1. This is an assessee's appeal in respect of the assessment year 1977-78. The assessee-firm was carrying on business in the name of Ramsahai Nathulal. Its accounting year used to end on Diwali every year. It had three partners as under : According to the assessee, the firm was dissolved on 14-8-1976, i.e., in the middle of the accounting year, and a new firm came into existence with effect from 15-8-1976. By the dissolution, two partners, namely, Nathulal and Vimal Chand retired from the firm leaving the business exclusively to Ramsahai. However, from the very next day the two outgoing partners along with two new partners, namely, Paryagdutt and Thapubai joined Ramsahai and formed a new partnership that continued the business of the old firm. The old firm was being assessed as a registered firm and the assessee filed a declaration in Form No.12 for the continuation of registration. No fresh application for registration of the new firm was made. The deed of partnership in respect of the new firm was also executed on 24-10-1976, i.e., after the close of the accounting year. The assessee filed two separate returns, one for the period up to 14-8-1976 and the other for the period 15-8-1976 to Diwali 1976. The ITO took the view that it was a case of reconstitution of a firm and, therefore, the assessee should have applied for fresh registration in Form No. 11A and he, therefore, refused the registration to the firm and made a single assessment for both the periods treating the assessee as an unregistered firm. The assessee's appeal before the AAC failed and he has come to this Tribunal in second appeal.
2. We have heard the learned Counsel for the assessee and the learned departmental representative and have gone through the record.
3. Two arguments were raised by the learned Counsel for the assessee before us. The first was that the old firm got dissolved on 14-8-1976 and there was no change in its constitution till 14-8-1976, the date of dissolution, and therefore, the declaration in Form No. 12 was proper and the ITO should have registered the firm which existed up to 14-8-1976 and made two separate assessments for different periods, though for the subsequent period the assessee could have been treated as an unregistered firm. The second argument was that since the ITO has assessed some of the partners of the firm on the income from this firm, it was not open to the ITO to assess the firm as an unregistered firm, as that would result in double taxation.
4. We would first deal with the question whether it was a case of dissolution of the old firm and the constitution of an entirely new firm having nothing to do with the old firm or it was a case of mere reconstitution of a firm and if it was a case of reconstitution, whether the assessee was entitled to registration 5. Chapter XVI of the Income-tax Act, 1961 ('the Act') enacts 'Special Provisions Applicable to Firms'. Sections 182 and 183 of the Act in Chapter XVI provide the procedure for the assessment of registered and unregistered firms, respectively. Sections 184, 185 and 186 of the Act then deal with the registration of the firms and Sections 187, 188 and 189 of the Act deal with the changes in constitution, succession and dissolution. Section 184 provides for the procedure for an application for registration of a firm. Sub-section (7) of Section 184 provides that registration granted to any firm shall have effect for every subsequent assessment year provided there is no change in the constitution of the firm or the shares of the partners and the firm furnishes a declaration to that effect in the prescribed form (Form No.12). Sub-section (8) then says that where any such change has taken place in the previous year, the firm shall apply for fresh registration in accordance with the provisions of that section. Section 187 deals with the change in constitution of a firm and provides that where at the time of making an assessment under Section 143 or Section 144 of the Act, it is found that a change has occurred in the constitution of a firm the assessment shall be made on the firm as constituted at the time of making the assessment. Sub-section (2) of Section 187 defines change in the constitution of the firm and says : 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.
Section 188 then says that where a firm carrying on a business or profession is succeeded by another firm and the case is not covered by Section 187, separate assessments shall be made on the predecessor firm and the successor firm in accordance with the provisions of Section 170 of the Act. Section 189 then says that where a firm is dissolved, the ITO shall make an assessment of the total income of the firm as if no dissolution had taken place.
