1. IT Appeal No. 734 is an appeal by the assessee. IT Appeal No. 877 is an appeal by the revenue. Both matters relate to the assessment year 1981-82 and are, hence, disposed of by this order.
2. Before we advert to the findings of the authorities below and to the contentions urged in the appeals, we would set out the facts in some detail because then alone would it be possible to appreciate the contentions in issue.
3. There was an instrument of partnership executed on 5-4-1972. The partners were C. Ahmed Hussain, his wife, Smt. C. Sakeena Bee and one Smt. Khairunnisa Begum, wife of S.A. Hameed. This instrument of partnership contained a Clause, i.e., Clause 11, which reads as under : In the event of death of any partner or partners, the business of the partnership shall not be discontinued but the surviving partners are at liberty to carry on the business of the. firm with legal heirs if they desired.
Another instrument of partnership was executed on 10-1-1981. This partnership was between Sakeena Bee, wife of late C. Ahmed Hussain and Khairunnisa Begum, wife of S.A. Hameed. The partnership deed, amongst other clauses, contained the following narration : And whereas the parties hereto have by mutual agreement dissolved the said partnership firm on 26th day of December, 1980. And are carrying on business under a new partnership as from 27th day of December, 1980.
4. For the assessment year 1981-82, now under consideration, two returns of income were filed on 5-7-1982. One return was for the period 1-4-1980 to 25-12-1980 on a total income of Rs. 62,800. The return bore the signatures of both Sakeena Bee and Khairunnisa Begum. Accompanying the return were statements containing the trading account for the period 1-4-1980 to 25-12-1980, profit and loss account for that period and the balance sheet as on 25-12-1980. The profit for the aforesaid period was apportioned between who, according to the assessee, were the partners in the period, viz., Ahmed Hussain, Sakeena Bee and Khairunnisa Begum. Another return of income was filed for the subsequent period from 26-12-1980 to 31-3-1981. This was also signed by Khairunnisa Begum and Sakeena Bee. Accompanying the return were statements containing the trading account, profit and loss account for this period as well as the balance sheet as on 31-3-1981. Income for this period was apportioned between Sakeena Bee and Khairunnisa Begum.
5. An application for registration in Form No. 11 was filed duly signed by Sakeena Bee and Khairunnisa Begum, seeking registration for the firm in which it was shown that they were admitted as partners with effect from 26-12-1980.
6. An application in Form No. 11A was also filed on 31-3-1981 again signed by Sakeena Bee and Khairunnisa Begum whereby the partners of the firm as constituted on the date of application were shown as comprised of Sakeena Bee and Khairunnisa Begum, while it was stated the income or loss of the firm was to be apportioned between Ahmed Hussain, Sakeena Bee and Khairunnisa Begum as per deed dated 5-4-1972.
7. A declaration in Form No. 12 was filed on 31-7-1981. This declaration was signed by Sakeena Bee and Khairunnisa Begum and sought for continuation of registration of the firm for which registration was granted for the assessment year 1980-81.
8. On 20-9-1982, Khairunnisa Begum wrote a letter to the ITO which read as under : I want to inform your goodselves that any papers or income-tax forms relating to C. Ahmed Hussain, Adoni for the assessment year 1981-82 (wherein Janab C. Ahmed Hussain was a partner) may kindly be treated as not signed by me, because I am afraid that I have been made to sign under undue influence and misrepresentation of facts. I hope you will be kind enough to heed my request and protect my interest in the name of justice by your goodselves.
In due course, the ITO took up scrutiny of the assessment and passed an order under Section 185(1)(b) of the Income-tax Act, 1961 ('the Act') on 12-1-1983 refusing registration. He referred to the background which we have set out. He stated that a copy Khairunnisa Begum's letter was sent to the authorised representative of the other partner and he had stated that Khairunnisa Begum might be summoned and the bona fides of her signature, etc., ascertained. The ITO also mentioned that Form No.12 had not been filed seeking continuation of registration. (We have already pointed out that there is a Form No. 12 on record.) He finally refused registration stating as under : It is not the contention of the partner Smt. Khairunnisa Begum that signature in the papers and forms for the assessment year 1981-82 was not hers. Her contention is that they were obtained by undue influence. Therefore, the question of summoning the partner for ascertaining the bona fides of her signature does not arise. The burden of proving whether there was undue influence and misrepresentation of facts lies on the partners of the firm and not on the department. The very fact that the partner Smt. Khairunnisa Begum has signed the papers and forms under undue influence and misrepresentation of facts clearly shows that there was no genuine firm in existence during the year under consideration. Therefore, I refuse to register the firm and treat the firm as an unregistered firm.
