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Addl. Commissioner of Income-tax Vs. Visakha Flour Mills - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 2 of 1974
Judge
Reported in[1977]108ITR465(AP)
ActsIncome Tax Act, 1961 - Sections 187, 187(2) and 188; Indian Partnership Act, 1932 - Sections 42
AppellantAddl. Commissioner of Income-tax
RespondentVisakha Flour Mills
Appellant AdvocateP. Rama Rao, Adv.
Respondent AdvocateJ.V. Srinivasa Rao and ;M.J. Swamy, Advs.
Excerpt:
direct taxation - separate assessment - sections 187, 187 (2) and 188 of income tax act, 1961 and section 42 of indian partnership act, 1932 - assessee firm reconstituted after death of a partner by induction of son of deceased partner - whether income of two broken periods can be clubbed and tax be computed separately on income for said broken periods - section 42 (c) or any other provision of partnership act have no application in view of specific provisions of section 187 (2) (a) of act - for application of section 188 case must not be covered by section 187 - there is no dissolution and succession by another new firm so as to attract section 188 of act warranting separate assessments for broken periods - held, incomes of two broken periods could be clubbed and taxed as single.....kondaiah, j.1. at the instance of the additional commissioner of income-tax, andhra pradesh, the income-tax appellate tribunal, hyderabad bench, has submitted an agreed statement of the case and referred under section 256(1) of the income-tax act, 1961, the following question of law for the opinion of this court:'whether, on the facts and in the circumstances of the case, the incomes of the two broken periods for each of the two assessment years 1966-67 and 1967-68 could not be clubbed and tax should be computed separately on the income for the aforesaid broken periods for the said two assessment years ?'2. in order to appreciate the scope of the question, it is not only profitable but necessary to briefly state the material facts and circumstances that gave rise to the same and which lie.....
Judgment:

Kondaiah, J.

1. At the instance of the Additional Commissioner of Income-tax, Andhra Pradesh, the Income-tax Appellate Tribunal, Hyderabad Bench, has submitted an agreed statement of the case and referred under Section 256(1) of the Income-tax Act, 1961, the following question of law for the opinion of this court:

'Whether, on the facts and in the circumstances of the case, the incomes of the two broken periods for each of the two assessment years 1966-67 and 1967-68 could not be clubbed and tax should be computed separately on the income for the aforesaid broken periods for the said two assessment years ?'

2. In order to appreciate the scope of the question, it is not only profitable but necessary to briefly state the material facts and circumstances that gave rise to the same and which lie in a short compass and are not in dispute: M/s. Visakha Flour Mills, the assessee-firm, was constituted under an instrument of partnership dated January 10, 1964, with 19 partners. The assessee derives income mostly from milling charges and also from dealings in bran.

3. During the assessment year 1966-67 whose relevant accounting year ended with March 31, 1966, one of the partners, Sri Ramanna, died on February 20, 1966. On the next day, i.e., February 21, 1966, a fresh deed of partnership including the deceased Ramanna's son, Subba Rao, as partner in the place of his father, was drawn up. In the accounting year ending with March 31, 1967, relevant to the assessment year 1967-68 another partner, Sri Manukonda Venkanna, died on October 4, 1966, at-d a fresh deed of partnership was drawn up on October 5, 1966, taking Ramamurthy, the son of the deceased Venkanna, in his place and the business continued till the end of the accounting year. In both the accounting years ending with March 31, 1966, and March 31, 1967, the business of the firm was continued in the same name and at the same place even after the death of Ramanna and Venkanna till the end of the respective accounting years. But, however, two returns of income for the broken periods, (i) commencing from April 1, 1965, and ending with February 20, 1966, and (ii) commencing from February 21, 1966, to March 31, 1966, for the assessment year 1966-67 have been filed by the assessee. Similarly, for the assessment year 1967-68, two returns of income for the broken periods from April 1, 1966, to October 4, 1966, and from October 5, 1966, to March 31, 1967, have been filed. The claim of the assessee that on the date of death of the partner, Ramanna, as well as on the date of death of the partner, Venkanna, the firm stood dissolved as there is no specific provision in the partnership deeds providing for continuation of the firm notwithstanding the death of a partner and, therefore, two separate independent assessments must be made as contemplated by Section 188 of the Income-tax Act, did not find favour with the Income-tax Officer. The assessing authority brought to tax the entire income of the assessee-firm for the two accounting periods in each of the aforesaid assessment years, in a separate assessment applying the procedure and the provisions indicated in Section 187 of the Income-tax Act. The assessee preferred appeals before the Appellate Assistant Commissioner and contended before him that the assessee's case is attracted by the provisions of Section 188 but does not fall under Section 187 of the Act. The Appellate Assistant Commissioner, holding it is the provisions of Section 187(2) but not Section 188 of the Act that are applicable to the case on hand, upheld the decision of the assessing authority that only a single assessment for the two periods should be made but not two separate assessments. In arriving at that conclusion, he observed at page 23 of the printed record thus:

'For the assessment year 1966-67 by the death of Sri P. Ramanna, one of the partners has ceased to be a partner in the firm. The other partners have continued the business uninterrupted. All assets and liabities have been taken over by the new firm. The business has been run uninterruptedly. Even if it amounts to dissolution of the earlier firm according to the provisions of Section 42 of the Indian Partnership Act, there is no doubt that such dissolution and succession has to be treated as a reconstitution of the firm according to the provisions of Section 187(2) of the Income-tax Act. What is true for the assessment year 1966-67 is also true for the assessment year 1967-68.'

4. Aggrieved by the decision of the Appellate Assistant Commissioner, the assessee preferred appeals to the Appellate Tribunal. The Tribunal, on a consideration of the facts, found that 'the Appellate Assistant Commissioner is correct in holding that the provisions of Section 187(2) apply to this case' but declined to uphold the clubbing of the income of the two broken periods for each of the two assessment years. Following its order dated October 15, 1971, in ITA No. 404 (Hyderabad) 68-69, M/s. Sri Venu-gopal Rice, Turmeric and Polish Mills v. Income-tax Officer, Gudivada, in which the same issue was decided, the Tribunal directed that--

'the assessments for the years 1966-67 and 1967-68 should be made on the firm as constituted at the time of the assessment, but tax should be computed separately on the incomes from April 1, 1965, to February 20, 1966, and from February 21, 1966, to March 31, 1966, for the assessment year 1966-67 and likewise tax should be computed separately on the income from April 1, 1966, to October 4, 1966, and from October 5, 1966, to March 31, 1967.'

