2. The assessee is a firm of partnership consisting of Deepak L.
Aswani, representing his family of which he is the karta, Lachmandas B.Aswani and Smt. Lajwanthi Deepak Aswani. This partnership was formed on 1-10-1981. Prior to that there was a partnership firm consisting of four partners, viz., Lalchandas, Kanyalal Makhija, Visnnudas and Deepak L. Aswani. That firm was dissolved with effect from 1-10-1981 by a deed of dissolution dated 5-10-1981 and the business was taken over by Deepak L. Aswani who had constituted the partnership on 1-10-1981 with the other two first mentioned partners. For the assessment year 1981-82, the firm consisting of four partners filed its return of income for the period from 1-4-1981 to 30-9-1981, that is, upto the date of dissolution. The new firm of three partners submitted its return of income for the period 1-10-1981 to 31-3-1982. The Income-tax Officer passed a single assessment order for the entire period of 12 months from 1-4-1981 to 31-3-1982. He also made protective assessments on the old firm for the period from 1-4-1981 to 30-9-1981 and on the new firm for the period from 1-10-1981 to 31-3-1982. It is in this context that we are in seisin of these-three appeals.
3. According to the Income-tax Officer there was only a change in the constitution of the firm and, therefore, there was no need for two separate assessments. This view was upheld by the CIT (Appeals) purportedly following the decision of the Kerala High Court in the case of Excel Productions v. CIT  80 ITR 356. The assessee is aggrieved.
4. We have heard rival submissions. In our considered view the reliance placed by the CIT (Appeals) on the decision of the Kerala High Court in Excel Productions' case (supra) is rather misplaced because at page 359 thereof the Hon'ble High Court had observed that "it is admitted (this was done before the Tribunal too) that this is a case of change in the constitution of the firm and not a case of succession of one firm by other firm". It was on such admission that the issue was decided applying the provisions of Section 187 of the Income-tax Act, 1961. In that decision, no doubt, their Lordships of the Kerala High Court have explained the import and content of Section 188 succinctly in the following terms : -- Therefore, the question is not whether there is a change in the constitution of a firm or whether there is a succession of one firm by another, the question is whether the particular case falls under Section 187 or not.
This observation cannot lead to the conclusion that in every case of succession of one firm by another firm there cannot be two assessments.
It would be different if the case falls squarely within the provisions of Section 187(2). Section 187 deals with change in the constitution of the firm and the assessment thereof. Sub-section (2) explains the change in the constitution of the firm in the following terms :-- 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: Provided that nothing contained in Clause (a) shall apply to a case where the firm is dissolved on the death of any of its partners.
This proviso was inserted by the Taxation Laws (Amendment) Act, 1984 with retrospective effect from 1-4-1975. It was not before their Lordships in Excel Productions' case (supra). This proviso came up for interpretation in CIT v. Raj Bros  165 ITR 720 (AP). Their Lordships of the Andhra Pradesh High Court held as follows : -- A partnership firm is essentially governed by the provisions of the Indian Partnership Act and the dissolution of the partnership could be brought about statutorily under the Indian Partnership Act by any of the modes referred to in Sections 40 to 44 of the said Act.
Dissolution by death of any of the partners is governed by Section 42(c). The contention that by introducing the proviso after Sub-section (2) of Section 187 of the Income-tax Act, 1961, the Act sought to recognise only a dissolution brought about by death of any of the partners within the meaning of Section 42(c) of the Indian Partnership Act and to derecognise all other forms of dissolution envisaged by Sections 40 to 44 is wholly insupportable. The dissolution of a partnership firm by any of the modes set out in Sections 40 to 44 brings about the legal death of a partnership firm. From the date of dissolution, the partnership has to be treated as extinct for all purposes. The proviso to Section 187(2) of the Income-tax Act was enacted to resolve the conflict of judicial opinion on the question whether the death of a partner brings about merely a change in the constitution of a firm or there is a dissolution bringing about extinction of the firm. The effect of the proviso to Section 187(2) is not to recognise dissolution of firms with reference to the death of the partners and derecognise all other modes of statutory dissolution.
In order to test whether the firm was legally and factually dissolved giving birth to a new firm, regard must be had not only to the mode of dissolution known to partnership law, but also the factum of dissolution as evidenced by the conduct of the parties or the events following dissolution. In the case of the assessee before us there is the dissolution deed dated 5-10-1981 which goes to state that the partnership originally formed by an instrument in writing dated 14-5-1970 as modified by the deed dated 11-5-1977 was carrying of the business till 30th September, 1981 and by mutual consent of all the partners it was decided to dissolve the said partnership with effect from the close of business on 30-9-1981. It declares further that the partnership firm stood dissolved on the closing of the business on 30-9-1981. Clause 2 of the dissolution deed dated 5-10-1981 is as follows :-- In giving effect to the said dissolution accounts have been closed on 30th September, 1981 after taking into account, the property, assets and liabilities of the partnership, inventory and valuation of all the machinery, plants, tools, utensils, stocks in hand, office equipments, materials, and effects belonging to the firm and also considering the debts owing to the firm after making provisions for the bad debts, irrecoverable items etc., and such closing of accounts have been accepted to by all the parties concerned.
3. The amount due to the erstwhile partners of the firm including capital, current and all other balances due to them has been determined as per books which has been accepted to and confirmed by the respective partners.
