1. The question of law posed for the opinion of the court, in this reference under section 256(1) of the Income-tax Act, 1961 ('the Act'), at the instance of the Department is this :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the appellant-firm was entitled to continuance of registration under section 184(7) of the Act ?'
2. The reference relates to the assessment year 1966-67 and the accounting period ended on June 30, 1965. A firm under the name and style of Sunder Lal Banwari Lal was constituted under an instrument of partnership dated July 10, 1959 w.e.f. February 8, 1959. In the relevant assessment year, i.e., at the beginning of the accounting period, there were four partners, namely, Mukat Behari Lal, Amba Prasad, Suraj Bhan and Om Parkash. Initially, there was another partner named Sunder Lal but he died on April 29, 1959, and on his death, Mukat Behari Lal was taken as a partner with the consent of the other partners. There was no clause in the deed of partnership dated July 10, 1959, providing that in the event of the death of one of the partners, the firm was not to be dissolved. Clause 8 of the partnership deed only provided that in the event of parties one (Mukat Behari Lal) and two (Amba Prasad) wishing to separate, the accounts would be settled and the leasehold rights of the premises would also be divided among the partners but the firm would not dissolve in the case of retirement of third and fourth parties.
3. On March 3, 1965, Mukat Behari Lal died. The firm neither closed its accounts nor interrupted the carrying on of the business which was continued up to June 30, 1965, namely, the date of closing of the accounts of the firm previously. With the consent of the three surviving partners, Smt. Chand Kiran, mother of Mukat Behari Lal, was taken as a partner with effect from March 4, 1965. However, no dissolution deed was drawn and no fresh written partnership deed was executed. For the assessment year 1966-67, the firm, Sunder Lal Banwari Lal, filed on June 28, 1966, only one return declaring a total income of Rs. 32,869 for the accounting period July 1, 1964, to June 30, 1965, but apportioned the income in this manner. The profits of the year were apportioned among the partners in the manner that the four partners including Mukat Behari Lal up to March 3, 1965, were given the profits for 8 months and the four partners including Smt. Chand Kiran were given the profits for the remaining four months. A declaration in Form No. 12 had also been filed before the Income-tax Officer on June 28, 1966, along with the return.
4. The Income-tax Officer, however, found that one of the partners had died on March 3, 1965, that no new instrument of partnership had been drawn up subsequently, that the old accounts had been continued till June 30, 1965, that the assessed-firm as constituted at the time of making up the assessment was not constituted under an instrument of partnership nor had any application for registration been filed an behalf of that firm and that the allocation of the profits among the partners were on time basis and the actual profits up to March 3, 1965, had not been apportioned and divided amongst the partners. For these reasons, the Income-tax Officer rejected the assessed's claim for registration and assessed it as an unregistered firm. We are not concerned in this reference with the question of assessment but only with the narrow question of the continuance of the registration of the firm. On appeal by the assessed, the Appellate Assistant Commissioner for similar reasons dismissed the appeal.
5. In the further appeal to the Tribunal, construing the terms of the instrument of partnership deed dated July 10, 1959, in the context of the provisions of the Indian Partnership Act, 1932 ('the Partnership Act'), it came to the conclusion that the earlier firm had been dissolved on March 3, 1965. The Tribunal held that during the period July 1, 1964, to June 30, 1965, there were two firms in existence, one for the period July 1, 1964, to March 3, 1965, and the other for the period March 4, 1965, to June 30, 1965, that the firm that was in existence during the first period was registered in earlier years and had also filed an application in Form No. 12 and that it was, thereforee, entitled to the continuation of registration. It was held that for this assessment year, the previous year of the firm was July 1, 1964, to March 3, 1965, when the firm came to an end, that in respect of that period there was a proper application in Form No. 12 and that should have been accepted by the Income-tax Officer under section 184(7) of the Act and effect given to the registration of the firm for the assessment year 1966-67.
6. The main argument of Shri K. K. Wadhera, the learned counsel for the Department, is that there was only a change in the constitution of the firm on March 3, 1965, and, accordingly, the Income-tax Officer was right in clubbing the income of the two periods for a single assessment and this is clear from the provisions contained in section 187(2) of the Act. According to the counsel, the assessed itself proceeded on the footing that there had been only a change in the constitution of the firm as it filed only one return on June 28, 1966, showing the income for the period July 1, 1964, to June 30, 1965. This fact is further borne out from the record that no dissolution deed had been drawn up on the death of Mukat Behari Lal on March 3, 1965, that no new instrument of partnership was executed and that, on the other hand, the mother of Mukat Behari Lal was taken in as a partner and the firm continued to carry on the same business. The conclusion urged to be drawn is that there was a firm with a change in the constitution on March 3, 1965, during the period July 1, 1964, to June 30, 1965, and since there was no proper application for registration in Form No. 11A, the registration had rightly been refused by the Income-tax Officer and the Appellate Assistant Commissioner. In law, the submission is that it is not permissible to break the periods of accounting and to allow piecemeal registration of the instrument of partnership and that the registration under the Act is an annual registration. Reliance is placed on CIT v. Kejriwal Traders : 71ITR463(Cal) , K.C. Trunk & Bucket Factory v. CIT and Jawaharlal Khandelwal v. CIT : 110ITR884(Orissa) .