5. This reference which has been made by the Appellate Tribunal under Section 256(1) of the Income-tax Act at the instance of the Additional Commissioner of Income-tax, came up for hearing first before a Division Bench of this court consisting of Chinnappa Reddy and Jayachandra Reddy JJ., who desired the case to be heard by a Full Bench in view of the importance of the question of law which is likely to arise frequently and directed accordingly. That is how this reference has come up before us.

6. Sri P. Rama Rao, learned standing counsel for the income-tax department, contended that the Appellate Tribunal, having rightly held that the provisions of Section 187(2) are applicable to the case on hand, erred in thinking that tax should be computed separately on the incomes for the two broken periods for each of the assessment years in question and thereby applying the provisions of Section 188 of the Income-tax Act. He asserted that the assessee's case falls squarely under Section 187 as the death of one of the 19 partners during each of the relevant accounting years must be construed on the facts of the case as amounting to a change in the constitution of the firm within the meaning of Section 187(2)(a) and there was no dissolution and succession by a new firm so as to attract the provisions of Section 188 of the Income-tax Act. This claim of the department is resisted by Sri J.V. Srinivasa Rao and Sri M.J. Swamy, learned counsel appearing for the respondent-assessee, contending, inter alia, that it is the provisions of Section 188 but not Section 187 that would apply to the case on hand as, on the death of a partner of a partnership firm, the partnership automatically gets dissolved under Section 42(c) of the Indian Partnership Act, 1932, that a new firm for the remaining broken period in each of the two accounting years has come into existence as there is no specific provision in the partnership deeds to continue the firm notwithstanding the death of any partner and that once there was dissolution of the firm, it is the provisions of Section 188 but not Section 187(2) of the Income-tax Act that will come into play. Alternatively, it is submitted that even if Section 187(2) applies, two separate assessments must be made and tax thereon has to be determined separately without clubbing the incomes for both the broken periods.

7. The answer to the question turns upon the provisions of Sections 187 and 188 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') and their application to the facts of the present case. Before adverting to the provisions of Sections 187 and 188 of the Act, we may conveniently notice the material and relevant provisions of the Indian Partnership Act, 1932, applicable to the assessment of firms. Clause (23) of Section 2 of the Act (Income-tax Act) defines 'firm', 'partner' and 'partnership' as having 'the meanings respectively assigned to them in the Indian Partnership Act, 1932, but the expression 'partner' shall also include any person who, being a minor, has been admitted to the benefits of partnership'. Section 4 of the Partnership Act reads :

'Definition of partnership--'Partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

'Partner', 'firm' and 'firm name'.--Persons who have entered into partnership with one another are called individually 'partners' and collectively 'a firm' and the name under which their business is carried on is called the 'firm name'.'

8. In order to constitute a partnership, there must be an agreement entered into by all the partners to share the profits of a business which must have been carried on by all or any of them. But, however, the mere sharing of profits or gross returns would not by itself make such persons as partners unless there is a specific and distinct agreement to that effect. Invariably, there must exist the voluntary contractual nature of the partnership with a desire to acquire gain and one must act and conduct the business for and on behalf of the others. Chapter V of the Partnership Act consisting of Sections 31 to 38 provides for the incoming and outgoing of the partners and the consequences thereof whereas Sections 39 to 55 comprised in Chapter VI deal with the dissolution of a firm. Section 31 provides for the introduction of a partner. Any person cannot be introduced as a partner without the consent of all the existing partners. Such introduction of a new partner shall be subject to contract between the partners and to the provisions of Section 30. A new partner does not become liable for any act of the firm done before he became a partner. Section 32 permits a partner to retire with the consent of all the other partners or in accordance with an express agreement by the partners, or where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire. The rights and liabilities of a retiring partner have been indicated in Sub-sections (2) and (3) of Section 32. Section 33 provides for the expulsion of a partner from the partnership whereas under Section 34, a partner in a firm would cease to be a partner on his adjudication as an insolvent. Section 34(1) reads as follows :

'Where a partner in a firm is adjudicated an insolvent, he ceases to be a partner on the date on which the order of adjudication is made, whether or not the firm is thereby dissolved.'

9. Section 37 provides for the rights of an outgoing partner in certain cases to share subsequent profits. It is applicable to the case of a partner dying or otherwise ceasing to be a partner and the surviving or continuing partners carrying on the business of the firm with the property of the firm without any final settlement of accounts as between them and the outgoing partner or his estate. The dissolution of partnership between all the partners of a firm is called under Section 39 the dissolution of the firm. Dissolution of a firm may be by several methods, viz., dissolution by agreement (Section 40), compulsory dissolution (Section 41), dissolution on the happening of certain contingencies (Section 42), dissolution by notice of partnership at will (Section 43) and dissolution by court (Section 44). Compulsory dissolution as envisaged by Section 41 may be due to the adjudication of all or some of the partners as insolvents or on the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership. Section 42 reads thus :

' Subject to contract between the partners a firm is dissolved--

(a) if constituted for a fixed term, by the expiry of that term ;

(b) if constituted to carry out one or more adventures or undertakings, by the completion thereof ;

(c) by the death of a partner ; and

(d) by the adjudication of a partner as an insolvent. '

10. Under Section 42(c), a firm would get dissolved by the death of a partner unless there is an agreement between the partners to the contrary. In other words, a firm would automatically be dissolved on the death of a partner if there is no specific agreement in the partnership deed that the partnership would continue notwithstanding the death of any one or more of the partners. A close reading of the provisions of the Partnership Act indicates that a partnership or firm as such is not a separate independent entity but only a combination of persons carrying on business with a motive to share the profits and some persons acting and conducting for and on behalf of the others. The original partners themselves may continue throughout a particular accounting year, or new partners in addition to the existing partners may be introduced under Section 31, or one or more existing partners may retire under Section 32, or any one of them may be expelled under Section 33, or one or more may cease to be the partners on being adjudged insolvents or by death in the course of the accounting year. To put it differently, there is no guarantee that all the partners who started the business of the firm would continue to be partners till the end of the accounting year. The constitution of the firm as well as the shares of the partners thereof may change or alter according to the wish and desire of the partners. The adjudication of a partner as an insolvent or the death of a partner would normally dissolve a partnership. However, if there is an agreement to the contrary that notwithstanding the death of a partner or adjudication of a partner as insolvent, the partnership shall continue, there shall be no dissolution. The remaining partners are at liberty to continue the firm and the business with the existing partners, as there will be no dissolution as per the provisions of the Partnership Act.

