1. In this appeal for the assessment year 1974-75, the assessee has objected to the making of a single assessment for the assessment year.
The firm Pelikan Paper & Stationery Mart, Chawri Bazar, Delhi, was constituted by three partners, namely, Shri Arnar Nath Gupta, Shri Kesho Nath Gupta and Shri Bansi Dhar Gupta, with 50 per cent, 40 per cent and 10 per cent shares, respectively by deed of partnership dated 21-9-1969. The partnership was at will and the partnership deed did not contain any term for the non-dissolution of the partnership on the death of a partner. On 1-11-1973 one of the partners, Shri Kesho Nath Gupta, retired and a new partnership deed was executed on 1-11-1973 between the remaining partners, Shri Amar Nath Gupta and Shri Bansi Dhar Gupta along with a new partner Shri Rajinder Kumar. On the retirement of Shri Kesho Nath Gupta a deed of dissolution of the partnership was executed between the retiring partner and the remaining two partners. The assessee submitted two returns, one for the period from 1-4-1973 to 31-10-1973 and the other for the period from 1-11-1973 to 31-3-1974. Before the ITO it was submitted that there was not a mere change in the partnership on the retirement of Shri Kesho Nath Gupta and a new partnership came into existence on the dissolution of the old partnership and on the execution of a new deed of partnership dated 1-11-1973 and that Section 187(2) of the Income-tax Act, 1961 ('the Act') was not attracted as it was a case of succession of one firm by another and Section 188 of the Act was applicable. The ITO rejected this contention of the assessee and made a single assessment clubbing the income for the two periods that is for the entire period from 1-4-1973 to 31-3-1974.
2. In appeal, the AAC agreed with the ITO and affirmed his order.
Aggrieved by the order of the AAC, the assessee is in appeal before the Tribunal. It is submitted by the learned counsel for the assessee that the old firm which came into existence by the deed of partnership dated 21-1-1969 came to an end on the retirement of the partner Shri Kesho Nath by the deed of dissolution dated 1-11-1973. He has next stated that a fresh deed of partnership was executed between the remaining partners and the new partner Shri Rajinder Kumar on 1-11-1973. His contention is that as there was a dissolution of the old firm on 1-11-1973, Section 187(2) is not attracted and that the assessee's case is governed by Section 188. He has placed reliance on the following decisions in support of his contention-Venkateswara Stone Co. v. CIT  115 ITR 236 (AP), Mavukkarai (N) Estate Tea Factory v. Addl. CIT  112 ITR 715 (Mad.), Addl. CIT v. Vinayaka Cinema  110 ITR 468 (AP) (FB), Addl. CIT v. United Commercial Co.  108 ITR 264 (Guj.), Addl. CIT v. Harjivandas Hathibhai  108 ITR 517 (Guj.), CIT v. Kunj Behari Shyam Lal  109 ITR 154 (All.) (FB), CIT v.Shiv Shanker Lal Ram Nath  106 ITR 342 (All.) and Dahi Laxmi Dal Factory v. ITO  103 ITR 517 (All.) (FB).
3. The old partnership came into existence by the deed of partnership dated 29-1-1969 between Shri Amar Nath Gupta, Shri Kesho Nath Gupta and Shri Bansi Dhar Gupta. The partnership was at will and it did not contain any term for the non-dissolution of the partnership on the death of a partner. On 1-11-1973 Shri Kesho Nath Gupta retired from partnership by deed of dissolution dated 1-11-1973. A new partnership deed was executed on the same day between the remaining partners Shri Amar Nath Gupta, Shri Bansi Dhar Gupta and a new partner Shri Rajinder Kumar Gupta. Two returnswere submitted, one for the period from 1-4-1973 to 31-10-1973 and the other for the period 1-11-1973 to 31-3-1974. This is not a case where the dissolution took place on account of the death of a partner. The partnership was at will and it stood dissolved by the act of partners on the execution of the deed of dissolution on 1-11-1973.