9. There was an appeal to the AAC wherein refusal of registration was challenged. The AAC set the record right by stating that there was a declaration in Form No. 12. He held that the genuineness of the firm for the period Ahmed Hussain was a partner could not be questioned, since it was held to be a genuine firm in earlier years. Adverting to the subsequent period, he observed that the genuineness of the partnership deed was not questioned and there was nothing to show that the firm was not genuine. He thereafter proceeded to examine the issue whether there were valid applications or not for the grant of continuation of registration. He mentioned that there was obviously withdrawal of signature by one of the partners. But it had to be seen whether letter for withdrawal of signature was signed under undue influence or coercion in which event the withdrawal itself would be invalid. The AAC, therefore, directed that it would be necessary to verify whether the letter of 20-9-1982 was signed under undue influence or coercion and in case it was so, the withdrawal of signature in Form Nos. 11 and 11A and declaration in Form No. 12 would be regarded as invalid. In such event, the AAC observed that procedural requirements were satisfied and, therefore, registration should be granted for both periods. If the letter was signed without undue influence or coercion, there was a valid withdrawal of signature and it was not for the ITO to find out the reasons which prompted the partner to withdraw her signature and the ITO would be justified to refuse registration without enquiring into the reasons for non-co-operation and the AAC went on to observe that the ITO would be justified in refusing registration for both the periods. He eventually set aside the order under Section 185 directing the ITO to pass fresh orders for the two periods after necessary verification. This order of the AAC was dated 25-3-1983.
10. The AAC also passed on 28-5-1983 another order described as 'Addendum' stating that though there was one appeal only, direction should have been given that two assessments should be completed for the two periods, i.e., one up to the date of death of Ahmed Hussain and the other for the subsequent period.
11. The assessee in its appeal contests the finding of the AAC directing a fresh investigation into the validity or otherwise of the applications and declaration for registration on record. According to the assessee, the AAC having taken the view that there was a genuine firm for both the periods, ought to have directed the ITO to grant registration straightaway.
12. The revenue in its appeal is aggrieved with the finding of the AAC that two separate assessments should be made and two orders should be passed in the matter of registration. According to the revenue, there was only a change in constitution as envisaged under Section 187 of the Act and the AAC had failed to consider the effect of Clause 11 of the partnership deed dated 5-4-1972.
13. The learned counsel for the assessee and the learned departmental representative adduced arguments in support of their respective stands at length.
14. We have set out the facts. The deed of 5-4-1972 contained a Clause, i.e., Clause 11, relating to what action is to be taken on the death of a partner. We have set out this clause in extenso earlier. The stand of the revenue was that because of the existence of this clause, the firm has not dissolved. Even accepting the contention of the revenue in this regard, we are still to examine whether there has been a dissolution of the firm or not by any other event. We have already set out the relevant clause in the deed executed on 10-1-1981. There it was mentioned that by mutual agreement the earlier firm was dissolved with effect from 26-12-1980. The argument of the learned departmental representative was that this subsequent deed cannot play a part in determining whether there was dissolution or not of the earlier firm.
Under the provisions of Section 42 of the Indian Partnership Act, 1932, in the absence of an agreement to the contrary, a firm will dissolve on the death of a partner. Such agreement has to be between the erstwhile partners while all were alive. To this extent, we agree with the learned departmental representative. We have assumed that Clause 11, which was a clause in existence during the lifetime of Ahmed Hussain, provided that the firm would not dissolve on the death of any partner.