6. In the case before us the assessee-firm carrying the name of Ramsahai Nathulal was a partnership firm under a deed dated 24-3-1970, consisting of Ramsahai, Nathulal and Vimal Chand as partners. This firm purports to have been dissolved by a deed dated 14-8-1976 by which Nathulal and Vimal Chand retired leaving the business to Ramsahai and they rejoined Ramsahai from the next day, i.e., 15-8-1976, along with two other partners, namely, Paryagdutt and Dhapubai. Thus, the assessee was a partnership firm till 14-8-1976 and again from 15-8-1976 when the new firm consisted of all the three old partners and the two new partners. Thus, in terms of Sub-section (2) of Section 187 it was a case of change in the constitution of the firm.
7. The learned Counsel for the assessee relied upon certain rulings to assert that where a firm is dissolved, registration can be granted up to the date of the dissolution. Reliance was placed on the ruling in Beni Prasad Sidhgopal v. CIT  128 ITR 659 (All.). In this case it was held that where a partner dies but the firm is not dissolved and the business is carried on, the constitution of the firm changes and a different assessable entity, namely, the reconstituted firm, comes into existence. The erstwhile firm continues its legal existence till the date of change in the constitution and such a case is similar to a firm which discontinues business in the middle of the accounting period. It was held that renewal of registration cannot be refused merely because the firm has not lasted for the entire accounting period. The case proceeded on the premises that on the death of a partner a firm is automatically dissolved and what comes into existence thereafter is a new firm. This view, as we will show just now, has been dissented from by the Madhya Pradesh High Court and cannot be followed. Further, as is evident from the circumstances of the case before us, the purported dissolution is not a real thing. It is a fake exercise and a mere paper transaction. The learned AAC has mentioned some reasons for this view and no attempt was made by the learned Counsel for the assessee before us to displace that finding.
8. Akin to the aforesaid Allahabad High Court ruling is the ruling in Mathurdas Govardhandas v. CIT  125 ITR 470 (Cal.) In this case also the dissolution was because of the death of a partner and it was held that it was not a case of reconstitution of the firm. Reliance was also placed on the ruling in Addl. CIT v. Abdul Kareem & Co.  117 ITR 233 (Mad.) in which, like the case before us, a partner retired during the accounting year and no new deed was executed between the remaining two partners during the account year. It was held that the firm was entitled to continuation of registration up to 3-3-1976, the date on which a partner retired and was not entitled to a registration for the broken period from 4-3-1963 to 31-3-1963. The question of application of Section 187 was not considered either in this case or in the other two cases mentioned above.
9. To the contrary there is the ruling in CIT v. Sree Durga Enterprises  145 ITR 351 in which the Karnataka High Court held that where a firm consisting of five partners was dissolved and the same business was continued by one of the partners who took four new partners, it was a case of change in the constitution of a firm and a single assessment for the entire period could be made. The Madhya Pradesh High Court which has jurisdiction over this Bench in a Full Bench case in Girdharilal Nannelal v. CIT has held that the provisions contained in Chapter XVI are special provisions relating to firms and where even on the death of a partner a firm is succeeded by another firm with the old surviving partner and one or more new partners, the case would be one of mere change in the constitution of the firm as contemplated under Section 187(2) and not that of dissolution. As already stated, the case of a dissolved firm is covered by Section 189 which says that where the firm is dissolved the ITO shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken place. The Hon'ble Madhya Pradesh High Court in the aforesaid case of Girdharilal Nannelal (supra) observed that a case would fall under Section 189 only if the business of the firm is discontinued and a case where the firm is dissolved but the business is not discontinued and is carried on by another partner with some of the old partners would be a case of mere change in the constitution. The Hon'ble High Court further observed that in Sections 187, 188 and 189 the Legislature has made special provisions applicable to firms relating to changes in their constitution, succession and dissolution. This exercise was unnecessary if these expressions were to be construed only according to the general law. In Shivram Poddar v. ITO  51 ITR 823 the Hon'ble Supreme Court while interpreting the provision of Section 44 of the Indian Income-tax Act, 1922 ('the 1922 Act') that was akin to the present Section 189 of the 1961 Act observed that Section 44 was attracted only when the business of a firm was discontinued, i.e., when there is complete cessation of the business and not when there is a change in the ownership of a firm or its constitution because by reconstitution of the firm no change is brought in the personality of the firm and the succession to the business and no discontinuance of the business results. The Hon'ble Supreme Court went on to say : ...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....
