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Commissioner of Income-tax Vs. Surana Trade and Finance Corporation - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberR.C. No. 158 of 1976
Judge
Reported in[1987]165ITR728(AP)
ActsIncome Tax Act, 1961 - Sections 187(2) and 188
AppellantCommissioner of Income-tax
RespondentSurana Trade and Finance Corporation
Appellant AdvocateP. Rama Rao, Adv.
Respondent AdvocateJ.V. Srinivasa Rao, Adv.
Excerpt:
.....and the new firm with ten members had come into existence from july 1, 1969. the income-tax appellate tribunal, which is the final fact finding authority, has found on the entire material on record that there was dissolution of the firm on the retirement of three of the original partners by virtue of the deed of dissolution of partnership and the new firm had come into existence with effect from july 1, 1969, which succeeded the earlier firm which was dissolved by june 30, 1969, although eight of the partners of the two firms are common. ) & sons' case [1975]100itr723(ap) on which strong reliance has been placed by sri p......rise to the question. the respondent-assessee was a firm with eleven partners constituted under a deed of partnership dated january 27, 1967, whereuuder the place of business is stated to be at ghasmandi road, secunderabad, and its accounting year was diwali year. three partners had retired with effect from july 1, 1969, and two new partners were admitted. a deed of dissolution ofpartnership evidencing the retirement of the three partners was executed on july 9, 1969, to be effective from july 1, 1969. on july 12, 1969, a fresh partnership deed was executed. for the assessment year 1970-71, the respondent-assessee filed two returns, one for the period commencing from october 22, 1968, to june 30, 1969, and the other for the period from july 1, 1969, to november 9, 1969, with a claim.....
Judgment:

C. Kondaiah, C.J.

1. This is a reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter called 'the Act '), by the Income-tax Appellate Tribunal, Hyderabad Bench, which has submitted a statement of case for the opinion of this court on the following question of law :

'Whether, on the facts and in the circumstances of the case, a single assessment has to be made in terms of Section 187(2) of the Income-tax Act, 1961, for the entire period October 22, 1968, to November 9, 1969, or whether two separate assessments have to be made, one for the period October 22, 1968, to June 30, 1969, and the other for the period July 1, 1969, to November 9, 1969?'

2. In order to understand the scope of the question, it is necessary to briefly state the material facts that gave rise to the question. The respondent-assessee was a firm with eleven partners constituted under a deed of partnership dated January 27, 1967, whereuuder the place of business is stated to be at Ghasmandi Road, Secunderabad, and its accounting year was Diwali year. Three partners had retired with effect from July 1, 1969, and two new partners were admitted. A deed of dissolution ofpartnership evidencing the retirement of the three partners was executed on July 9, 1969, to be effective from July 1, 1969. On July 12, 1969, a fresh partnership deed was executed. For the assessment year 1970-71, the respondent-assessee filed two returns, one for the period commencing from October 22, 1968, to June 30, 1969, and the other for the period from July 1, 1969, to November 9, 1969, with a claim that there was dissolution of the partnership constituted under the partership deed dated January 27, 1967, with effect from July 1, 1969, and a new firm with ten partners had come into existence from that date. This claim of the assessee was accepted by the Income-tax Officer who made two assessments for the two broken periods. The Additional Commissioner of Income-tax, in exercise of his re-visional jurisdiction under Section 263 of the Act, set aside the orders of the Income-tax Officer on June 29, 1974, and directed him to make a single assessment clubbing the incomes of both the periods in terms of Section 187(2) of the Act. Aggrieved by the order of the Additional Commissioner of Income-tax, the assessee preferred an appeal before the Income-tax Appellate Tribunal contending that there was dissolution of the earlier partnership and that a new partnership with ten members had come into existence on July 1, 1969. The Department contested the claim of the assessee relying upon the decision of this court in CIT v. Veeraraghavulu Chetty (T.) & Sons : [1975]100ITR723(AP) on the ground that a single assessment under Section 187(2) had to be made on the aggregate income of the two periods. The Tribunal, by its order dated February 27, 1975, held that on the retirement of some of the partners, the firm stood dissolved by virtue of the dissolution deed and that the case was one of succession governed by Section 188 even though some of the partners of the two firms are common and consequently reversed the order of the Additional Commissioner and restored the orders of the Income-tax Officer. Hence, this reference.

3. Sri P. Rama Rao, learned standing counsel for the Income-tax Department, contended that this is a case of only a change of constitution of the partnership as contemplated by Section 187(2) of the Act and that the decision in Veeraraghavulu Chetty (T.) & Son's case : [1975]100ITR723(AP) squarely applies to the case on hand. This claim of the Department is resisted by Sri J. V. Srinivasa Rao, learned counsel for the respondent-assessee, contending, inter alia, that in view of the fact that there is a deed of dissolution of the partnership executed on July 9, 1969, and there is also a new partnership deed on July 12, 1969, the view of the Tribunal that there was a dissolution of the partnership on July 1, 1969, and a new firm had come into existence on that date must be upheld and the decision in Veeraraghavulu Chetty (T.) & Sons : [1975]100ITR723(AP) is no longer good law in view of the recent decision of the Full Bench of this Court in Addl.

