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Commissioner of Income-tax, Andhra Pradesh-ii, Hyderabad Vs. K.D.P.M. Board - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberR.C. No. 127 of 1979
Judge
Reported in[1986]157ITR247(AP)
ActsIncome Tax Act, 1961 - Sections 187 and 187(2)
AppellantCommissioner of Income-tax, Andhra Pradesh-ii, Hyderabad
RespondentK.D.P.M. Board
Advocates:M. Suryanarayana Murthy, Adv.
Excerpt:
.....returns one relating to partnership of eleven partners and other relating to partnership of ten partners - partnership reduced to ten members due to demise of one partner - he sought single assessment for said two periods of relevant year - partnership automatically comes to an end on death of any partner under section 42 (c) unless there is a contract to contrary - held, single assessment for two periods not in accordance with law. - - learned counsel states that the tribunal failed to consider the impact of the subsequent conduct in arriving at the conclusion that there was a dissolution of the partnership within the terms of section 42(c) of the indian partnership act. in our opinion, the above acts on the part of the first-mentioned partnership firm as well as the..........?'2. the assessee was a partnership consisting of eleven partners. it was constituted under a deed of partnership executed on february 6, 1962. out of the eleven partners, one partner, k. subbarao died on september 3, 1971. for the income-tax assessment year 1972-73, the assessee filed two income-tax returns, one for the period january 1, 1971, to september, 3, 1971, relating to the partnership firm of eleven partners and another for the period september 4, 1971, to december 31, 1971, relating to the partnership firm which came into existence after the death of k. subbarao. it may be mentioned that after the death of subbarao, a partnership deed was executed on september 29, 1971, between twelve partners. in the place of the deceased partner, subbarao, his two sons, kutumba rao and.....
Judgment:

Anjaneyulu, J.

1. The Income-tax Appellate Tribunal referred the following question of law to this court for its opinion under section 256(1) of the Income-tax Act, 1961 :

'Whether, on the facts and in the circumstances of the case and in view of s. 187(2)(a) of the I.T. Act, 1961, a single assessment could not be made on the aggregate of the income for the two periods and the tax charged on such aggregate income ?'

2. The assessee was a partnership consisting of eleven partners. It was constituted under a deed of partnership executed on February 6, 1962. Out of the eleven partners, one partner, K. Subbarao died on September 3, 1971. For the income-tax assessment year 1972-73, the assessee filed two income-tax returns, one for the period January 1, 1971, to September, 3, 1971, relating to the partnership firm of eleven partners and another for the period September 4, 1971, to December 31, 1971, relating to the partnership firm which came into existence after the death of K. Subbarao. It may be mentioned that after the death of Subbarao, a partnership deed was executed on September 29, 1971, between twelve partners. In the place of the deceased partner, Subbarao, his two sons, Kutumba Rao and Purna Ramarao, were admitted as partners, with the result that the total number of partners as per the deed of partnership dated September 29, 1971, came to twelve. Before the Income-tax Officer, the assessee claimed that there was a dissolution of the partnership under section 42(c) of the Partnership Act, 1932, on the death of Subbarao and, therefore, two separate assessments should be made, one on the partnership as was in existence till September 3, 1971, and the other on the partnership which came into existence after the death of Subbarao on September 3, 1971. Accordingly, two separate returns were filed. For the former period, the income declared was Rs. 1,03,972. For the latter period, the income declared was Rs. 52,000. The Income-tax Officer made an assessment by his order dated November 25, 1972, clubbing the incomes declared in the two separate returns filed. A single assessment was made on a total income of Rs. 1,73,660. The claim of the assessee that two separate assessments should be made was not dealt with by the Income-tax Officer. Aggrieved by the single assessment made by the Income-tax Officer, the assessee filed an appeal before the Appellate Assistant Commissioner who confirmed the assessment on the short ground that all the ten surviving partners continued to be partners in the newly constituted firm after the death of Subbarao and the assets and liabilities were taken over by the newly constituted firm and the business was thenceforth carried on as a going concern. The Appellate Assistant Commissioner rejected the assessee's contention that there was a dissolution on September 3, 1971, when the partner, Subbarao, died. He accordingly upheld the assessment made by the Income-tax Officer. The assessee went in second appeal to the Appellate Tribunal. The Tribunal accepted the assessee's contention that on the death of Subbarao, there was a dissolution of the partnership evidenced by the deed executed on February 6, 1962, and, therefore, a separate assessment should be made on the firm as was in existence till September 3, 1971. The Tribunal held that it was not merely a change in the constitution of the firm under section 187(2) of the Income-tax Act entitling the Income-tax Officer to make one single assessment. The Tribunal was of the view that a dissolution had taken place on September 3, 1971. Accordingly, the appeal was allowed and the Income-tax of Officer was directed to make separate assessments on the partnerships above referred to. The Commissioner of Income-tax requested for and obtained a reference and that is how the above question was referred to this court.

3. Learned standing counsel for the Revenue fairly admits that in the partnership executed on February 6, 1962, there was no provision for the continuance of the partnership notwithstanding the death of a partner. He, however, invites attention to the subsequent deed of partnership executed by the newly constituted firm on September 29, 1971. He points out to two aspects to derive support for his plea that it must be assumed that the partners under the deed of partnership dated February 6, 1962, agreed to continue the partnership firm without dissolution on the death of any of the partners. He firstly points out to clause 4 of the deed of partnership dated September 29, 1971, according to which the two sons of the deceased partner were admitted as partners in the place of the deceased partner, Subbarao. This, according to the learned standing counsel, supports the view that there was no intention at any time to dissolve the partnership on the death of any partner and the intention to continue the partnership with the legal heirs of the deceased partner is amply borne out by clause 4 admitting the legal heirs of the deceased partner as partners. The second aspect to which he invites our attention is clause 14 of the partnership deed which is in the following terms :

'14. The period of this partnership is not specified. However, the partners may continue this partnership as long as they desire and if they decide to discontinue this firm, this deed will be in operation till the transactions relating to this firm are completed, thereafter it is settled that we shall all manage the same.'