4. The facts in the case of Dahi Laxmi Dal Factory (supra) were that the assessee-firm was constituted of two partners and three minors had been admitted to the benefits of partnership. One of the partners died on 21-6-1969. On the next day the son of the deceased partner and the surviving partner took over the business and a fresh partnership deed was executed on 28-6-1969. The three minors were also admitted to the benefits of this partnership. The assessee's contention in this case was that there was no change in the constitution of a firm under Section 187 and that Section 188 applied. It has been held by majority of the Lordships of the Allahabad High Court in this case as follows : Section 187 of the Income-tax Act, 1961, applies only where a firm is reconstituted in accordance with Sections 31 and 32 of the Indian Partnership Act namely, when a new partner is taken or an existing partner retires with the consent of all the partners or without their consent if the contract of partnership so provides. But where a firm is dissolved either by agreement of the partners or by operation of law and another firm takes over the business, that will be a case of succession governed by Section 188 of the Act, even though some of the partners of the two firms are common. In the present case, the old firm was constituted by two partners. One of them died and there was no stipulation in the partnership deed that the firm shall not stand dissolved on the death of a partner. Even if there had been such a stipulation, the firm could not have been saved from dissolution, because, after the death of J, only one partner was left and one man cannot constitute a firm; the firm automatically came to an end. Since the erstwhile firm stood dissolved on the death of one of the partners, the petitioner-firm which took over the same business could be assessed only in accordance with Section 188 and a single assessment for the whole year was not valid. (p. 518) It may be pointed out that there were only two partners in this case and there was no clause in the partnership deed for the continuation of the partnership on the death of any one of those two partners. The majority of the Judges held that even if there had been such a clause, it would have been inoperative as being violative of the provision of the Indian Partnership Act, 1932. The decision, however, turned on the point that the firm as originally constituted stood dissolved and on account of the dissolution of the firm, the firm which took over the business of the dissolved firm was not the same firm which was originally constituted and Section 188 applied.
The dissenting Judge, however, took a contrary view that where a firm was dissolved and its business was carried on by another firm, it could be considered as a case of change in the constitution of the firm under Section 187 even if a single partner was common to the constitution of the two firms. It may be pointed out that even in the dissenting judgment it was held that two separate assessments were to be made on the newly constituted firm, one in respect of the income derived by the old firm and the other on the new firm and that a single assessment could not be made.
5. In the case of Shiv Shanker Lal Ram Nath (supra) the facts were that the firm was constituted of seven partners and two of the partners retired and in their place two other were admitted as partners and two minors were also admitted to the benefits of the partnership. The ITO held that there was merely a change in the constitution of the old firm and it was held that in case where a firm was reconstituted, the old firm ceased to exist and that Section 187 even by implication did not create a fiction that the income derived by the old firm became the income of the reconstituted firm but the section made by the new firm is liable to assist in respect of the income derived by the old firm.
6. The facts in the case of Kunj Behari Shyam Lal (supra) were that a firm was constituted between seven partners. One of the partners died on 22-3-1964 another partnership deed was drawn up on 23-3-1964 by the remaining partners and they carried on the business of the erstwhile firm. It was claimed on behalf of the assessee that two assessments should be made-one against the erstwhile firm for the period ending 22-3-1964 and the other against the assessee-firm for the period 23-3-1964 to the end of the relevant period 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 that Section 188 was applicable. The ITO and the AAC did not accept this contention. According to them, Section 187 was applicable as it was a case of reconstitution of the firm. The Tribunal took a contrary view. It was held by the majority of their Lordships of the Allahabad High Court that the partnership deed of the erstwhile firm did not contain any stipulation to the fact that the firm would 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 the 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 would apply and that the assessments should be"made on the two firms. The decision in the case of Dahi Laxmi Dal Factory (supra) followed in this case.