11. We shall now advert to the relevant provisions of the Act (Income-tax Act). As pointed out earlier, Section 2 of the Act defines the terms 'firm', 'partner' and 'partnership' as indicated in the Partnership Act. Section 4 of the Act charges the total income of the previous year of every person to income-tax at the rate or rates specified in the Finance Act applicable to the assessment year in question. The term 'person' is defined under Section 2(31) thus: ''Person ' includes--

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses.'

12. The charging section, therefore, applies to the case of a firm. A firm, under the Act is, unlike under the Partnership Act, a separate and distinct entity chargeable to income-tax. It has a separate personality and existence independent of the partners. It is, therefore, a taxable unit.

13. Section 182 provides for the assessment of registered firms whereas Section 183 deals with assessment of unregistered firms. Under Section 182 the assessing authority, after computing the total income of the firm, has to determine the income-tax payable by the firm itself and include the share income of each partner of the firm in his total income and assess him to tax accordingly. In the case of an unregistered firm, the assessing authority may determine the tax payable by the firm itself on the basis of the total income of the firm as a unit, or resort to the provisions of Clause (b) of Section 183, if, in its opinion, the aggregate amount of tax payable by the partners if the firm were treated as a registered firm would be greater than the aggregate amount of the tax which would be payable by the partners individually. The scheme of the Act is that in the case of a registered firm, the firm itself is taxed as an entity and the share income of each partner is included in his total income and assessed to tax. Sections 184 and 185 prescribe the procedure for the registration of a firm. Section 186 empowers the assessing authority to cancel registration if, in its opinion, during the previous year there was no genuine firm in existence as registered.

14. We shall now turn to Sections 187, 188 and 189 which deal with the cases of change in the constitution of a firm, succession of one firm by another and the dissolution of a firm or the continuance of the business of a firm, respectively. Section 187 corresponds to Section 26(1) of the Indian Income-tax Act of 1922, whereas Section 188 is analogous to Section 26(2) of the said old Act. Section 187 would come into play if, at the time of making an assessment under Section 143 or Section 144, it is found that a change had taken place in the constitution of a firm. The change in constitution of a firm might have occurred either in the relevant assessment year or accounting year or subsequently thereafter. Section 187(1) prescribes the procedure for making assessment of a firm in respect of which a change has occurred in its constitution by the time of making an assessment of that firm. The material point of time that really governs a particular case is the time of making an assessment. The accounting year or the assessment year in respect of which the assessment of the firm was sought to be made, is immaterial. This view gains support from the use of the expression 'at the time of making an assessment'. The aforesaid expression means, 'in the course of the process of assessment' but it should not be construed as merely the act of making an assessment order. However, this section has no relevancy or application to a case where the change in the constitution of a firm takes place subsequent to the completion of the assessment of that firm for any previous year. The intendment and object of Section 187(1) is to have the continuity of the procedure to complete the assessment of a firm in respect of its income of the previous year or years. The assessment shall be made on the firm as constituted at the time of making the assessment ignoring for the purpose of assessment the actual changes in the constitution of the firm that took place prior to the making of the assessment. The proviso to Sub-section (1) of Section 187 requires the income of the previous year to be apportioned between the partners who, in such previous year, were, entitled to receive the same. But, however, when the tax assessed upon a partner cannot be recovered from him, the same shall be recovered from the firm as constituted at the time of making the assessment.

15. Sub-section (2) of Section 187, unlike Section 26(1) of the old Act, indicates what amounts to a change in the constitution of the firm for the purposes of that section. Parliament, in its wisdom, had thought fit and proper to specifically state in the very section as to what amounts to a change in the constitution of the firm. Section 187(2) reads thus :

'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.'

16. Where one or more of the partners of the firm cease to be partners andwhere one or more of the persons who were partners of the firm before thechange continue as partner or partners of the firm after the change, thereis a change in the constitution of the firm. Where one or more newpartners are admitted and one or more of the persons who were partners ofthe firm before the change continue after the change, it amounts to a changein the constitution of the firm. Even if either of the two contingencies orboth referred to above occur, there would be a change in the constitution ofthe firm. There must invariably be cessation of an old partner or admission of a new partner coupled with the continuance of one or more partnersof the firm before the change as partners, so as to bring a particular casewithin the provisions of Section 187(2)(a). Any change in the share orshares of one or some of the partners or all the partners of the firm wouldamount to a change in the constitution of the firm under Section 187(2)(b).The aforesaid statutory fictions so as to amount to a change in the constitution of the firm are intended only for the purposes of this section. Thisprovision must be given effect to notwithstanding the provisions of thePartnership Act governing similar situations. A mere change in the sharesof the partners is not considered under the Partnership Act to be a, changein the constitution of the firm.