7. Before dealing with these contentions, we may notice the statutory provisions. In the Act, sections 4 and 5, which are the charging sections, levy tax on every person. 'Person' is defined by clause (31) of section 2 as including, inter alia, a firm. Clause (23) of section 2 says that 'firm', 'partner' and 'partnership' have the meanings assigned to them in the Partnership Act, but the expression 'partner' shall also include any person who, being a minor, has been admitted to the benefits of partnership. Section 4 of the Partnership Act says that the partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all and persons who have entered into partnership with one another are called individually 'partners' and collectively a 'firm' and the name under which their business is carried on is called the firm name. Under the general law, a firm is not a legal person or juridical entity, but for the purposes of the Act, a firm is treated as an entity, distinct from the persons who constitute the firm. By virtue of the definition of the expression 'person', it is obvious that a firm is included in it and is and is an assessable entity.
8. Chapter XVI of the Act contains special provisions applicable to firms. Sections 182 and 183 of the Act deal with the assessment of firms, registered and unregistered, respectively. Section 184 prescribes several requirements for the grant of registration. We are not concerned in this case with the conditions which are essential to the registration of the firm. The firm was granted registration for the earlier assessment years. The question of registration is of vital importance to a firm. An unregistered firm is charged as a unit of assessment while in the case of a firm which is registered by the authorities under the Act, although tax at special rates prescribed is levied on the firm, the substantive levy is on each individual partner in respect of his share of the firm's income. Sub-section (7) of section 184 provides that where registration is granted to any firm for any assessment year, it shall have effect for every subsequent assessment year. There are, however, two provisos. In section 184(7), clause (ii) of the proviso was substituted by the Taxation Laws (Amendment) Act, 1970, with effect from April 1, 1971. Clause (i) of the proviso is that there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted, and clause (ii) (as it stood prior to amendment) was that the firm furnishes, along with its return of income for the assessment year concerned, a declaration to that effect, in the prescribed form and verified in the prescribed manner. Rules 22 to 25 of the Income-tax Rules, 1962, deal with the registration of a firm. Rule 22 prescribes the manner and the form in which the application for registration should be made. Rule 24 provides for the declaration for continuance of registration. It says that the declaration to be furnished under sub-section (7) of section 184 shall be in Form No. 12 and shall be verified in the manner indicated therein and shall be signed by the persons concerned in accordance with sub-rule (5) of rule 22. The prescribed form is Form No. 12. Section 185 prescribes the procedure to be adopted on the receipt of application for registration of a firm or renewal of registration. Section 186 deals with the application of registration. The effect of these provisions is that a genuine firm, once registered and continuing without any change in its constitution or in the shares of its partners, must be treated as registered for subsequent years. In other words, the registration ensures for subsequent years subject only to the filing of a declaration under section 184(7) in the manner prescribed. Section 187 deals with the case where at the time of making an assessment, it is found that a change has occurred in the constitution of the firm. Sub-section (2) says that for the purposes of section 187, there is a change in the constitution of the firm 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. Section 188 provides for the succession of one firm by another firm and says that where a firm carrying on a business or profession is succeeded by another firm, and the case is not one covered by section 187, separate assessments shall be made on the predecessor firm and the successor firm ins accordance with section 170 of the Act.