Therefore, in view of the above rulings, the mere purported dissolution of the firm was of no effect so far as the liability of the firm to assessment under the Act is concerned and since, as is admitted by the assessee, the three partners in the old firm joined hands with two new partners in constituting the new firm which carried on the same business with the same assets and liabilities, it was a case of mere reconstitution of the firm. The result, therefore, is that under Section 187 only one assessment had to be made on the firm for the whole of the accounting period and it being a case in which a change had taken place in the constitution of the firm during the previous year, the assessee was bound to make a fresh application for registration in terms of Sub-section (8) of Section 184. Admittedly, no such application was made and registration granted in the earlier years could not have any effect for the assessment year in question as there had been a change in the constitution of the firm. The ITO, therefore, rightly refused to grant registration to the firm and rightly assessed it as an unregistered firm. In similar circumstances registration was refused to a firm and the Hon'ble Madhya Pradesh High Court affirmed the action in Ganesh Rice Mills v. CIT  4 Taxman 540. In that case there was a change in the constitution of the firm due to the retirement of a partner. It was held that the declaration in Form No.12 was not correct and the application for registration should have been made in accordance with the new instrument of partnership.
10. The learned Counsel for the assessee contended that for the period up to 14-8-1976, the assessee should have been granted registration and assessed as a registered firm and for the subsequent period it could be assessed as an unregistered firm. Since there had been a change in the constitution of the firm and proper application for registration was not made, registration could not be granted to the firm for the period up to 14-8-1976. In any case it is impossible to assess a firm as unregistered firm for one period and registered firm for another period. If only one assessment has to be made in terms of Section 187, the assessee has to be either a registered or an unregistered firm for whole of the accounting year. We, therefore, uphold the findings of the authorities below that it was a case of mere change in the constitution of a firm within the meaning of Sections 184 and 187 and for want of a proper application, registration could not be granted to the assessee and a single assessment had to be made in terms of Section 187.
11. Now we come to the next argument that some of the partners having been assessed on the income representing their share from the firm in question, the assessee cannot be assessed as an unregistered firm as that would amount to double taxation.
12. Reliance was placed on the ruling in CIT v. Murlidhar Jhawar & Puma Ginning & Pressing Factory  60 ITR 95 in which the Hon'ble Supreme Court held that the partners of an unregistered firm might be assessed individually or they might be assessed collectively in the status of an unregistered firm. The ITO could not, however, seek to assess the income twice, once in the hands of the partners and again in the hands of the unregistered firm. That was a ruling under the 1922 Act and the partners as well as the firm appear to have been assessed by the same ITO. The report shows that the Hon'ble Supreme Court did not accept the plea that the ITO was not in possession of information relying on which, if he desired, he could have assessed the three parties collectively as an unregistered firm. Another ruling relied upon by the learned Counsel for the assessee is by the Hon'ble Gujarat High Court in Laxmichand Hirjibhai v. CIT  128 ITR 747. In that case also it was held that where the partners have been assessed separately of their respective share of profit, subsequent assessment in the status of an unregistered firm was not possible. These rulings will not help the assessee for a variety of reasons. Section 183 deals with the assessment of unregistered firms and it gives the option to the ITO either to assess the income in the hands of the firm itself treating it as an unregistered firm or if it is beneficial to the revenue, to tax the respective shares in the hands of the partners, then he may make an assessment as if the firm was a registered firm. As is clear from the language of Section 183, the option lies with the ITO assessing the firm and not with the ITO assessing the partners. In the present case the firm was an old assessee and was being assessed by the ITO. The assessment of partner Nathulal appears to have been made by ITO 'N'-Ward, and it is not clear which ITO made the assessment in the case of partner Ramsahai. In any case it is not shown that the cases of the partners as well as the firm were being dealt with by the same ITO.Therefore, the