17. The crucial point that falls for our decision is whether the deceased, Ramanna and Venkanna, ceased to be partners on account of their death in the relevant accounting years within the meaning of Section 187(2)(a) of the Act, The word 'cease' or the expression 'cease to be partners' used in Section 187(2)(a) is not denned in the Act. This expression is used in a statute while conferring the power on the assessing authority and prescribing the procedure for the completion of the assessment of a firm. This procedural section is certainly applicable to both registered and unregistered firms. A partner of a firm may cease to be a partner, (i) by agreement of parties, (ii) by voluntary retirement, (iii) by expulsion, (iv) on his being adjudged insolvent, and (v) on his death. The expression 'one or more of the partners cease to be partners' in Section 187(2) must be construed to be of wide import so as to take in all cases of cessation of partner. It is not possible to limit the cessation of partner to only agreement, voluntary retirement, expulsion and adjudication as an insolvent. A change in the constitution of a firm within the meaning of Section 187 would occur where,--

(i) one of the partners voluntarily retires or is expelled leaving the remaining partners to continue the business, or

(ii) a new partner is introduced with the consent of the existing partners, or

(iii) all the partners continue as before but with readjustment or re-allocation of shares of one or more or all of them, or

(iv) one of the partners is adjudicated as an insolvent and others continue the business, or

(v) one of the partners dies.

18. Under Section 42(c) of the Partnership Act, the firm gets dissolved if any one of the partners dies unless there is a specific agreement in the deed of partnership to the effect that notwithstanding the death of any one of the partners, the firm continues to do its business with the remaining partners. In the present case, there is no specific term of agreement in the partnership deeds under which the applicant-firm had been constituted. On the application of the provisions of Section 42(c) of the Partnership Act, we have no hesitation to hold that the firm got dissolved on the death of Ramanna as well as Venkanna and the partnerships that came into existence and continued the business till the end of the respective accounting years are new firms unconnected with the original firms and the case would squarely fall under Section 188 of the Act which applies to a case of dissolution of an existing firm and succession by a new firm. The provisions of Section 42(c) or any other provisions of the Partnership Act must be held to have no application in view of the specific provisions of Section 187(2)(a) which govern the case on hand. If there is conflict between the provisions of the Act and those under the Partnership Act, the provisions of the Act would prevail over those of the Partnership Act. In view of the admitted fact that all the other 18 partners along with the son of the deceased partner continued the business of the partnership, the case would squarely fall under Section 187(2)(a) as it must be construed or deemed to be a change in the constitution of the firm. When there is only a change in the constitution but not dissolution of the existing firm and succession by another new firm, the assessment of the income for the previous year of the firm must be made on the firm as it stood at the time of the making of the assessment as a single unit for the entire period of the accounting year. There is no question of two assessments for the two broken periods being made on the firm which existed at the time of the making of the assessment.

19. There may be cases of overlapping in which event both Section 187 and Section 188 are attracted. Where a case falls both under Sections 187 and 188, the assessment shall be made as per the provisions of Section 187 but not under Section 188. This view gains support from the expression 'and the case is not one covered by Section 187' in Section 188. In order to attract the provisions of Section 188, there must not only be a firm carrying on business or profession succeeded by another firm, but the case must be one not covered by the provisions of Section 187. Unless and until the aforesaid two conditions are satisfied, Section 188 cannot be applied. It cannot be said that the expression 'and the case is not one covered by Section 187' has been used by Parliament in Section 188 without any object or purpose. The court or the income-tax authorities must first apply the provisions of Section 187 to a given case and if the conditions specified therein are satisfied, the procedure contemplated therein for the completion of the assessment of the firm for any previous year must invariably be followed notwithstanding the fact that that case may also fall under Section 188, A close and combined reading of Sections 187 and 188doesnot warrant or justify the assumption that Section 187 is not applicable to a case of dissolution of a firm. Where, therefore, a firm is dissolved on account of the death of a partner by virtue of the provisions of Section 42(c) of the Partnership Act and the business is continued by the remaining partners or by the remaining partners and another in the place of the deceased partner, there being only a change in the constitution of the firm within the meaning of Section 187(2)(a), the assessment of the firm for the previous year or years must invariably be made under Section 187 and if there be succession to the business by another separate entity owned by altogether different partners, assessment has to be made under Section 188 as it would squarely fall under Section 188. Succession involves change in ownership from one entity to another, although the continuity of the business and its nature are preserved intact. It contemplates or postulates the existence of two separate and distinct entities owned by two different groups of persons and none of the old partners should continue to be partners in the new or re-constituted firm. However, if there are one or more of the old partners continuing as partners in the second firm, it must be construed to be only a change in the constitution of the firm within the meaning of Section 187 but not a case of succession as contemplated by Section 188.

20. This view of ours gains support from decided cases of the Supreme Court in Shivram Poddar v. Income-tax Officer : [1964]51ITR823(SC) , Commissioner of Income-tax v. Kirkend Coal Co. : [1969]74ITR67(SC) and Commissioner of Income-tax v. K. H. Chambers : [1965]55ITR674(SC) and of the High Courts of Punjab in Dharam Pal Sat Dev v. Commissioner of Income-tax , of Calcutta in Sandersons & Morgans v. Income-tax Officer : [1973]87ITR270(Cal) , of Mysore in K. Suryanarayana Shetty & Sons v. Commissioner of Income-tax : [1973]92ITR141(KAR) and of Kerala in Excel Productions v. Commissioner of Income-tax : [1971]80ITR356(Ker) , respectively, which we shall presently refer to.

21. While construing the provisions of Section 26(1) and Section 26(2) of the old Income-tax Act, which correspond to Sections 187 and 188 of the present Act, the learned judge. Shah J. (as he then was), speaking for the Supreme Court in Shivram Poddar v. Income-tax Officer : [1964]51ITR823(SC) , ruled thus I

'Under the ordinary law governing partnerships, modification in the constitution of the firm in the absence of a special agreement to the contrary amounts to dissolution of the firm and reconstitution thereof, a firm at common law being a group of-individuals who have agreed to share the profits of a business carried on by all or any of them acting for all, and supersession of the agreement brings about an end of the relation. But the Income-tax Act recognises a firm for purposes of assessment as a unit independent of the partners constituting it; it invests the firm with a personality which survives reconstitution. A firm discontinuing its business may be assessed in the manner provided by Section 25(1) in the year of account in which it discontinues its business; it may also be assessed in the year of assessment. In either case it is the assessment of the income of the firm. Where the firm is dissolved, but the business is not discontinued, there being change in the constitution of the firm, assessment has to be made under Section 26(1), and if there be succession to the business, assessment has to be made under Section 26(2). The provisions relating to assessment on reconstituted or newly constituted firms, and on succession to the business are obligatory. Therefore, even when there is change in the ownership of the business carried on by a firm on reconstitution or because of a new constitution, assessment must still be made upon the firm.