9. At this stage, it will be apposite to notice some other provisions of the Partnership Act. The effect of the death of Mukat Behari Lal on March 3, 1965, in our opinion, is that there was a dissolution of the firm as constituted under the instrument of partnership dated July 10, 1959, on his death. Chapter VI of the Partnership Act deals with the dissolution of the firm and contains in sections 39 to 44 of the Partnership Act, the circumstances in which the dissolution of a firm takes place. The dissolution of a partnership between all the partners of a firm is called the 'dissolution of the firm'. A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. There may be a compulsory dissolution in law on the happening of the events provided in section 41. Section 42 of the Partnership Act deals with the dissolution of a firm on the happening of certain contingencies and provides that subject to contract between the partners, a firm is dissolved, (a) if constituted for a fixed term, by the expiry of that term; (b) if constituted to carry out one or more adventures or undertakings, by the completion thereof; (c) by the death of a partner; and (d) by the adjudication of a partner as in insolvent. The death of any one of the partners of a firm operates as a dissolution thereof a between all the members. unless there is some agreement to the contrary. Whether there is a contract to the contrary is to be considered on the construction of the instrument of partnership. It may be recalled that there was no clause in the deed of partnership dated July 10, 1959, providing that in the event of the death of one of the partners, the firm was not to be dissolved. The death of Mukat Behari Lal on March 3, 1965, thus, resulted in the dissolution of the firm. A partnership is essentially a contract between the parties and with the death of one of the partners, it is no longer possible to adhere to the original contract. The acts of not closing the books of account on March 3, 1965, or reconstitution of the firm with three surviving partners and Smt. Chand Kiran or carrying on the same business, would not create a contract between the partners of the firm which stood dissolved by operation of law on the death of Mukat Behari Lal. The aforesaid acts subsequent to the death of one of the partners cannot attribute a contract to a dead person, when he made no such agreement or expressed any intention to the contrary within the meaning of section 42 of the Partnership Act. On the death of a partner, there is dissolution of the firm and in that case, the authority of the surviving partners to bind the firm continues, so far as may be necessary to wind up the affairs of the firm. They are the proper persons to have the business wound up after dissolution. But as between the firm on the one hand and surviving partners and the estate of the deceased partners on the other, there is a right to have the property of the firm applied in payment of the debts and liabilities of the firm and to have the surplus distributed among the partners or their representatives according to their rights. The surviving partners have no authority to continue to carry on the business of the firm except to complete transactions begun but unfinished at the time of the dissolution, but not otherwise. It bears repetition that there was no clause in the partnership deed dated July 10, 1959, providing that the death of a partner would not dissolve the firm and, thus, on the death of Mukat Behari Lal, the firm stood dissolved under section 42(c) of the Partnership Act.
10. Chapter V of the Partnership Act deals with the rights and liabilities of incoming and outgoing partners in sections 31 to 38. Section 31 provides that subject to contract between the partners and to the provisions of section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners. The reason for this is that the persons entering into a contract do so with the intention of forming a partnership between themselves and themselves alone. The foundation of the partnership is mutual confidence and for this reason the introduction is by agreement. Section 35 deals with the liability of the estate of a deceased partner and provides that the estate of a deceased partner is not liable for any act of the firm done after his death even when under a contract between the partners, the firm is not dissolved by the death of a partner. Clause (c) of section 42 of the Partnership Act lays down that subject to contract between the partners, a firm may be dissolved by the death of a partner. There is, however, an exception to the introduction of partners. If there is a contract between the original partners that the partnership should not be dissolved on the death of any of them and is to be continued with the legal heirs of the deceased partner after the death of the said partner, then the firm would continue to exist, otherwise not. The legal heirs of the deceased partner would become partners immediately after the death of the said partner with the result that the continues to remain in existence. The provisions contained in Chapters V and VI of the Partnership Act bring out in sharp contrast a condition between the change in the constitution of the firm and the dissolution of the firm. If one can imagine a partnership as an association of persons bound by a legal tie or a vinculum Jurisdiction, a change in the constitution of the firm reflects only an adjustment of this legal tie which binds the partners. It is as if there is a belt which encircles all these partners and the belt either shrinks or expands to accommodate or give effect to an incoming or outgoing partner. A dissolution, on the other hand, is a breaking or a disruption of this legal tie. The belt itself breaks asunder and all the persons who were members of the firm stand free from the above legal tie. There is thus a very clear and vital distinction between the case of a change in the constitution of the firm and the case of a dissolution of a firm - CIT v. Sant Lal Arvind Kumar : 136ITR379(Delhi) .
11. There is nothing in the language of sections 182 to 189 of the Act which may preclude the application of the partnership law principles even under the Act. We may recall the definition in clause (23) of section 2 that for the purposes of the Act, the expressions 'firm', 'partner' and 'partnership' have the same meaning as they have under the Partnership Act. The concepts of partnership law have absolute relevancy in its application unless there is something in any particular provision in the Act which may compel a contrary view. In Malabar Fisheries Co. v. CIT : 120ITR49(SC) , the Supreme Court considered the question of partnership and dissolution of a firm. Their Lordships approved the decision of the Privy Council to make it clear that even under the Act, the concept of a firm will be the same as under the partnership law and that in the absence of a contract to the contrary, a firm on its dissolution ceases to exist.