7. The facts in the case of United Commercial Co. (supra) were that the assessee, a partnership firm, was granted registration for the assessment year 196.4-65. Clause 6 of the partnership deed stated that it was a partnership at will Clause 8 of the deed provided that the partnership will not be continued or closed on account of retirement or death of a partner and the business will be carried on with the remaining partners. One of the partners died on 9-3-1963. On his death the books of the firm dealing with the contracts with the railways were closed. The firm was maintaining its accounts in three separate sets of books ; set No. 1 dealt with the contract with the railways. The accounts maintained in set No. 2 and set No. 3 were continued but in account No. 1 the balances were struck after preparing profit and loss account as on March 1963 and the profit was credited to the respective partner's account. Thereafter the account of the deceased partner was carried forward in different books. In respect of other business, the books were not closed but at the end of year's account, profits were determined and bifurcated between the periods -the first period till the date of death of the deceased partner and the second period after his death. The assessee-firm filed two returns for the assessment year 1964-65-one for the period ending on 4-3-1963 and the other for the rest of the accounting period on the basis that there was a dissolution of the firm on the death of the deceased partner and, therefore, the subsequent continuance of the business was only for the purpose of winding up the firm. The ITO held that there was only a change in the constitution of the firm within the meaning of Section 187. The AAC agreed with the ITO. The Tribunal, however, held that there was a dis-solution of the partnership on 19-3-1963. The Tribunal negatived the contention of the revenue that Section 187(2) applied to the facts of the case. It was held by the High Court that since there was a dissolution of the firm with effect from 9-3-1963, the same firm could not continue with the change in the constitution of the firm and the requirements of Clause (a) of Sub-section 2 of Section 187 were not satisfied. So far as Clause (b) was concerned, all the partners did not continue with some change in their respective shares as after the death of the deceased partner no new partnership took his place. It may be pointed out that in this case there was a stipulation in the contract for the non-dissolution of the firm on account of the death of the partner. But there was a dissolution of the firm by act of partners.
8. The Gujarat High Court has taken the same view in the case of Harjivandas Hathibhai (supra). It has been held in this case that on general principles, unless the words of the Act compel, it would not be correct to depart from the well known principles of the partnership law. Under the partnership law, even though a partner retires the firm continues as before. What is meant by a change in the constitution of the firm is the coming in of a new partner with the consent of all the existing partners or retiring of an old partner with the consent of all the partners. In such a case, there is a mere change in the constitution of the firm and nothing more. The same firm continues as before. The question of dissolution of a firm by either operation of law or by acts of parties is a different thing altogether. When a firm is dissolved, the old partnership comes to an end and a new relationship comes into existence and if the succeeding partnership continues the old business then there is succession of one firm by another as contemplated in Section 188. Section 187(2) merely specified two points of changes in the constitution of the firm. Section 187(2) points out is that with the retirement of one or more of the partners so long as one of the old partners continues and with the introduction of new partners there is a mere change in the constitution of the firm.
Again under Section 187(2)(b), by mere variation in the respective shares of the partners of shares of some of the partners, there is no change in the firm itself. The old firm still continues and that is emphasised by Section 187(2)(b). It is, therefore, not correct to say that any special provision of law has been introduced by the interpretation clause in Section 187(2) apart from the general law of partnership as laid down in the Indian Partnership Act.
9. The facts in the case of Vinayaka Cinema (supra) decided by the Andhra Pradesh High Court were that the assessee-firm was constituted with nine partners. One of the partners died on 17-8-1968 and on that very day another partner retired from the firm after giving away his interest in the firm's business to another individual. There was no clause in the partnership deed providing that in the event of death of one of the partners the firm was not to be dissolved. By another deed dated 19-8-1968, a new partnership deed dated 19-8-1968 a new partnership firm was constituted in which seven of the partners of the old firm together with the two new partners started new partnership and the business of the old partnership was taken over and continued by the new firm. On behalf of the assessee it was claimed that there were two distinct firms and the ITO rejected the assessee's plea and held that there was only a change in the constitution of the firm as contemplated by Section 187(2) and made a single assessment. The AAC, however, held that the old firm stood dissolved on 17-8-1968 in the absence of any provision to the partnership deed to the contrary and that two assessments had to be made on the two firms, The Tribunal confirmed the order of the AAC. It has been held by the majority of the Judges in this case as follows : ...The very basis concept underlying Section 187(1) is that one and the same firm must be continuing throughout the year under consideration. Even if there is a change in the constitution of the firm, the firm, as an entity, must continue as one and single throughout the period. When the case falls under Section 187, there must be a single assessment because there is only one assessee, namely, the firm as it stood at the end of the assessment year and it cannot be contended that in such a case there should be two assessments.
Where the firm ceases to exist as contemplated by Section 42 of the Partnership Act, the relationship of the partners inter se comes to an end and, thereafter, the firm can no longer be said to continue as before.