When there is succession, the successor and the person succeeded have to be assessed each in respect of his actual share.'

22. Reiterating the aforesaid view, the Supreme Court in Commissioner of Income-tax v. Kirkend Coal Co. : [1969]74ITR67(SC) observed thus :

' Section 44, therefore, only applied to those cases in which there had been discontinuance of the business and not to cases in the business continued after reconstitution of the firm, or there was succession to the business. Cases of reconstitution of the firm or succession to the business of the firm are covered by Section 26(1) and (2)......'

23. If there is reconstitution of the firm, by virtue of Section 26, the Income-tax Officer will, in imposing the penalty, proceed against the firm. If there is discontinuance of the business, penalty will be imposed against the partners of the firm.

24. The difference between succession and reconstitution of a firm must always be kept in view in solving the present problem. What amounts to succession is not defined but fell for decision in decided cases. In Commissioner of Income-tax v. K. H. Chambers : [1965]55ITR674(SC) , the learned judge, Subba Rao J. (as he then was), while construing the applicability of the provisions of Section 25(4) of the Income-tax Act of 1922 to the case of the respondent therein, ruled thus :

'Succession involves change of ownership, that is, the transferor goes out and the transferee comes in ; it connotes that the whole business is transferred ; it also implies that substantially the identity and the continuity of the business are preserved. If there is a transfer of a business, any arrangement between the transferor and the transferee in respect of some of the assets and liabilities not with a view to enable the transferor to run a part of the business transferred but to enable the transferee to run the business unhampered by the load of debts or for any other appropriate collateral purpose cannot detract from the totality of succession,'

25. On the facts of that case, it was held that there was a clear case of succession as the export business of the father was carried on by the son and the whole of the business of the father was transferred and continued and the identity was preserved. The present case can be said to be a case of dissolution and succession only if the partnership that continued the business with all other existing partners and another was a new partnership. There is no reason or ground for such assumption.

26. The observation of the Mysore High Court in Commissioner of Income-tax v. Bharat, Engineering & Construction Co. : [1968]67ITR273(KAR) that for the purposes of assessment, every change in the constitution of a firm brings into existence a new firm, does not represent the correct position of law. The aforesaid view of ours gains support from the later decision of the Mysore High Court in K. Suryanarayana Shelly & Sons v. Commissioner of Income-tax : [1973]92ITR141(KAR) wherein the contention of the assessee's counsel that every change in the constitution of a firm brings into existence a new firm and there shall be two separate assessments for the two different periods though the assessment has to be made by virtue of Section 187 of the Act on the firm as constituted at the time of the making of the assessment, has been repelled. After quoting the observation of Hegde J. in Bharat Engineering & Construction Co.'s case : [1968]67ITR273(KAR) referred to above, it was observed thus (at page 143):

'That case did not lay down that whenever there is a change in the constitution of a firm, two separate assessment orders shall be made. Therefore, the decision relied on is not an authority for the proposition now contended for by the learned counsel for the assessee.'

27. Again, at page 144, it was observed :

'By virtue of Section 187(1), the assessment shall be made on the firm as constituted at the time of making the assessment notwithstanding that a change has occurred in the constitution of the firm. Section 188 provides for separate assessments on the predecessor firm and the successor firm where a firm carrying on business is succeeded by another firm and the case is not one governed by Section 187. The language of Section 188 is clear and leaves no room for doubt that separate assessments are required to be made on the predecessor firm and the successor firm when a particular case is not one covered by Section 187.'

28. To the same effect is the decision of the Kerala High Court in Excel Productions v. Commissioner of Income-tax : [1971]80ITR356(Ker) . While considering the applicability of the provisions of Sections 187 and 188 to the facts of that case where there were originally 5 partners and subsequently 4 more partners were taken for a portion of the accounting year, Raghavan J. (as he then was), speaking for the court, observed as follows:

'From the language of Section 188, one thing appears, i.e., that there might be a case of one firm succeeding to another which might still fall under Section 187. Succession of one firm by another is not defined in Section 188; the section merely says that, when one firm is succeeded by another, the assessment should be in a particular manner--the predecessor firm and the successor firm should be separately assessed. But the section also says that even in a case where there is a succession of one firm by another, the separate assessment need be done only if the case does not fall under Section 187. Therefore, the question is not whether there is a change in the constitution of a firm or whether there is a succession of one firm by another, the question is whether the particular case falls under Section 187 or not. If it does, even if there is a succession of one firm by another, separate assessment as contemplated by Section 188 cannot be had. In other words, even if every change in the constitution of a firm brings into existence a new firm, still, if the case falls under Section 187, separate assessment under Section 188 is ruled out. Only a case which does not fall under Section 187 may fall under Section 188 to claim separate assessment.'

29. We may now notice cases where one of the partners died in the course of the accounting year just as in the present case. In R.B. Jessa Ram Fateh Chand v. Commissioner of Income-tax : [1971]81ITR409(All) one of the partners of the assessee-firm died on or about August 1, 1958. The assessment of the firm for the assessment year 1959-60, corresponding to the accounting period commencing from October 24, 1957, to November 11, 1958, had to be made by the assessing authority. The assessee filed two separate returns--one for the period from October 24, 1957, to August 1, 1958, and the other for the period from August 2, 1958, to November 11, 1958. The Income-tax Officer made two separate assessments for the two periods. The appeals of the assessee before the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal were not successful. The High Court agreed with the assessee that the case was governed by Section 26(1) of the old Act as only a change in the constitution of the firm occurred within the meaning of that provision and consequently a single assessment for the entire accounting period ought to have been made on the firm as constituted at the time of making the assessment, rejecting the plea of the department that that was a case of succession governed by Section 26(2) and two separate assessments for the two periods were properly made by the Income-tax Officer.

