Per S. Kannan, Account Member - This departmental appeal is directed against the order dt. 16-4-1985 of the C. I. T. (Appeals), relating to the assessment year 1981-82.
2. The facts of the case are that the assessee firm is a dealer in grains. For the assessment year 1981-82, it filed two returns, one for the period from 21-10-1979 to 5-5-1980 and the other for the period from 6-5-1980 to 7-11-1980. The two returns came to be filed in the following circumstance : 3. Previously firm consisted of four partners. On 5-5-1980, one of the partners, Shri Nanjibhai Shah, died. A new partnership was constituted with effect from 6-5-1980 consisting of two out of the three remaining partners of the old firm, and four new partners. The I. T. O. took the line that the case was one of the change in the constitution of the firm and in this view of the matter made a single assessment clubbing together the income returned for the two periods.
4. On his part, the C. I. T. (Appeals) directed the I. T. O. to make two separate assessments. In this regard, he was impelled by the retrospective amendment to section 187(2) made by the Taxation Laws (Amendment) Act, 1984 whereby a proviso is deemed to have been added right from 1-4-1975.
6. Shri V. G. Nair, the learned Departmental Representative, contended that the C. I. T. (Appeals) erred in holding that the amended provisions applied to this case. He first drew our attention to the fact that the proviso inserted by the Taxation Laws (Amendment) Act, 1984 with retrospective effect from 1-4-1975 applies only to cases where a firm is dissolved on the death of its partners. In the case before us, the firm was not dissolved on the death of the partner, Shri Nanjibhai Shah. The firm consisting of four partners which was in existence at the beginning of the relevant previous year was constituted by and under partnership deed dt. November 12, 1977. Clause 13 of the Deed clearly stipulate : "In case of death of any of the partner, the partnership shall not come to an end. It may be continued to subsist between the remaining partners and legal heirs or heirs of the deceased partner." According to Shri Nair this specific provision goes to show that, as agreed to by the partners, the firm did not come to an end on the death of Nananjibhai Shah.
7. Turning his attention next to the partnership deed dated 6-5-1980, Shri Nair contended that the paragraph 5 of the recital portion of the said deed as also clause (1) of the deed went to show that, even according to the partners, there was no dissolution of the old partnership on the death of Nananjibhai Shah.
8. In view of the foregoing, therefore, contended Shri Nair that the I.T. O. was justified in making a single assessment treating the case as one of change in the constitution of the firm.
9. On his part, Shri R. M. Shah, the learned Counsel for the assessee, contended that as provided in section 40 to 43 of the Partnership Act, death of a partner resulted in dissolution of the firm. Further, he contended that after the death of Nanjibhai Shah, one of the remaining partners gave notice of dissolution and accordingly, the firm was dissolved and the accounts made up and settled. It was, thereafter, the new firm was dissolved and the accounts made up and settled. It was, thereafter, the new firm was constituted. He, therefore, urged that the impugned order of the C. I. T. (Appeals) does not invite any interference. In this connection, he contended that it is not legally necessary that a dissolution must be invariably evidenced by a written deed of dissolution.
10. We have looked into the facts of the case. We have considered the rival submissions. We consider that the points urged by Shri Nair are well taken.
11. Prior to the insertion of the proviso to section 187(2) of the Income-tax Act, 1961, by the Taxation Laws (Amendment) Act, 1984 with retrospective effect from 1-4-1975, the question whether the provisions of section 187(2) would also apply in cases where a firm stands dissolved by operation of law or by virtue of an agreement amongst the partners was the subject matter of litigation and conflicting judicial decisions. With a view to ending the uncertainty and litigation on this issue, the Amending Act of 1984 inserted a proviso which states that nothing contained in clause (a) of section 187(2) shall apply to a case where the firm is dissolved on the death of any of its partners. It should be highlighted that the proviso deals with the case where a firm is dissolved on the death of any of its partners. The proviso does not lay down that in all cases and in all circumstances, the death of a partner will result in the dissolution of the firm. Before the proviso could come into play, it must be shown that the firm in question stood dissolved on the death of any of its partners. Now the said dissolution of the firm. Before the proviso could come into play, it must be shown that the firm in question stood dissolved on the death of any of its partners. Now the said dissolution may be by the operation of law or virtue of an agreement amongst the partners. On the death of one of its partners of the firm, a firm is dissolved by operation of law in a case where the provisions of section 42 of the Indian Partnership Act apply.
Even here, it must be highlighted that the provisions of section 42 are "subject to contract between the partners." In other words, where a partnership deed is silent on the fate of the firm on the death of any of its partners, section 42(c) of the Indian Partnership Act would get activated and consequently the firm will stand dissolved on the death of the partner. Where, however, as in the case before us, the partnership deed contains a specific provisions to the effect that the death of any of its partners of the firm shall not result in dissolution of the firm, section 42(c) is totally inapplicable.
12. In the case before us, as rightly pointed out by Shri Nair, the agreement amongst the partner was that "in case of death of any of the partner, the partnership shall not come to an end." Further, the new partnership deed dated May 6, 1980 also makes it clear that the intention of the parties was to continue the old firm as a going concern.
13. In view of the foregoing, therefore, it must be held that the case before us is not one of the dissolution of the firm on the death of the partner. It should, therefore, follow that the proviso introduced by the Taxation Laws (Amendment) Act, 1984 is not applicable to the case.
Consequently, the C. I. T. (Appeals) erred in deciding the issue as though the said proviso applies to the case.
14. In view of the foregoing, therefore, we set aside the impugned order of the C. I. T. (Appeals) and restore that of the I. T. O.15. Before taking leave of this matter, we may deal with one of the arguments which the assessees Counsel sought to raise. According to him, a notice was given by one of the partners on pursuant to which the firm was dissolved. Two points must here be made. If the firm came to be dissolved on the notice being given by one of the partners then this is not a case of dissolution on the death of partner. Secondly, even assuming that the so called notice came to be given simultaneously with the death of Nananjibhai Shah, this is a new plea raised for the first time before the Tribunal - a plea that involves an investigation into facts. We, therefore, reject the plea.