If there has been a dissolution, the firm comes to an end and if the firm comes to an end, there cannot be a continuity of the firm and, therefore, after dissolution, there cannot be said to be a mere change in the constitution of the firm.
Sections 187, 188 and 189 deal with three different situations.
Section 187 deals with the case where the firm continues the same as before in the eye of law but there is change in the constitution either because of the partner going out or any partner coming in and so long as one of the partners is common. Section 188 deals with a situation where there is succession of one firm by another and in such a situation the assessment is to be made separately in the light of Section 170. Section 189 deals with a situation where a partnership firm is dissolved or its business is discontinued.
Merely because some of the partners of the dissolved firm constitute a new firm by a new agreement, it cannot be said that the old firm continues with a mere change in the constitution. Hence, Section 187 does not apply to the situation where the firm is dissolved by the operation of one or the other provisions of Section 42 of the Partnership Act and after dissolution one or more partners continue, the same business as before by a fresh agreement with one or more new partners.
There is no conflict between the Partnership Act and the Income-tax Act regarding this aspect.
Therefore, when a partner dies and the firm is dissolved, though it can be said that he ceases to be a partner, it cannot be said that there is a mere change in the constitution of the firm. (pp. 469-70) 10. The Madras High Court has expressed similar views in its decision in the case of Mavukkarai (N) Estate Tea Factory (supra). The Andhra Pradesh High Court has in its decision in the case of Venkateswara Stone Co. (supra) followed its earlier Full Bench decision in the case of Vinayaka Cinema (supra).
11. The above decisions lay down that Section 187(2) does not apply to the case where the old partnership is dissolved either by the death of a partner or by act of the partners and that in such a case, Section 188 applies and that Section 187(1) applies to a case where the old partnership continues in spite of the death of a partner or even if there is retirement of a partner or a new partner is taken.
12. A contrary view is expressed by the Punjab and Haryana High Court in the case of Dharam Pal Sat Dev v. CIT  97 ITR 302 wherein it has been held that the provision of the Partnership Act can be referred to only if it is found that a particular situation is not covered by the provision of the Act. In this cast two partners remaining the same and there being a change only in one partner-one partner ceases to be a partner on account of his death and another partner entering the partnership- this answers the description of Section 187 and the taxing authorities rightly held that this constituted only a change in the constitution of the firm. It is further held that a particular case can be covered by Section 188 only when it is a succession of one firm by another, meaning there by that there is a complete change and no one of the partners in the previous firm continues to be a partner in the latter firm which is not the present case. The assessment for both the periods was justified in view of the provision of Section 187(2).
13. The Punjab and Haryana High Comt has again expressed the above view by a majority judgment in the case of Nandlal Sohanlal v. CIT  110 ITR 170 (FB).
14. The decision of the Kerala High Court in the case of CIT v.Kelukutty  85 ITR 102 does not help the department. It has been held in this case that a mere change in the personnel of the partners and in their respective shares without a dissolution of the firm or continuation of the assets and liabilities would not be sufficient to bring into being a totally different assessable unit. In the present case the old firm was dissolved on 1-11-1973 on the retirement of the partner and by the execution of the deed of dissolution dated 1-11-1973 and the decision in the above-mentioned case does not apply to the fact of the present case.
15. It has been held by their Lordships of the Supreme Court in the case of CIT v. Vegetable Products Ltd.  88 ITR 192 that where two interpretations of provision of law are possible, the one in favour of the assessee should be adopted. In view of this principle of interpretation of law laid down by their Lordships of the Supreme Court, the view taken in the cases relied upon by the learned counsel for the assessee is to be followed.
16. This is not a case of change in constitution in view of the decisions cited by the learned counsel for the assessee. Section 187(2), therefore, does not apply to the present case and it is governed by the provision of Section 188. The ITO was not justified in making a single assessment for the entire period from 1-4-1973 to 31-3-1974 as two assessments were required to be made for two periods from 1-4-1973 to 31-10-1973 and the other from 1-11-1973 to 31-3-1974.
The single assessment made by the ITO is set aside and he is directed to make two assessments on the two firms for the two respective periods from 1-4-1973 to 31-10-1973 and from 1-11-1973 to 31-3-1974.