4. Learned counsel submits that the real effect of clause 14 is that the partners shall continue the partnership without cessation and this intention is not merely the intention of the partnership newly constituted under the deed dated September 29, 1971, but also the intention of the parties who were partners under the deed of partnership dated February 6, 1962. These two aspects, learned counsel urges, reflecting the conduct subsequent to the death of the partner point out to a contract between the partners under the partnership deed dated February 6, 1962, not to dissolve the partnership on the death of any partner putting out of application section 42 of the Indian Partnership Act. According to the learned counsel, even if there was no specific provision in the deed of partnership dated February 6, 1962, it is permissible to draw the necessary conclusion regarding the agreement to the contrary based on the subsequent conduct of the surviving partners and the legal heirs of the deceased partner. Learned counsel invites attention to the decision of the Allahabad High Court in Lala Ram Kumar v. Kishor Lal : AIR1946All259 . Dealing with an identical situation, the Allahabad High Court held that the conduct of the parties subsequent to the death of the deceased partner is also relevant. If the subsequent conduct would evidence an agreement to the effect that the partnership shall not be dissolved on the death of a partner, then the omission to incorporate an express provision in the original deed of partnership would make no difference to the situation. Learned counsel, therefore, urges that the above two aspects adverted to already would support the Revenue's plea that there was an agreement between the partners under the deed of partnership dated February 6, 1962, not to dissolve the partnership on the death of any of the partners. Learned counsel states that the Tribunal failed to consider the impact of the subsequent conduct in arriving at the conclusion that there was a dissolution of the partnership within the terms of section 42(c) of the Indian Partnership Act.

5. In the first place, we are unable to subscribe to the view that the admission of the legal heirs of a deceased partner would by itself establish a conduct to justify the inference that there was, an agreement to the effect that the partnership shall not be dissolved on the death of a partner in the original partnership. It may be one of the relevant factors for consideration. But that by itself would not constitute necessary conduct, nor are we persuaded to accept the submission that clause 14 of the deed of partnership of the newly constituted firm reveals any such conduct. All that the said clause says is that the partnership constituted under the deed dated September 29, 1971 would be continued till the events specified therein take place. The provisions of this clause refer to the partnership constituted under the deed of partnership dated September 29, 1971, and cannot have any reference to the partnership constituted under the deed dated February 6, 1962, which is relevant for the purpose of consideration in this reference. Even assuming that these two aspects referred to by the learned standing counsel show some conduct subsequent to the death of the deceased, it is not possible to look into the above two aspects alone to ascertain the conduct of the parties. It is necessary to look into the entire conduct and arrive at a proper conclusion. The facts on the record would indicate that the partnership firm, which was in existence till September 3, 1971, under the deed of partnership dated February 6, 1962, closed its books of account on September 3, 1971, when partner, Subbarao, died. If there was an agreement that the partnership shall not be dissolved on the death of a partner, it is difficult to understand why the books of account were closed on the death of the partner on September 3, 1971, and the profits up to the date of death ascertained at Rs. 1,03,972. The newly constituted partnership opened separate accounts on September 4, 1971, and closed its accounts on December 31, 1971, and for this period, the profit was Rs. 52,000. The opening of accounts separately for the two periods, the ascertainment of the profits separately for two periods and the division of the profits among the respective partners under the two deeds of partnership referred to above is also conduct relevant for the purpose. In our opinion, the above acts on the part of the first-mentioned partnership firm as well as the second-mentioned partnership firm would point to the conduct that the parties intended to treat that the partnership which came into existence under the deed dated February 6, 1962, was dissolved on September 3, 1971, and the new partnership came into existence on September 4, 1971. This is further reinforced by the fact that two separate income-tax returns were filed and claim was made for two separate assessments. This, in our opinion, is also a relevant conduct to be taken into consideration. Thus, taking the conduct as a whole, we are not persuaded to accept the submission of the Revenue that the conduct subsequent to the death of Subbarao necessarily indicated that there was an agreement not to dissolve the partnership under the deed dated February 6, 1962. It is not possible to treat the firm as continuing by drawing an inference from the two rival differing conduct. We are, therefore, unable to accede to the contention of the Revenue that the conduct subsequent to the death of Subbarao indicated that there was no dissolution of the partnership by virtue of section 42(c) of the Indian Partnership Act on September 3, 1971.

6. Learned standing counsel did not fairly advance the plea that if there was a dissolution on September 3, 1971, in terms of section 42(c) of the Act, the provisions of section 187(2) of the Income-tax Act would come into operation and it should be treated as a change in the constitution of the firm. This was obviously because of the decision of this court in Addl. Commissioner of Income-tax v. Vinayaka Cinema : [1977]110ITR468(AP) taking the view that when a partner died, there was an automatic dissolution of the partnership under section 42(c) of the Act unless there is a contract to the contrary in the deed of partnership. We may also state that this principle finds acceptance by the Legislature in the Taxation Laws (Amendment) Act, 1984, which effected an amendment to section 187(2) of the Income-tax Act, 1961, to the effect that once a partner died and there is no provision in the deed of partnership to the contrary, there is an automatic dissolution of the partnership and the provisions of section 187(2) of the Income-tax Act do not come into operation.

7. For the reasons aforesaid, the Tribunal was correct in holding that a single assessment could not be made on the aggregate of the income for the two periods. We accordingly answer the question referred in the affirmative, that is to say, in favour of the assessee and against the Revenue. No costs.


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