessee was the same. It was of the opinion that a partnership is nothing but a conglomerate of persons who have come together to trade under a single name, and hence, because of the difference in composition, the assessee during the assessment years 1962-63 to 1965-66 must be said to be different from the assessee during the assessment year 1971-72. We are of the opinion that the view taken by the Tribunal is unsustainable in law.
9. The expression 'assessee' is defined in clause (7) of s. 2, in the following words :
''Assessee' means person by whom any tax or any other sum of money is payable under is Act, and includes -
(a) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person;
(b) every person who is deemed to be an assessee under any provision of this Act;
(c) every person who is deemed to be an assessee in default under any provision of this Act.'
10. The expression 'person' is defined in clause (31) to include, inter alia, a firm. Section 184 to 189 deal with registration of firms. For the present purpose, only ss. 187 and 188 are relevant, which may now be set out :
'187. (1) Where at the time of making an assessment under section 143 or section 144 it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment :
Provided that -
(i) the income of the previous year shall, for the purpose 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; and
(ii) when the tax assessed upon a partner cannot be recovered from him, it shall be recovered from the firm as constituted at the time of making the assessment.
(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; or
(b) where all the partners continue with a change in their respective shares or in the shares of some of them.'
'188. Where a firm carrying on a business or profession is succeeded by another firm, and the case is not one covered by section 187, separate assessments shall be made, on the predecessor firm and the successor firm in accordance with the provisions of section 170.'
11. While s. 187 deals with reconstitution of the firm and treats it as a continuing firm, s. 118 contemplates a situation where one firm is succeeded by another firm, and both the entities are treated as different entities. Section 187 makes it clear that a mere reconstitution of the firm as defined in sub-s. (2) thereof, does not and cannot be treated as a change in the identity of the assessee. The assessee-firm continues to be the assessee in spite of the change in the composition. Sub-section (2) makes it clear that, so long as one or two partners continue as partners even after the change, the mere cessation of one or two partners, or induction of one or more partners, does not make the firm a new firm, or a new assessee. The firm which was the assessee before such change continues to be the assessee even after the change, for the purpose of the Act; the only difference being that the income of the previous year, for the purpose of inclusion in the total income of the partners, shall have to be apportioned between the partners who, in such previous year, were entitled to receive the same. Indeed, the second proviso to s. 187(1) provides that, where the tax assessed upon a partner cannot be recovered from him, it shall be recovered from the firm as constituted at the time of making the assessment, i.e., from the reconstituted firm. Applying the above test, it must be held that what was happening in the case of the assessee-firm from time to time over the last several years, was a mere change in composition. In other words, change in the constitution of the firm, within the meaning of s. 187(2). It was not a case of succession of one firm by another firm, within the meaning of s. 188. Indeed, if it was a case of succession of one firm by another, and in case such succession takes place during the accounting year, two different assessments have to be made on two firms for the respective periods. It was not suggested by the assessee at any time that any such separate assessments were done. The conduct of the partners shows that even the death of a partner was not treated as putting an end to the partnership. The wife of the deceased was taken as a partner, a fresh partnership deed was executed, and the business of the firm continued as usual. It is equally well to notice that it was the assessee-firm alone which was fighting all these years for refund of the sales tax paid during the assessment years 1962-63 to 1965-66 in all the tribunals and courts, and it is the assessee-firm which ultimately received the refund. We are unable to attach any significance to the certain of the assessee that this amount was distributed among the partners constituting the firm during the assessment years 1962-63 to 1965-66. Firstly, this fact seems to have been asserted for the first time at the stage of the Tribunal; and, secondly, even if true, it cannot be said to make any difference in principle. If the assessee which received the refund is the same assessee which paid the tax during the said assessment years, it constitutes its income under s. 41(1), and it is immaterial what it dies with that income later. Whether it appropriates the money to itself, or gives it away to some persons, whether bona fide or under a misapprehension of law, or whether if gifts away that amount to someone else, are not factors relevant to the question of taxability. Indeed, we must say that Mr. Ch. Srirama Rao, learned counsel appearing for the assessee, did not contend before us that what was happening from time to time was the coming into existence of a new firm. He agreed that what was happening was only a reconstitution of the firm from time to time, within the meaning of s. 187(2). His main contention, however, is that this is a case where the income was diverted to the real beneficiaries under an overriding legal obligation and, therefore, it cannot be said that the amount of refund was ever received by the assessee. He says that the amount was only physically received by the assessee for being distributed among the true beneficiaries and that it was accordingly distributed. He wants us to infer an implied agreement among the partners that, if and when any refund of sales tax was obtained, it would be distributed only among those who were partners at the relevant time, from two facts, namely, (i) that the amount of refund was actually distributed among the persons who were partners during the relevant assessment years; and (ii) from s. 17(a) of the Partnership Act, which reads to the following effect :
'17. Subject to contract between the partners -
(a) where a change occurs in the constitution of a firm, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were immediately before the change, as far as may be.'
12. We must say that we are unable to draw the inference of the kind suggested from the above circumstances. Firstly, at no stage had the assessee put forward this theory of overriding legal obligation. All that it stated - that too at the stage of the Tribunal - was that the amount was actually distributed among the then partners. Secondly, we are unable to see as to how such an inference can be drawn from clause (a) of s. 17 of the Partnership Act. All that clause (a) says is, where a change occurs in the constitution of a firm, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were before the change, even after the expiry of the term of the firm. On the contrary, it is evident from the statement of the case and the orders annexed thereto that the assessee continued to fight the litigation for refund of the sales tax amount, and ultimately succeeded and obtained the refund. No material was placed before the authorities to show that the partnership deeds executed from time to time on the death or retirement of a partner, reserved the rights of the retiring partners to a share in the sales tax amount, if and when refunded. On the contrary, the AAC has noted that, according to the latest partnership deed, the retiring partners took their share including the share in the goodwill, and were not concerned with further liabilities of the firm. The AAC has further observed that the sundry debtors, creditors and the assets were taken over by the firm and the business constitution from time to time. In the above circumstances, were unable to give effect to the argument that there was an overriding legal obligation whereunder the amount was diverted to the then partners, even before the accrual of the said income to the assessee.
13. For the above reasons, we answer the question referred to us, in the affirmative, i.e., in favour of the Department and against the assessee. In the circumstances of the case, however, we make no order as to costs.