1. JUDGMENT : R. R. Rastogi, J. - This is a reference u/s 256(1) of the IT Act, 1961 (hereafter the Act). At the instance of the CIT the following two questions have been referred by the IT Appellate Tribunal, Allahabad Bench. Allahabad (hereafter the Tribunal) for the opinion of this Court :
"1. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in cancelling the assessment and directing the ITO to make two assessments, one for the period upto the date of reconstitution of the firm and another for the period after the reconstitution of the firm ?
2. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the firm after its reconstitution was different from the firm which existed previously and, therefore, was entitled to choose its own previous year from the date of its reconstitution in its own right ?"
2. The facts as found by the Tribunal briefly stated are that the respondent assessee, M/s. Bharat Builders and Engineers Lucknow was a partnership firm of four partners up to 1-1-1970. The firm was dissolved and a fresh instrument of partnership was executed on 1-1-1970. Sarvashri Gurmukh Singh Puri and Mohinder Singh Puri left the partnership and the remaining two partnerships Sarvashri Yogendra Singh Puri and Narendra Singh Puri agreed to continue the business as equal partners. The previous year of the firm before its dissolution was the year ending 30th June. The newly constituted firm adopted the calendar year as its previous year. For the year under consideration, that is, 1971-72, two sets of account books had been maintained by the firm : one for the period 1-7-1969 to 31-12-1969 and the other for the period 1-1-1970 to 31-12-1970. The assessee filed two returns for these two periods separately. It also filed applications for continuation of registration for the first period and for the grant of fresh registration for the second period.
3. The ITO computed the income for the two periods separately but made one assessment treating the assessee as a body of individuals. At the same time he made another assessment wherein the income for both the periods was separately determined and the assessment was made in the status of a registered firm. That was a protective assessment.
4. The assessee went up in appeal before the AAC. The AAC allowed some relief in the quantum of the income but he did not interfere with the manner in which but he did not interments had been made by the ITO. Aggrieved, the assessee filed appeals before the Tribunal.
5. The Tribunal, relying on a decision of this Court in CIT v. Shiv Shankar Lal Ram Nath (1977) 106 ITR 342 (All) held that where a firm is reconstituted the earlier firm ceases to exist and hence two assessments have to be made, one for the period up to the date of reconstitution of the firm and the other for the period after the date of reconstitution. Further, the firm after its reconstitution could elect to adopt previous year, which may be different from the one which being followed by the old firm and there is no question of the assessee changing the previous year without the consent of the ITO in such a case. In the result, the Tribunal cancelled the assessment made by the ITO and directed him to make two assessments for the two periods mentioned aforesaid separately. He has been further directed to consider the assesss claim for continuance of the registration for the first period and for registration in respect of the second period. Now, at the instance of the Department the two question mentioned above have been referred to this Court.
6. There is no dispute in regard to the facts found by the Tribunal and we agree that the controversy involved stands concluded by the decision in the case of Shiv Shankar Lal Ram Nath (supra). It has been laid down in that case that in a case where a firm is reconstituted, the old firm ceases to exist Sec. 187 of the Act even by implication does not create a fiction that the income derived by the old firm becomes the income of the reconstituted firm. But the section makes the new firm liable to be assessed in respect of the income derived by the old firm. It was held that the Tribunal was right in holding that not withstanding the provisions of s. 187 of the Act the firm after it underwent the change after its reconstitution on 1-4-1961, became an assessable entity, which for the purposes of assessment, was distinct from the firm as it stood prior to 1-4-1961 and that income derived by the old firm had to be assessed in the hands of the new firm separately and without clubbing it with the income derived by it during the relevant accounting year. It was also laid down that the new firm could not be compelled to elect previous year which had been elected by the old firm. No question of the assessees changing its previous year without obtaining the consent of the ITO arises in such a case.
7. We are in respectful agreement with this decision. It appears therefore, that the Tribunal was right in directing the ITO to make two assessments on the assessee for the aforesaid two periods, that is, the one from 1-7-1969 to 3-12-1969 and the other from 1-1-1970 to 31-12-1970. It was also right in holding that the assessee after 1-1-190 could adopt a different previous year and there was no question of its obtaining prior permission of the ITO to do so. The ITO would consider the assessees claim for continuance of registration for the first period and grant of fresh registration for the second period.
8. In the result, we answer both the questions in the affirmative, in favour of the assessee and against the Department. The assessee is entitled to costs which are assessed at Rs. 250.