4. In consideration of the amounts due to Kanyalal Makhija and Vishnudas L. Aswani, and Sri Lachmandas B. Aswani agreed to be paid to them within six months by Sri Deepak L. Aswani, Messrs. Kanayalal Makhija, Vishnudas L. Aswani and Sri Lachmandas Aswani do hereby assigns to Sri Deepak L. Aswani all their respective shares and other rights, titles in the book and other debts, benefits of contracts, agreements, assets and liabilities and all effects thereof to have and to hold the same unto the use of the said by Deepak L. Aswani absolutely and for ever.
5. Sri Deepak L. Aswani hereby agrees to pay the amount due to Kanyalal Makhija and Vishnudas L. Aswani and Sri Lachmandas Aswani respectively as per the accounts within six months from 1st October, 1981 without interest. In case full payment is not made before the expiry of six months, any amount outstanding as on that date shall be paid over to the respective parties with interest at the rate of 24% p.a. from 1st April, 1982.
6. Sri Deepak L. Aswani alone has full right, liberty, authority and responsibility to collect all the amounts and outstanding due to the dissolved partnership with power to appropriate the same for his use, benefit and ask for, demand, sue, recover receive, compromise, sign and give full and effectual receipts and discharges for all the debts, outstandings, liability due to or otherwise belonging to the said dissolved partnership and to settle all accounts, matters, and things whatsoever relating to the dissolved partnership.
7. Sri Deepak L. Aswani shall alone be responsible solely and exclusively liable for the payments of debts, liabilities of said dissolved partnership and also all future rent of the business premises and further shall indemnify and keep indemnified Sri Vishnudas L. Aswani and Sri Kanyalal Makliija and Sri Lachmandas Aswani from all actions, proceedings, costs, claims and demands in respect of the dissolved partnership.
8. All tax liabilities in respect of the dissolved partnership upto the date of dissolution shall be borne and paid by the erstwhile partners in their respective shares. So also any refunds due, from income-tax, sales-tax and any other departments shall be received by them in their profit sharing ratio.
9. All the parties hereto shall respectively sign, execute and do all such further documents, deeds, forms and such other things as the other party may reasonably require for completely effectuating this dissolution.
10. It is hereby agreed and declared between the parties concerned that in view of the circumstances under which the dissolution has taken place, it has been decided that no valuation need be made and none of the parties have any share therein.
11. Sri Deepak L. Aswani shall alone be entitled to take over and carry on the business relating to the dissolved partnership either by himself with any person or persons and he is at liberty to carry on the business in any mode they like and Vishnudas L. Aswani and Kanyalal Makhjja and Sri Lachmandas and sons shall not have any right responsibility, claim whatsoever in this regard.
Accordingly, Sri Deepak L. Aswani had taken over the business. For securing financial assistance and help in running the business he in turn constituted a partnership with two other persons and this partnership is witnessed by an instrument dated 1st October, 1981.
Thus, the old firm was dissolved with effect from 1-10-1981 by the mutual consent of all the partners. This is one of the modes prescribed under Section 40 of the Indian Partnership Act, 1932, which reads as follows : -- 40. Dissolution by agreement - A firm shall be dissolved with the consent of all the partners or in accordance with a contract between the partners.
Dissolution of the firm is defined in Section 39 of the above Act as under :-- 39. The dissolution of a partnership between all the partners of a firm is called the 'dissolution of the firm'.
In the assessee's case, the dissolution of the firm is evidenced by a deed of dissolution dated 5-10-1981 with effect from 1-10-1981. A perusal of the dissolution deed extracted above would demonstrate that it was not merely a paper dissolution, but a dissolution in pith and substance of the matter in that an account of the stock, assets, liabilities etc., had been taken and the amounts due to the erstwhile partners of the firm had been determined and accepted by all the partners. As a result of the dissolution one of the erstwhile partners had taken over the business and has accepted the liabilities arising under the deed of dissolution. Thus factually the partnership has come to an end. The reason for constituting another partnership with effect from 1-10-1981 by one of the erstwhile partners along with two other different persons is stated to be the need for financial help and assistance and accordingly the new firm was constituted which is also evidenced by an instrument in writing. Therefore, it cannot be said that there was only a change in the constitution of the firm so far as the assessee is concerned and even by applying the ratio and the obiter dictum of the Hon'ble High Court of Kerala laid down in the case of Excel Productions' (supra) we hold that this is not a case falling within the provisions of Section 187 of the Income-tax Act, 1961. The case is squarely governed by the recent decision of the Kerala High Court in United Coir Works v. CIT. Therefore, two assessments should have been made one in relation to the period from 1-4-1981 to 30-9-1981 and another in relation to the period from 1-10-1981 to 31-3-1982. In this view of the matter, we confirm the protective assessments as regular assessments and cancel the single assessment for the entire period as has been done by the Income-tax Officer.
(iv) Tax paid should be treated as advance tax and interest under Section 214 should be granted.
Of the points raised above, we find that only the issue regarding the disallowance of a part of depreciation was raised in ground No. 6 before the CIT (Appeals), but the learned first appellate authority had not dealt with the same. The other points were not agitated before the first appellate authority and, therefore, we cannot permit the assessee to raise those points for the first time before us.
6. But the dispute on the quantum of depreciation arises only in ITA No. 459 (Coch.)/ 1986. We, therefore, restore ITA No. 459 (Coch.)/1986 to the file of the CIT(Appeals) with a direction to resolve the issue in accordance with law.