30. In Dharam Pal Sat Dev v. Commissioner of Income-tax exactly the present question arose under similar circumstances. Therein, three partners, viz., Dharm Pal, Sat Dev and Ram Rattan, were the partners of a partnership firm carrying on wholesale cloth business. Ram Rattan died on June 6, 1966. On 9th June, 1966, a new partnership between Sat Dev and Dharam Pal and Sham Lal, son of the deceased partner, Ram Rattan, was formed. The business was continued till the end of the accounting year, i.e., March 31, 1967. The assessee filed two returns for the broken periods commencing from December 18, 1965, to June 8, 1966, and from June 9, 1966, to March 31, 1967, and requested the assessing authority to make separate assessments for the two broken periods. The Income-tax Officer, by his order dated March 13, 1968, clubbed the income of the two firms and passed a single assessment order holding that it was a case of change in the constitution of the firm but not one of dissolution and succession by another firm. The assessee's appeals to the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal were not successful. At the instance of the assessee, the following question was referred to the High Court of Punjab and Haryana for its opinion :

'Whether, on the facts and in the circumstances of the case, the assessment for both the periods was justified in view of the provisions of Section 187(2) of the Income-tax Act, 1961 ?'

31. The High Court opined that there was only a change in the constitution of the firm within the meaning of Section 187(2) and it does not fall under Section 188. The learned judge, Bhopinder Singh Dhillon J., speaking for the court, observed at page 306 thus:

'Section 187 of the Act defines as to what is to be considered as a change in the constitution of the firm so as to make applicable the provisions of Sub-section (1). It is provided that 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 where all the partners continue with a change in their respective shares or in the shares of some of them, it shall be considered to be a change in the constitution of the firm for the purposes of Sub-section (1)...,...........In the present case, only one partner, namely, Ram Rattan, ceased to be a member of the firm on account of his death and his son, Sham Lal, was entered as a new partner in his place. The other two partners, namely, Sat Dev and Dharam Pal, remained the same. Therefore, the two partners remaining the same and there being only a change in one partner, as one partner ceasing to be a partner on account of his death and another partner entering into partnership, this answers the description of Sub-section (2) of Section 187 of the Act and it has been rightly held by the authorities below that this constituted a change in the constitution of the firm.

The contention that the previous firm as a legal entity came to an end on the death of Ram Rattan and a new firm came into existence by the joining of Shyam Lal loses sight of the fact that, for the purposes of the Income-tax Act, this will be considered to be a change in the constitution of the firm as when dealing with the matters under the Income-tax Act, as to whether a particular case is a change in the constitution of the firm or not, the ingredients of Sub-section (2) of Section 187 of the Act have to apply. A particular case can only be covered by Section 188 of the Act when it is a succession of one firm by another, meaning thereby that there is a complete change and no one of the partners in the previous firm continue to be a partner in the latter firm, which is not the present case.'

32. We are in entire agreement with the view taken by the Punjab and Haryana High Court, which is consistent with the intendent and object of the provisions of Sections 187 and 188 and the language employed therein. This view gains support from the decisions of the Supreme Court in Shiv-ram Poddar v. Income-tax Officer : [1964]51ITR823(SC) and Commissioner of Income-tax v. Kirkend Coal Co. : [1969]74ITR67(SC) referred to supra.

33. We may add that the Kerala High Court in Commissioner of Income-tax v. Kelukutty : [1972]85ITR102(Ker) expressed the view that a partner who died during the accounting year had ceased to be a partner on account of his death. This is evidenced by the following sentence in its judgment :

'In the partnership dated July 15, 1959, except the fact that Kelukutty ceased to be a partner there was no change in the membership or management of the firm.'

34. In that case, Kelukutty, one of the partners, died on July 8, 1959. The firm constituted under a subsequent partnership deed carried on the same business as the old firm and the assets of the old firm became the assets of the reconstituted firm. The court observed :

'A mere change in the constitution of the partnership does not necessarily bring into existence any new assessable unit or distinct assessable entity. In other words, a mere change in the personnel of the partners and in their respective shares, without a dissolution of the firm or division of its assets and liabilities, would not be sufficient to bring into being a totally different assessable unit. Since there was no dissolution of the partnership on the death of Kelukutty, but only a reconstitution of the firm, the assessment on the reconstituted firm must be for the entire period from January 1, 1959, to December 31, 1959.'

35. No doubt, there is a specific provision in the deed of partnership that notwithstanding the death of any one of the partners, the firm shall not stand dissolved. But, however, the provisions of Section 187(2) would be applicable even if there was no such provision in the partnership deed as the court, in such circumstances, has to look for guidance to the provisions of Section 187(2) of the Act but not Section 42(c) of the Partnership Act. We may in this context usefully notice the decision of Sabyasachi Mukharji J, in Sandersons & Morgans v. Income-tax Officer : [1973]87ITR270(Cal) . That was a case of a registered firm evidenced by a deed of partnership which provided that the death or retirement of any partner shall not dissolve the partnership. The registration was refused by the assessing authority on the ground that there was a change in the constitution of the firm due to the death of the partner and the assessee did not submit the original instrument of partnership. One of the questions that arose for decision therein was whether there was a change in the constitution of the firm consequent on the death of a partner. The learned judge, while construing the scope of the expression 'change in the constitution of the firm', observed thus:

''Change in the constitution of the firm' normally and ordinarily would mean every alteration in the set-up of the firm, viz., death, retirement, incapacity of partners, alteration of the shares of the partners in the firm, etc. Whether any particular alteration would amount to a change in the constitution of the firm would depend upon the context of the use of that expression.........