That only takes the case outside the provisions of Section 42. The subsequent agreement in the deed of 10-1-1981 cannot operate to alter the position under Section 42. Therefore, we proceed on the footing that there was no dissolution of the firm by virtue of the provisions of Section 42. However, the provisions of Section 42 are not the only provisions under which a partnership can be dissolved. The provisions relating to dissolution of partnership start with the provisions of Section 39 and Section 40 of the Indian Partnership Act expressly provides that a firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. The statement in the instrument of partnership dated 10-1-1981 by Sakeena Bee and Khairunnisa Begum, the two surviving partners, that by mutual agreement the erstwhile firm was dissolved with effect from 26-12-1980, is a statement of there having been a dissolution by consent of partners. This would be a dissolution within the meaning of the provisions of Section 40, provided it is borne out by other facts also that the agreement was genuine and contemporaneous. We have already referred to the accounts being closed as evidenced by separate balance sheets being prepared as on 25-12-1980. All trading accounts for such periods had also been drawn up as also a separate profit and loss account. All this showed that the treatment in the accounts was fully in conformity with the statement in the partnership deed dated 10-1-1981. Therefore, under the provisions of Section 40, there was a dissolution of the erstwhile firm of Ahmed Hussain, Sakeena Bee and Khairunnisa Begum.
15. According to the learned departmental representative, the ratio of the judgment of the Andhra Pradesh High Court in Addl. CIT v. Vinayaka Cinema  110 ITR 468 (FB) applied only in a case where there was a dissolution consequent to the death of a partner. We are unable to agree to such a statement. The ratio of the judgment of the Full Bench of the Andhra Pradesh High Court in the case referred to applies in all cases where there is dissolution of a firm, i.e., one firm comes to an end and another firm comes into being. Section 42 is only one of the provisions under which a dissolution takes place. Therefore, the fact that dissolution was not effected under Section 42 but under Section 40, does not alter the principle which is laid down by the aforesaid Full Bench decision. The learned departmental representative submitted that in a case where accounts were closed and new accounts were opened, i.e., CIT v. T. Veeraraghavulu Chetty & Sons Co.  100 ITR 723, the Andhra Pradesh High Court held that the provisions of Section 187 alone were attracted. This decision has been referred to by their Lordships in the later Full Bench decision in the case of Vinayaka Cinema (supra). The observations of their Lordships in this regard are as under : In CIT v. T. Veeraraghavulu Chetty & Sons Co.  100 ITR 723 (AP), a Division Bench of this Court consisting of Obul Reddy C.J. and Sriramulu J. dealt with a situation where there was introduction of new partners in the midst of the accounting year. They were not dealing with a situation where a firm was dissolved because of the provisions of the Partnership Act and it was held that the entire income of the firm for the whole year was to be assessed instead of two separate assessments and the conclusion of the learned judges of the Division Bench is correct in the light of the fact that the case was clearly governed by the provisions of Section 187(1) as interpreted by us ... (p. 492) The aforesaid observations themselves are clear that where there is a dissolution of the firm because of the provisions of the Indian Partnership Act, the income of the different periods has to be assessed separately. So, we come to the conclusion that on facts, there has been a dissolution in the present case by virtue of the provisions of Section 40 and income from 1-4-1980 to 25-12-1980 has to be assessed separately from the income from 26-12-1980 to 31-3-1981. This is because there are two different firms for the two different periods.
Each firm is entitled to the continuation or grant of registration, as the case may be.
16. As far as the first firm of Ahmed Hussain, Sakeena Bee and Khairunnisa Begum is concerned, this was a firm to which registration had been, granted earlier. A declaration in Form No. 12 had been filed.
It was stated that this declaration was signed only by the two surviving partners and it was not indicated that one of them was signing as legal heir for the deceased partner, Ahmed Hussain.
