1. This is a reference under Section 256(1) of the Income-tax Act, 1961.
2. There was a firm of the name and style of Kunj Behari Shyamlal which carried on the business in yarn at Sitapur. During the previous year relevant to the assessment year 1965-66, one of the partners died on 22nd March, 1964. Another partnership deed was drawn up on 23rd March, 1964, by the remaining partners and they carried on the business of the erstwhile firm. At the time of assessment it was claimed that two assessments should be made, one against the erstwhile firm for the period ending 22nd March, 1964, and the other against the assessee-firm for the period 23rd March, 1964, to the end of the relevant previous year, on the ground that on the death of one of the partners the firm had dissolved and the assessee-firm, which had taken over the business of the erstwhile firm was a successor and, as such, Section 188 of the Income-tax Act was applicable. The Income-tax Officer as also the Appellate Assistant Commissioner of Income-tax did not accept this contention holding that, since there were common partners in the two firms, Section 187 was applicable so that it was a case of reconstitution and the reconstituted firm was liable to be assessed for the whole year under Section 187. On second appeal the Income-tax Appellate Tribunal took a different view. The Tribunal found that the partnership deed of the erstwhile firm did not contain any stipulation to the effect that the firm will not dissolve on the death of one of the partners and by virtue of Section 42(c) of the Indian Partnership Act the firm stood dissolved and, as such, the assessee-firm which took over the business after the dissolution of the erstwhile firm could not be said to be a reconstituted firm and Section 188 and not Section 187 will apply. The Tribunal relied for this proposition on its earlier decision in another case. At the instance of the Commissioner of Income-tax the Tribunal has, however, made this reference and has submitted the following question for the opinion of this court :
'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the provisions of Section 187 of the Income-tax Act were not applicable and that there were two separate firms during the previous year liable to be assessed separately ?'
3. Now, in view of the fact that the partnership of the erstwhile firm did not contain a provision saving the firm from dissolution on the death of a partner, the firm stood dissolved by virtue of Clause (c) of Section 42 of the Indian Partnership Act which provides that subject to the contract between the partners a firm is dissolved upon the death of a partner.
4. It is true that whether a firm has been dissolved or not is a question of fact and the fact that the partnership deed does not contain a stipulation that on the death of a partner the firm will not dissolve is not conclusive. It may be possible to prove from the subsequent conduct of the partners or from a collateral agreement that the partners did not intend to dissolve the firm on the death of a partner, but such a finding can be arrived at on the basis of the material on the record. There is no such finding in the instant case. Indeed, the material on the record militates against such a finding. It has been found that two sets of accounts were maintained, one up to the date of the death of the partner, i.e., March 22, 1964, and the other from the commencement of the new partnership to the end of the relevant previous year. This clearly shows that the intention of the partners was not to treat the firm as continuing even after the death of the partner. The intention was to treat the new firm as a separate entity and that is why two separate sets of accounts were maintained.
5. In the connected Writ Petition No. 5205 of 1972 (Dahi Laxmi Dal Factory v. Income-tax Officer : 103ITR517(All) ) we have held that Section 187 applies only when a firm is reconstituted and not when another firm takes over the^business of a dissolved firm even though some of the partners in the two firms are common. For the reasons stated in the connected writ petition, we hold that it was a case of succession governed by Section 188 of the Income-tax Act, 1961, calling for two assessments.
6. We, accordingly, answer the question in the affirmative, in favour ofthe assessee and against the department. As the legal position was notclear we make no order as to costs.
H.N. Seth, J.
7. In Civil Misc. Writ No. 5205 of 1972 (Dahi Laxmi Dal Factory v. Income-tax Officer : 103ITR517(All) ) decided by us today, I have held that Section 187 of the Income-tax Act, 1961, applies also to a case where a firm stands dissolved and a new firm takes up the business of the erstwhile firm in such circumstances that one or more of the partners who were partners of the firm before the change continue as partner or partners after the change. Further, while making assessment under Section 189 of the Act the income of the erstwhile firm is to be assessed separately in the hands of the reconstituted firm and it is not to be clubbed with the income of the reconstituted firm earned during the year relevant to the assessment year in question. In the instant case one of the partners of the firm died on 22nd March, 1964. The remaining partners drew up a new partnership deed on 23rd March, 1964, and then carried on the business of the erstwhile firm. In my opinion, the case is squarely covered by Section 187 of the Income-tax Act, 1961.
8. Accordingly, I answer the question referred to us as follows:
'On the facts and in the circumstances of the case, the Tribunal was not right in holding that the provisions of Section 187 of the Income-tax Act were not applicable. However, separate assessments in respect of the income of the erstwhile firm and the reconstituted firm had to be made in the hands of the reconstituted firm.'
9. Parties to bear their own costs.
10. In view of the majority opinion the question is answered in the affirmative, in favour of the assessee and against the department.
11. As the legal position was not clear there will be no order as to costs.