4. CIT v.Vinayaka Cinema : [1977]110ITR468(AP) overruling the earlier Full Bench decision in Addl. CIT v. Visakha Flour Mills [1977] 108 ITR 466.

5. In reply, Sri P. Rama Rao asserted that the decision of the Full Bench of this court in Visakha Flour Mitts [1977] 108 ITR 466 has been affirmed by a Full Bench of five judges of the Punjab High Court in Nandlal Sohanlal v. CIT , and the decision of the Full Bench of five judges in Vinayaka Cinema's case : [1977]110ITR468(AP) does not represent the true content and concept of a change in the constitution of the firm as envisaged in Section 187(2) and it, therefore, requires reconsideration by constituting a Fuller Bench, of seven judges in view of the importance of the question involved.

6. We have carefully gone through the Full Bench decision of this court in Visakha Flour Mills [1977] 108 ITR 466 and Vinayaka Cinema : [1977]110ITR468(AP) as well as Nandlal Sohanlal v. CIT . On a careful consideration of the admitted facts in the present case, we are of the view that the question before us can be answered without relying upon the decision of the earlier or later Full Bench of this court. We, therefore, prefer not to go into the larger question of reconsidering the correctness or otherwise of the Full Bench decision in Vinayaka Cinema : [1977]110ITR468(AP) . We may consider that larger legal question as and when it arises directly in any case that may come up before us in future.

7. Where there is only a change in the constitution but not any dissolution, the assessment must invariably be made under Section 187(2) of the Act as a single unit for the entire period. It is also well settled that where the provisions of Section 187 are not attracted, the provisions of Section 188 would come into play in addition to the fact that the firm carrying on a business is succeeded by another firm. Succession undoubtedly postulates change in ownership from one entity to another, although the continuity of the business and the nature of the firm are preserved intact. In other words, it contemplates the existence of two separate and distinct entities owned by two different groups of persons. When once it is found that Section 187(2) is applicable, it is not permissible to plead that there should be two separate assessments for the two broken periods of the firm which was in existence at the time of making the assessments. Consequently, one assessment of the firm which was in existence at the time of making the assessments for the entire accounting year is inevitable. The dividing line between change in the constitution of the firm and succession is the factum of dissolution of the earlier firm. What amounts to a dissolution for the purpose of determining this question has been differed in the two Full Bench decisions referred to above. However, where there is in fact and law a dissolution of the earlier firm and formation of a new firm, theprovisions of Section 187(2) cannot be resorted to. In such a case, Section 188 will be applicable.

8. In the present case, the original partnership constituted under the deed of partnership executed on January 27, 1967, was in fact found to be dissolved by the Tribunal as a fact. This finding is supported by the execution of a deed of dissolution of the partnership executed on July 9, 1969, with effect from July 1, 1969, and the books of account of the partnership business were made up till June 30, 1969, and the net profits and losses had been ascertained. It also evidences the retirement of the three partners. From July 1, 1969, a new partnership with ten members, i.e., the remaining eight partners of the old firm after the retirement of the three and two new partners who were admitted on July 1, 1969, was constituted and it came into existence on July 1, 1969, itself. The dissolution of the partnership (annexure C) and the execution of the new partnership deed amongst ten partners on July 12, 1969, clearly indicate and establish that the original firm was dissolved by June 30, 1969, and the new firm with ten members had come into existence from July 1, 1969. The Income-tax Appellate Tribunal, which is the final fact finding authority, has found on the entire material on record that there was dissolution of the firm on the retirement of three of the original partners by virtue of the deed of dissolution of partnership and the new firm had come into existence with effect from July 1, 1969, which succeeded the earlier firm which was dissolved by June 30, 1969, although eight of the partners of the two firms are common. This finding of fact is based on sufficient material and, therefore, we see no reason to differ from the conclusion arrived at by the Tribunal.

9. The decision of this court in Veeraraghavulu Chetty (T.) & Sons' case : [1975]100ITR723(AP) on which strong reliance has been placed by Sri P. Rama Rao in support of his contention, is distinguishable on facts. There was no deed of dissolution of the partnership nor was a fresh deed of partnership executed between the partners of the new firm in Veeraraghavulu Chetty's case : [1975]100ITR723(AP) . The existence of the aforesaid two documents and the other material on record has rightly made the Tribunal hold that there was dissolution of the old firm by June 30, 1969, and the new firm had come into existence on July 1, 1969. Each case has to be decided on the facts and circumstances of that particular case and we, therefore, see no legal flaw in the decision of the Tribunal.

10. For the reasons stated, our answer to the question is in favour of the assessee and against the Revenue holding that two separate assessments have to be made, one for the period commencing from October 22, 1968, to June 30, 1969, and the other from July 1, 1969, to November 9, 1969,but not a single assessment, as the provisions of Section 188, but not Section 187(2), would be applicable to the case on hand. The Department shall pay the costs of the reference to the assessee. Advocate's fee Rs. 300.


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