Harbans Lal, J.
1. This is a reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter called 'the Act '), and the following question of law has been referred to this court by the Income-tax Appellate Tribunal, Amritsar Bench (hereinafter called 'the Tribunal'), vide its order dated June 30, 1973 :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing the sum of Rs. 10,799 as a bad debt for the assessment year 1967-68 ?'
2. For the purpose of appreciation of the point of law in controversy, the relevant facts of the case may be summarised.
3. A firm under the name and style of Messrs. Jagat Ram Om Parkash, Bazar Ghantaghar, Amritsar, was brought into existence by a partnership deed dated February 7, 1963. Its business was the purchase and sale of shawls, yarn and woollen goods. The partnership comprised of the following six partners :
1. Shri Sham Dass Virmani;
2. Shri Shiv Parkash Khanna ;
3. Shri Om Parkash Khanna;
4. Shri Satish Parkash Khanna ;
5. Shri Narpinder Parkash Khanna; and
6. Shri Kulbhushan Khanna.
4. This firm was dissolved by the deed of dissolution dated May 11, 1965. This was necessitated because two of the partners, Shri Sham Dass Virmani and Shri Shiv Parkash Khanna, retired as partners voluntarily. A new partnership was constituted and the remaining four partners executed a new deed of partnership dated May 12, 1965, effective from April 2, 1965, under the same name and style of Messrs. Jagat Ram Om Parkash. According to the preamble of the dissolution deed, the continuing, partners took over the running business of Messrs. Jagat Ram Om Parkash as well as all the assets, liabilities, goodwill, firm's name, quota rights, occupancy rights of the business premises, sales tax licences, telephone installations,stock-in-trade and other such rights and privileges, etc., which had been acquired by the said firm in the course of business. The dissolved firm had a number of bad debts outstanding at the time of dissolution. One of such debts was amounting to Rs. 39,662 against Kunwarji Vallabhadass, Bombay. It was specifically recorded in the dissolution deed that the recovery of this debt was doubtful, a suit was pending in the civil court at Amritsar and that Sham Dass Virmani, one of the partners had paid his proportionate share of this debt. It was one of the stipulations that in case this debt was recovered, after deducting litigation expenses, the balance amount shall be paid to the retiring partner, Shri Sham Dass Virmani, in proportion to his share and if nothing was recovered, he will be required to pay his share of the litigation expenses. Regarding other debts also, the stipulation was in similar terms. The other retiring partner, Shri Shiv Kumar Khanna, was, however, not to be liable to and responsible for any bad debt whether recovered or otherwise. The total amount of the bad debt was Rs. 46,372. A separate atta account was opened in the books of the reconstituted firm and the total amount of the bad debts was shown in the account for the assessment year 1965-66. The same state of affairs continued in the account for the assessment year 1966-67.
5. The reconstituted firm carried on the same business which was carried by the earlier firm. Cl. 12 of the new partnership deed was to the following effect :
'That the firm hereby formed has taken over and succeeded to all the assets, liabilities, quota rights, sales tax licences, trade marks, stock-in-trade, occupancy rights of the business premises, telephone installations, goodwill, firm's name and such other rights and privileges, etc., acquired by the said predecessor firm which came into existence by virtue of partnership deed dated February 7, 1963.'
6. This firm was again reconstituted by another deed of partnership dated July 6, 1966, which was to operate from March 23, 1966, whereby Shri Shiv Parkash Khanna, who had retired from the first firm was again taken as a partner. With his entry, the shares of three of the fo.ur partners were reduced. During the period from March 23, 1966, to April 9, 1967, that is, for the assessment year 1967-68, the reconstituted firm in its income-tax return declared income of Rs. 76,779. During this period, there was a settlement with Messrs. Kunwarji Vallabhadass, Bombay, against whom a decree had been passed by the subordinate judge, Bombay, on May 30, 1964, for a sum of Rs. 40,712.77. Suit No. 681 of 1963 had also been filed by the firm in the civil court at Amritsar. In respect of the liability of defendant in the said suit, a sum of Rs. 20,000 was recovered by the firm by means of a cheque dated April 23, 1966, on the State Bank of India. As according to the settlement with the above-mentioned debtor a sum ofRs. 40,329 was recoverable and only Rs. 20,000 had been recovered, the remaining amount, Rs. 20,329, was claimed as bad debt. Out of this, the ITO disallowed the following two amounts.
(1) Rs. 9,530 in proportion to the seven annas and six pies share of Sham Dass Virmani; and
(2) Rs. 2,223 in proportion to one anna and nine pies share of Shiv Parkash Khanna ; the total being Rs. 11,753.