Normally, Sakeena Bee having signed this declaration, she could be considered as having signed as legal heir of Ahmed Hussain. But, we cannot ignore the letter which is on record, written by Khairunnisa Begum dated 20-9-1982 wherein she has made certain allegations about the circumstances in which she came to sign the papers relating to. the period when Ahmed Hussain was a partner. We find in the decision of the Madras High Court in the case of CIT v. Ganesh Fire Works Industries  147 ITR 781, the following observations : ... To cite only one instance of judicial criticism of the harsh administration of the law relating to registration of firms under the Income-tax Act, witness the following observations of Jagadisan J., in V.M. Periasamy Chettiar & Co. v. CIT  52 ITR 134 (Mad.) at p. 136 : 'We must also observe that the department is over-punctilious in considering applications for registration of firms and is not averse to refuse registration quite readily in a facile manner.' Section 185(2) and (3) of the Income-tax Act, 1961, is a welcome parliamentary reaction to judicial observations of this kind. At this time of the day, therefore, it would be too much to urge that the ITO is not under a duty bound to give a helping hand to assessees, who, even with expert professional advice, might falter here and there in filing the applications, which the ITO might not quite regard as being in order. In those cases, not only normal courtesy, but the dictates of the statutory requirements would make for a return of the (defective) applications with an express reference to the defects contained in the applications and an opportunity given to the assessee-firms to rectify the defects. Such a procedure had not been gone through in this case. As we observed, since the defect was a minimal one, the Tribunal was justified in reading the declaration as if it did not contain even that defect and in proceeding to grant continuance of registration on that basis.
Time was when the provisions relating to registration of firms in the Income-tax Act were buttressed by such judicial utterances as that 'registration is not a common law right but a statutory privilege'. Even now, the registration of firms might remain very much a statutory privilege, but the assessees are entitled to be given the guidance, at official level, which the statute compels the ITO to render to them ... (p. 790) 17. In the present case, therefore, we set aside the orders of the authorities below. We would direct (a) that inasmuch as the declaration in Form No. 12 is not expressly signed by a person as legal heir for the deceased partner Ahmed Hussain as required by Rule 22(5) of the Income-tax Rules, 1962 ('the Rules,), the ITO would, under the provisions of Section 185(2), intimate the defect to the firm and give it as opportunity to rectify the defect within the period prescribed in the aforesaid provision. Since Khairunnisa Begum has sent a letter to the ITO making certain allegations about the circumstances in which the declaration was filed, it stands to reason that the ITO should specifically intimate her also about the requirement for rectification of the defect. If the opportunity under Section 185(2) is availed of, then the ITO would examine Khairunnisa Begum as well as the other partner or such other persons as he may consider necessary and arrive at a finding about the validity of her signature, etc. On the basis of the declaration in Form No. 12, if found validly made, registration would be accorded by the ITO for the period up to 25-12-1980.
18. As far as the subsequent period is concerned, the ITO will process the application in Form No. 11. The allegations made by Khairunnisa Begum no doubt are only in respect of applications of the firm for the period when Ahmed Hussain was a partner. The latter firm is a new firm because of succession. Nevertheless, it would be open to the ITO to examine parties again to satisfy himself about the application made in Form No. 11 being in order, etc. The ITO will look into this aspect and thereafter process the application made in Form No. 11 in accordance with law and grant registration for the period subsequent to 26-12-1980 to the new firm if the requirements of the Act are found satisfied.
It would follow that since we have held that there were two firms in existence, the request for continuation of registration and grant of registration of respective firms has to be processed separately. It would also follow as a consequence of any orders that may be passed that separate assessments will have to be made and in the assessments so made, appropriate status would have to be taken for the respective firms. Therefore, there was no infirmity in the order of the AAC making it clear that two separate assessments would have to be made. That is only a natural consequence flowing out of his order on the points of registration. To this extent, there was no error in the order of the AAC and there is no merit in the appeal of the revenue on this point.
19. As far as the appeal of the assessee is concerned, we have given directions which are different from those given by the AAC, but which would nevertheless call for further enquiries to the extent stated.
Therefore, it cannot be said that the AAC should have straightaway directed the grant of registration and to this extent, therefore, he was not in error.
20. The result is, the orders of both the authorities below are set aside and fresh orders will be passed by the ITO in conformity with our aforesaid directions. For statistical purposes, the appeal of the assessee would be treated as dismissed and the appeal of the revenue would be treated as allowed in part.