assessment of the partners by a different ITO would not take away the jurisdiction of the ITO assessing the firm to tax it as an unregistered firm or as a registered firm, as the case may be. This option further has to be exercised at the time of the assessment of the firm and where the assessments of the partners are completed without taking up the assessment of the firm and without applying the mind to the ITO's options under Section 183, the assessee cannot take advantage of the assessments made in the case of the partners particularly when, as in the case before us, the assessments of the partners are made under Section 143(1). In Deccan Bharai Khandsari Sugar Factory v. CIT  123 ITR 802, the Andhra Pradesh High Court observed that the ITO before exercising the option to assess the income must determine whether the assessment made in the hands of an unregistered firm will be prejudicial to the interest of the revenue and he cannot form an opinion and exercise option unless he determines the income in the hands of the individual partners of the firm. The ITO cannot be expected to frame an opinion about the aggregate amount of tax payable by the unregistered firm and the tax which should be payable by the partners individually unless he has before him all the assessment files relating to the unregistered firm and its individual partners. Hence, it cannot be said that once the ITO exercises his option to assess the income in the individual hands of the partners, his option to treat the firm as an unregistered firm and assess the same income in its hands is foreclosed. In Rodamal Lalchand v. CIT  109 ITR 7, the Punjab and Haryana High Court held that there is no prohibition in Section 4 of the Act restraining the assessing authority from proceeding against the firm which is a taxable entity even though two of its partners had been separately assessed in respect of their share of the income from the partnership business. The Hon'ble Court further observed that the position that once the income of an entity has been assessed and taxed in the hands of other taxable entities mentioned in Section 3 of the Act, no tax could be levied on the first entity, cannot prevail under the Act. The ruling in Murlidhar Jhawar & Puma Ginning & Pressing Factory's case (supra) was discussed and distinguished. There is another ruling of the Hon'ble Supreme Court itself which shows that the assessment of an income in wrong hands cannot prevent its assessment in the hands of the right assessee. It was in the case of ITO v. Bachu Lal Kapoor  60 ITR 74. In that case a partition in the family was recognised and assessments were made in the hands of the individual members. Later it was discovered that the partition was fake and action under Section 34 of the 1922 Act was initiated against the joint family. The same argument was raised that the income having once been assessed in the hands of the individuals its taxation in the hands of the family would amount to double taxation. The Hon'ble Supreme Court held that if the HUF existed, the assessment of income in the hands of the individual members was wrong and the ITO had jurisdiction to initiate proceedings under Section 34 against the karta of the joint Hindu family. As regards the apprehension of double taxation, the Hon'ble Supreme Court held that adjustments had to be made by the ITO in respect of the taxes realised by the revenue on that part of the income of the family assessed in the hands of the individual. To do so was not to reopen the final assessment orders, but in reality to arrive at the correct figure of tax payable by the HUF. Similar adjustments can be made by the ITOs concerned in the case of the present assessee and its partners.
13. There is another ruling of the Madhya Pradesh High Court itself in Jawaharlal v. CIT  144 ITR 620. In that case a minor was separately assessed on his income. It was held that this would not bar inclusion of such income of the minor's father under Section 64(1)(ii) of the Act.
14. There is another thing worth notice in the case before us. The computations of income filed by the assessee's counsel in respect of partners Ramsahai and Nathulal at pages 17 and 19 of the paper books show that from the share income shown by the partners, they had deducted their respective shares of the firm's tax. It indicates that they represented to the respective ITOs that the firm was a registered firm and the ITO assessed the income under Section 143(1) under the impression wrongly created by the assessee that the firm was a registered firm, while in fact it was not so. For these reasons as well as the assessments made by the respective ITOs assessing Ramsahai and Nathulal could not operate as an estoppel against the ITO assessing the firm.
15. For the reasons discussed above, we find that the assessee was rightly assessed as an unregistered firm for the whole period and this appeal deserves to be dismissed.