7. However, in appeal before the AAC, the entire amount of the remaining bad debt of Rs. 20,329 was disallowed and the AAC held that it was a case of a reconstituted firm under Section 187(2) of the Act, and not of a successor-firm. In appeal by the assessee before the Tribunal, it was held that out of the total bad debt of Rs. 20,329, the share of Sham Dass Virmani, that is Rs. 9,530, could not be allowed as a bad debt in view of the terms of the agreement between the parties. The remaining amount of Rs. 10,799, was, however, allowed as bad debt. It was also held that the firm was taken over as a going concern and there was no dissolution of the old firm, but there was only a change in the constitution of the firm as envisaged under Section 187(2)(a) of the Act. The contention of the revenue that it was the case of a new firm having been brought into existence did not find favour with the Tribunal. As the revenue felt aggrieved by the order of the Tribunal allowing the sum of Rs. 10,799 as bad debt for the assessment year 1967-68, an application was made under Section 256(3) of the Act, for making a reference to this court, which has been allowed.
8. The sole proposition of law canvassed by Mr. Awasthy, the learned counsel for the revenue, is that after the retirement of the two partners out of the six partners from the first firm, the said firm had been dissolved by means of a regularly executed dissolution deed and a new firm had been brought into existence by another partnership deed dated May 12, 1965. Therefore, it was a case of a new legal entity having come into existence for the purpose of income-tax and the new firm cannot be held,to be a reconstituted firm with only change in the constitution, under Section 187(2) of the Act. A perusal of the partnership deeds of the two firms and the dissolution deed makes it clear that after the dissolution of the first firm, the number of the parthers was reduced from six to four in the newly constituted firm, but the remaining four partners remained the same and the business, goodwill, name of the firm, etc., of the previous firm were also continued. Even the liabilities and assets were taken over by the second firm. The scope and ambit of Sections 187 and 188 of the Act, in the light of the provisions of the Indian Partnership Act, was considered by a Full Bench of this court in Income-tax Reference No. 20 of 1972 (NandlalSohanlal v. CIT ) wherein it was held at pages 196, 197:
' The purport of Section 187(1) is that assessment on the firm which under-goes change in its constitution has to be made as it stands reconstituted at the time of the making of assessment, provided of course one of its old partners continues to be its member at the time of framing the assessment. In a way it gives a special definition of the expression 'reconstituted firm'. It implies that if the same business continues and at least one of the old partners continues as a partner, the change in the remaining personnel of the firm, whether one or more partners cease to remain as partners or some new ones are added, the firm continues to have a legal entity as a unit of assessment. It has already been noticed that if one of the partners dies or an additional partner is introduced in a partnership, a new partnership comes into existence if the case is viewed strictly in accordance with the provisions of the Indian Partnership Act, but the Act makes a thorough departure from these concepts and expressly provides that such changes would ensure continuity of the firm as a unit of assessment.'
9. It was further held :
'If the legislature has succeeded in introducing a fiction by which a dissolved firm is deemed to continue, there appears to be no reason to whittle down the effect of wide and all embracing phraseology employed in Section 187 of the Act, which allows an assessment to be framed against a reconstituted firm. This section makes no distinction between a going concern which is reconstituted or a firm which is dissolved and then reconstituted. In principle there is no difference between a person who ceased to be the partner of a firm on his being dropped as a partner or on his being declared insolvent. Nor does it make any difference if a person ceases to be a partner because of his death. All that the section requires is that if the same business is continued by a reconstituted firm of which at least one of the old partners continues to be a partner of the new firm, the firm will be treated as a continuing entity in the eyes of law.'
10. According to the learned counsel, in the aforesaid case decided by the Full Bench, one of the partners of the first firm had died, but no dissolution deed had been executed and only a minor son of the outgoing partner was admitted to the benefits of the partnership and, therefore, the ratio of the said decision is not applicable in the present case. We do not find any merit in this contention. The formal execution of the dissolution deed and the fact that dissolution of the partnership results consequent to the death of a partner or by a voluntary retirement of one or two partners is not of any relevance for tbe purpose of determining the true scope of Section 187 of the Act. In our considered opinion, the ratio of the above referred Full Bench decision is fully applicable to the present case and we are bound by the saiddecision. The decision in Jupiter Foundry and Machines (Knives) v. CIT is also to the same effect. Therein, even the formal dissolution deed had been executed on the retirement of one partner.
11. It was lastly contended that according to Section 36(1)(vii) read with Section 36(2), only such bad debt could be allowed which had been taken into account in computing the income of the assessee of that previous year or of an earlier previous year, and the assessee of the previous year cannot be held to be the same assessee for the relevant assessment year 1967-68, in the case of a firm which was dissolved and a new one was created. This contention has also no substance, as the expression 'assessee' in Section 36(2)(i)(a) has to be interpreted keeping in view the interpretation of Section 187 regarding reconstituted firm or the succeeding firm, as the case may be.
12. For the reasons mentioned above, we hold that the assessee-firm for the assessment year 1967-68, was only a reconstituted firm of the first firm and as such, the decision of the Tribunal was correct in law in allowing a sum of Rs. 10,799 as a bad debt. Consequently, our answer to the question referred to this court is in the affirmative.
S.S. Sandhawalia, J.
13. I agree.