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Additional Commissioner of Income-tax Vs. Allada Kanthayya and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 166 of 1976
Judge
Reported in[1981]127ITR401(AP)
ActsIncome Tax Act, 1961 - Sections 187, 187(2) and 188
AppellantAdditional Commissioner of Income-tax
RespondentAllada Kanthayya and ors.
Appellant AdvocateP. Rama Rao, Adv.
Respondent AdvocateNone
Excerpt:
.....188 of income tax act, 1961 - two separate returns of income for two periods filed by respondent firm for assessment year 1969-70 - whether income of two periods should be computed separately as separate returns filed for such period by respondent - no dissolution of original partnership - no new partnership firm came into existence - there was only change in constitution of firm - provisions of section 187 (2) would be applied as no dissolution of original firm - held, entire assessment year should be made in one single assessment. - - having held so, the tribunal committed a grievous error in law in thinking that tax has to be computed separately for the broken periods for the assessment year 1969-70. it is well settled that where, as in the present case, there is only a change..........be made separately for the two periods on the ground that there was a dissolution of the original firm on october 10, 1968, that a new firm had succeeded the old firm on october 11, 1968, and, therefore, section 188 of the act would apply to the case. the ito held that on october 11, 1968, no new firm came into existence nor the original firm was dissolved on october 10, 1968, but there was only a change in the constitution of the firms as two more partners were inducted on october 11, 1968, and, consequently, clubbed the income of the firm for the two periods in a single assessment.3. on appeal, the aac dismissed the appeal, holding that the assessee must be treated as a reconstituted firm and, therefore, one assessment for the entire period had been rightly made. aggrieved by the.....
Judgment:

Kondaiah, C.J.

1. This is a reference under Section 256(1) of the I.T. Act, 1961, at the instance of the Addl. Commissioner of Income-tax, Andhra Pradesh, for the opinion of this court on the following question of law :

' Whether, on the facts and in the circumstances of the case, the income of the two periods, from April 1, 1968, to October 10, 1968, and from October 11, 1968, to March 31, 1969, as per the separate returns filed for the said periods, should not be completed separately in the assessment made on the assessee-firm for the assessment year 1969-70 '

2. We may notice the admitted facts as disclosed from the statement of the case submitted by the Income-tax Appellate Tribunal, Hyderabad Bench. For the assessment year 1969-70, the respondent firm, M/s. Allada Kanthayya and others, had filed two separate returns of income for the following two periods, viz., from April 1, 1968, to October 10, 1968, and from October 11, 1968, to March 31, 1969. The assessee claimed that the assessment should be made separately for the two periods on the ground that there was a dissolution of the original firm on October 10, 1968, that a new firm had succeeded the old firm on October 11, 1968, and, therefore, Section 188 of the Act would apply to the case. The ITO held that on October 11, 1968, no new firm came into existence nor the original firm was dissolved on October 10, 1968, but there was only a change in the constitution of the firms as two more partners were inducted on October 11, 1968, and, consequently, clubbed the income of the firm for the two periods in a single assessment.

3. On appeal, the AAC dismissed the appeal, holding that the assessee must be treated as a reconstituted firm and, therefore, one assessment for the entire period had been rightly made. Aggrieved by the decision of the AAC, the assessee preferred an appeal to the Income-tax Appellate Tribunal and reiterated its contentions before the Tribunal.

4. The Tribunal held that the business of the original firm was continued by the new firm having taken over the firm as a going concern and in fact there was no dissolution of the original firm. It was further of the view that on October 11, 1968, there was only a reconstitution of the firm by which two more partners were taken with corresponding change in the shares and ratio of profits and, therefore, the provisions of Section 187(2)(a) of the Act were applicable to the case and the assessment had to be made on the present assessee-firm under Section 187(1) since that was the firm that was constituted at the time when the assessment was made. The plea of succession made by the assessee was rejected. However, the Tribunal did not agree with the revenue that the income of the firm as constituted under the deed of the partnership dated April 1, 1969, comprising of four partners should be clubbed with that of the firm constituted under the deed of partnership dated October 11, 1968, which comprised of six partners and held that the ITO erred in clubbing together the income in respect of the periods from April 1, 1968, to October 10, 1968, and from October 11, 1968, to March 31, 1969, with a direction to compute the tax separately for the aforesaid two periods of assessment. Hence this reference.

5. Sri P. Rama Rao, learned standing counsel for the revenue, contended that the Tribunal, having held that there was no dissolution of the firm on October 10, 1968, and there was no succession of a new firm as contended by the assessee, erred in holding that there should be a separate computation of income for the aforesaid two periods for the assessment year 1969-70.

6. The view taken by the Tribunal is erroneous in law either on the application of the earlier Full Bench decision of this court in Addl. CIT v. Visakha Flour Mills [1977] 108 ITR 466 or on the application of a later Full Bench (five judges) decision of this court in Addl. CIT v. Vinayaka Cinema : [1977]110ITR468(AP) .

7. Where there was no dissolution of the original firm and there was only a change in the constitution of the firm the provisions of Section 187(2) would come to play and in such a case there can be only one assessment for the entire period and the application of Section 188, to enable the department to make two assessments for the broken periods, will not arise. Admittedly, the Tribunal has found as of fact that there was no dissolution of the original partnership on October 10, 1968, nor a new partnership firm had come into existence on October 11, 1968, as there was only addition of partners to the original partnership firm, changing the ratio of shares and profits of the partners with a continuity of the business being conducted as before. The Tribunal has expressed the view that Section 188 which applies to a case of succession of a new firm and dissolution of an original firm cannot be applied to the present case. Having held so, the Tribunal committed a grievous error in law in thinking that tax has to be computed separately for the broken periods for the assessment year 1969-70. It is well settled that where, as in the present case, there is only a change in the constitution of the firm and there was neither dissolution of the original firm nor succession by the new firm, the only course that is open to the income-tax authorities is to make one single assessment for the entire period on the firm which was in existence at the time of the making of the assessment. It is not open to the income-tax authorities in such a case to compute tax separately for the two broken periods. Such a procedure would be illegal and contrary to the provisions of Sections 187 and 188 of the Act. The order of the Tribunal is due to a misconception of the provisions of Section 187 of the Act. We are satisfied that the Tribunal's view in this regard is erroneous and illegal.

8. For all the reasons stated, our answer to the question is in the negative and against the assessee, holding that the assessment of the two periods for the entire assessment year 1969-70 should be made in one single assessment on the second firm, which was in existence at the time of making the assessment. In view of the fact that none appeared for the assessee-respondent there shall be no order as to costs.


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