Under Section 42 of the Partnership Act subject to the contract between the parties a firm is dissolved on, inter alia, the death of a partner. But, change in the constitution of a firm can occur even without dissolution--dissolution is not the only change in the constitution of a firm........On the other hand, Section 187, in my opinion, is an indication of the fact that the changes by death or retirement of the partners would be a relevant factor so far as the purpose of the Income-tax Act is concerned. In this case, counsel for the respondents contended that Sub-section (2) of Section 187 was an indication of the fact that in case of death, there would be a change in the constitution of the firm. To this, counsel for the petitioner contended that that was an indication only for the limited purpose of that section. It is true that the definition provided in Sub-section (2) of Section 187 is for a limited purpose, but it is also true that the expression 'cease to be partners' cannot indicate a further change by the death, which is covered by the ordinary connotation of that expression. But, having regard to the purpose of the Act and having found nothing to indicate the contrary to the ordinary meaning, in this case, I must construe the expression 'constitution of the firm' by its ordinary connotation and construe by that connotation that death would certainly indicate a ' change in the constitution of the firm'. '

36. We shall now advert to the decisions taking the contrary view. In Dahi Laxmi Dal Factory v. Income-tax Officer : [1976]103ITR517(All) [FB], the partnership was constituted under a partnership deed dated June 21, 1966, with two partners, Jethalal and Deep Narain, besides three minors who were admitted to the benefits of partnership. Jethalal died on June 21, 1969, and another partnership deed was drawn up on June 28, 1969, with two partners Yashwant Lal and Deep Narain besides the three minors and the business of the firm was continued. For the assessment year 1970-71, the petitioner claimed that on the death of Jethalal, the old firm stood dissolved on June 21, 1969, and the next day the new firm took over the business and, therefore, two assessments must be made--one against the old firm and the other against the new firm--for the respective periods. As the Income-tax Officer refused to accept the claim of the assessee, the assessee sought for the same relief in an application under Article 226 of the Constitution of India before the High Court of Allahabad. It was held per majority consisting of R.L. Gulati and C.S.P. Singh JJ. that Section 187 applies only where a firm is reconstituted in accordance with Sections 32 and 33 of the Partnership Act and that section has no application if a partner dies in the course of the accounting year. It was opined that the firm gets dissolved the moment one of the partners dies if there is no specific stipulation in the partnership deed that the partnership would continue despite the death of a partner. The firm also gets dissolved by agreement of the partners. In that view, it was held that it was a case of succession which falls squarely under Section 188 of the Act and, therefore, there must be two separate assessments for the two broken periods and there could be no single assessment for the whole year. The minority view has been expressed by the other learned judge, H.N. Seth J., who held that there was only a change in the constitution of the firm as the business was continued by one or more of the old partners even if there was dissolution of the firm and the plea that Section 187 applies only to a case where the firm is not dissolved and that a change in the constitution of a firm occurs only as a result of partners being added or ceasing to be partners in the firm as provided in Sections 31 and 32 of the Partnership Act was negatived. It was further held that the income of the firm before its constitution has to be assessed in the hands of the firm as reconstituted in the manner prescribed in Section 187, but the income of the old firm cannot be added to the income of the new firm and two different assessment orders must be passed though against the newly constituted firm in respect of the income derived by the old firm and that derived by it. He opined that Section 187 merely makes the new firm liable to be assessed in respect of the income derived by the old firm and in a case of reconstitution, the firm before its reconstitution does not for purposes of assessment exist as a separate assessable entity and he consequently held that the clubbing of the income of the erstwhile and the reconstituted firms was vitiated and was liable to be set aside. The contrary view taken by the majority of the Full Bench in construing the provisions of Sections 187 and 188 of the Act, in our considered opinion; is not warranted. The opinion expressed by the Full Bench of the Allahabad High Court is directly in conflict with the very language and the words employed by the sovereign legislature in Sections 187 and 188. What amounts to a change in the constitution of the firm has been defined in Sub-section (2) of Section 187. It is also pertinent to notice the use of the words 'for the purposes of this section' in sub-section (2) of Section 187. This construction and definition alone would apply and the contrary provisions of the Partnership Act would not prevail. There is no warrant in the statute for the view that the definition of 'change in the constitution' applies only where a partner voluntarily decides to go out of the partnership but not to a case of death of one of the partners. The word used is 'ceased' which, in our view, is of wide import so as to take in all types of cessation. Where there are no specific provisions in the Act to cover a particular aspect, the provisions of the Partnership Act may be applicable but where there is a conflict between the provisions of the Act and those of the Partnership Act with regard to a particular aspect, we are of the firm view that the provisions of the Act would govern the situation as they prevail over the similar provisions under the Partnership Act or any other Act. We are not also concerned with the general law and the impact of the provisions of other statutes white construing the provisions of Section 187 as the very section defines what amounts to a change in the constitution of the firm. The sovereign Parliament have designedly used the expression 'ceased'. With great respect to the learned judges, we are unable to agree with their view that the provisions of Sub-section (2) of Section 187 do not change the concept of reconstitution of a firm as understood in the Indian Partnership Act nor do they obliterate the distinction between reconstitution and dissolution and that once a firm is dissolved either by agreement or by operation of law, the question of reconstitution does not arise even when the new firm has common partners and takes over the same business. We are not persuaded to agree with the opinion expressed by the Allahabad Full Bench.

37. The decision of the Allahabad High Court in Additional Commissioner of Income-tax v. Dilkush Rai Madho Prasad : [1977]108ITR299(All) supports the stand taken by the assessee herein. Therein it was held that there was dissolution of the old firm on the death of one of the partners although the remaining six partners continued the business with two new partners for the remaining accounting year. The court followed the earlier Full Bench decision in Dahi Laxmi Dal Factory's case : [1976]103ITR517(All) [FB] which is an authority for the proposition that where a firm is dissolved either by agreement of the partners or by operation of law and another firm took over the business, that would be a case of succession governed by Section 188 of the Act although some of the partners of the two firms are common. The basis for this decision being the Full Bench decision referred to above, we need not separately deal with it as our reasons for not accepting the Full Bench decision would equally apply to this decision. The next decision on which strong reliance has been placed by the assessee's counsel is that of the Gujarat High Court in Vinodkumar Ratilal v. Commissioner of Income-tax : [1975]100ITR564(Guj) . Therein the assessee, one Ratilal Ranchhoddas, was a partner in two firms in which his wife was a partner and his two minor sons were admitted to the benefits of partnership. The assessee died on July 1, 1963. There was no clause in the partnership deed to continue the firms in spite of the death of one of the partners. For the assessment year 1964-65, the question that arose for decision was whether the incomes of the wife and the two minor sons of the assessee in the firms up to July 1, 1963, were or were not liable to be included in his total income. It was held that the two firms were dissolved by operation of law on the death of Ratilal Ranchhoddas on July 1, 1963, and Lilavati ceased to be his wife from that date as the marital relationship ceased to subsist. The share of profits from the firms up to July 1, 1963, allocated to Lilavati, therefore, could not be included in the total income of Ratilal Ranchhoddas for the assessment year 1964-65. But, however, the share of profits that arose to the minors for that period was held to be liable to be included in their father's total income as the relationship between them and their father was not snapped by Ranchhoddas's death. This decision is distinguishable on facts. That decision is not an authority for the proposition pertaining to the scope and interpretation of the provisions of Sections 187 and 188. The application of the provisions of Section 187 of the Act did not arise there. Hence, that decision which arose under Section 64 of the Act would not render any assistance to the assessee herein.

38. The decision of this court in Koteswara Rao v. Commissioner of Income-tax : [1962]46ITR882(AP) relates to succession under Section 25(4) of the Indian Income-tax Act, 1922, Therein it was held that the death of one of the partners resulted in the dissolution of the partnership unless there is a contract to the contrary and such contract need not be expressed but may be inferred from the conduct of the parties although the contract must invariably be between the original partners at the time of formation of the contract. On the facts of that case, it was held that there was no such express or implied contract and consequently there was dissolution of the partnership and that succession to the business took place on May 13, 1946, when Kotaiah, one of the partners, died and the assessee was entitled to the benefits of Section 25 for the period commencing from April 1, 1946, to May 13, 1946. This decision also would not help the assessee.

39. The decision of the Patna High Court in Jittanram Nirmalram v. Commissioner of Income-tax : [1953]23ITR288(Patna) is also a case of succession under Section 25 read with Section 26(2) of the Income-tax Act, 1922. Therein, one of the four partners of the firm died and the deed of partnership authorised each of the partners to exercise the right of dissolving the partnership at will. One of the partners had given notice to the others expressing his intention to sever his connection with the firm and commenced a new business of his own. The remaining three partners continued to carry on the same old business under the name of the old firm. It was held that the old firm stood dissolved on account of the notice issued by the partner and the new firm consisting of the remaining three partners had to be treated as a different person and entity and, therefore, there was a succession to the business within the meaning of Section 25(4). This decision also is distinguishable on facts.

40. The decision of this court Maddi Sudarsanam v. Borogu Viswanadham Brothers : AIR1955AP12 is an authority for the proposition that under Section 42(c) of the Partnership Act, a firm would be dissolved by the death of a partner unless there is a contract to the contrary. That decision arose under the Partnership Act and the point that arises herein did not fall for consideration and, therefore, it is distinguishable.

41. The further submission of the assessee's counsel that even if Section 187(2) of the Act applies to the facts of the case, there must be two separate assessments for the two broken periods on the firm which is in existence at the time of the making of the assessment, cannot be acceded to. The view canvassed by the assessee is, no doubt, supported by the decision of a Division Bench of the Allahabad High Court in Commissioner of Income-tax v. Shiv Shankar Lal Ram Nath : [1977]106ITR342(All) . Therein it was held that the income of the old firm cannot be added to the income of the new firm and that Section 187 of the Act cannot be said to contemplate only one assessment being made on the new firm after clubbing the income derived by it and the old firm during the entire accounting year and the new firm cannot be compelled to elect the previous year which had been elected by the old firm and the mere absence in Section 187 as in Section 188 of a specific provision for assessing two different persons would not alter the legal position. With great respect to the learned judges, we are unable to agree with this view. When once the provisions of Section 187(2) are found to be applicable, the inevitable result is that there should be only one assessment on the firm which is in existence at the time of the making of the assessment for the entire accounting year. Such single assessment on the firm in existence at the time of the assessment would be possible only if the incomes for the two broken periods of the old and reconstituted firms are clubbed together as if they belong to one entity for the purpose of assessment. If Parliament intended to have two separate assessments for the two broken periods without clubbing the incomes of the old and the reconstituted firms, the language of Section 187 would have been different. The specific omission in Section 187 of a provision similar to the one found in Section 188 for making separate and independent assessments for the two broken periods would indicate the intendment of the sovereign Parliament to make a single assessment but not two on the firm which is in existence at the time of the making of the assessment. The aforesaid view expressed by the Allahabad High Court appears to have derived strength from the observation of the Mysore High Court in Commissioner of Income-tax v. Bharat Engineering & Construction Co. : [1968]67ITR273(KAR) to the effect that, for the purpose of assessment, every change in the constitution of a firm brings into existence a new firm. The aforesaid observation of the Mysore High Court, as pointed out earlier, cannot be construed in that way: See K. Suryanarayana Shetty & Sons v. Commissioner of Income-tax : [1973]92ITR141(KAR) .

42. We have no hesitation to hold that the view taken by the AllahabadHigh Court in Dahi Laxmi Dal Factory v. Income-tax Officer : [1976]103ITR517(All) [FB] and Commissioner of Income-tax v. Shiv Shanker. LalRam Nath : [1977]106ITR342(All) does not represent the correct legalposition and we are in entire agreement with the view expressed by the.Punjab and Haryana High Court in Dharam Pal Sat Dev v. Commissioner ofIncome-tax and that of the Calcutta High Court in Sandersons & Morgans v. Income-tax Officer : [1973]87ITR270(Cal) , whichis consistent with the very language employed by Parliament in Sections 187,and 188 of the Act. We affirm the view taken by this court in Commissioner of Income-tax v. T. Veeraraghavalu Chetty & Sons Co. : [1975]100ITR723(AP) that the induction of a partner in the midst of an accounting year,would amount only to a change in the constitution of the firm and only asingle assessment for the whole year's income but not separate assessments,has to be made applying the provisions of Section 187 of the Act and Section 188 has no application.

43. For all the reasons stated, we hold that the incomes of the two brokenperiods for each of the two assessment years in question could be clubbedand taxed as a single assessment on the reconstituted firm as the death ofthe partners in the middle of the accounting year would only amount to achange in the constitution of the firm within the meaning of Section 187 ofthe Act, and answer the question against the assessee and in favour of thedepartment. There shall be no order as to costs.


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