12. We have noticed that section 187 deals with a change in the constitution of a firm. The very concept of a change in the constitution of a firm and its carrying on the business is that the same identical firm continues as before, subject however, to either a change in the composition of the firm by incoming or/and outgoing partners or as sections 184(7) and 187(2)(b) point out, there may be an alteration in the shares, inter se, of the partners of the firm. This is consistent with only a change in the constitution of a firm in the sense of continuity being maintained and the identity of the firm being maintained as contemplated by the provisions of sections 31 to 35 of the Partnership Act. There may be induction of a new partner or there may be a retirement of a partner or there may be expulsion or a partner or where there is a contract to the contrary that the partnership does not get dissolved even on the death of a partner and continues with legal heirs of deceased partner continuing as partners instead. In none of the three eventualities, the firm gets dissolved. There is only a change in the constitution of the firm, though the firm as an entity continues. This is the concept underlying section 187(1) and the same continues in section 187(2), as the opening words 'for the purposes of this section' suggest. Clauses (a) and (b) of section 187(2) provide that, for the purposes of this section, there is a change in the constitution of the firm if one or more of the partners cease to be partners or one or more new partners are admitted to where all the partners continue with a change in their respective shares or in the shares of some of them. This is consistent with the principles underlying the partnership law. The language of section 188 suggests that where any business or profession carried on by a firm has been discontinued or where the firm is dissolved, the assessment should be made on the total income of the firm as if no discontinuance or dissolution had taken place. It provides that where a firm 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. The dissolution of a firm either by an act of parties or by operation of law is clearly contemplated in the Act by the Legislature. If one of the partners dies in the middle of the accounting period, it is dissolution of the firm. The firm comes to an end. It is akin to death. The surviving partners are, however, at liberty, thereafter, to enter into a fresh partnership, may be with the legal representatives and continue to carry on the business. Such a case would be a case of succession and not a mere change in the constitution of the firm. There is no contract to the contrary in the case before us. The partnership gets dissolved on the death of Mukat Behari Lal. It ceases to exist with the result that there can be no continuation of the old firm. The old firm constituted by the partnership deed dated July 10, 1959, came to an end and if a firm comes to and end, there cannot be continuity of the firm as it stood prior to its dissolution. After the dissolution of a firm, it cannot be said that it is a case of a mere change in the constitution of a firm with the three surviving partners and the legal heirs of the deceased partner.
13. We may now consider the cases relied upon by the counsel. The case of Kejriwal Traders : 71ITR463(Cal) was one of retirement of one partner in pursuance of another deed. The assessed-firm was originally constituted by a partnership deed dated April 18, 1957. On September 30, 1957, one of the partners retired and a new partnership deed was executed on January 31, 1958, in which it was recited that the partnership constituted under the deed of April 18, 1957, was 'dissolved'.
14. For the assessment year 1958-59, for which the previous year was from February 1, 1957, to December 31, 1957, the firm applied on September 5, 1957, for registration under section 26A of the Indian Income-tax Act, 1922. The Income-tax Officer refused to allow registration on the ground that there is no instrument of partnership governing the firm after September 30, 1957, nor are the sharing of profits and losses specifically laid down. The Appellate Assistant Commissioner held that it was not a case of dissolution but only a change in the constitution of the firm on January 31, 1958, and allowed registration of the firm for the whole previous year. The Tribunal cancelled the registration of the firm from October 1, 1957, to December 31, 1957, but allowed the registration of the firm for the period from February 1, 1957, to September 30, 1957. The Calcutta High Court held that the kind of allocation suggested by the order of the Tribunal was illegal and not permissible under the 1922 Act. To allocate a part to the old firm as long as it continues and the rest to the new firm when it came into existence during the accounting year could not be done by virtue of the express provisions of the deed dated January 31, 1958, which expressly declares that all debts and liabilities have been taken over by the new firm; the old firm's existence as a unit for tax liability had been wiped out by this agreement between the parties. It is in these facts and circumstances, it was held that it is not permissible to break the periods of accounting and to allow piecemeal registration of the instrument of partnership under section 26A. Even then it was held (headnote) :
'...... If the authorities below had granted registration to the firm as constituted under the instrument dated 18th April, 1957, for the period 1st February to 30th September, 1957, there could not possible be any objection. But in granting registration to the reconstituted firm for only a part of the accounting year, the Tribunal, in my opinion, has erred.'
15. In the case before us, on an application in Form No. 12, the previous year of the firm was considered as July 1, 1964, to March 3, 1965, when the previously registered firm came to an end on the death of Mukat Behari Lal. The Tribunal rightly directed the Income-tax Officer to accept the application under section 184(7) in respect of that period. Another significant aspect to be noticed is that there have been changes made in the Act and as a result of those changes, a decision rendered under the 1922 Act would have no application. The form of application for the renewal of registration of a firm under section 26A has undergone several material changes. In the form under the 1922 Act, a certificate is required that the constitution of the firm and the individual shares of the partners so registered remain unaltered. It did not contain the words 'up to the last date of the previous year relevant to the assessment year or to the date of the dissolution of the firm'. Form No. 12 under the Act now specifically provides for an application for continuance of registration to the date of dissolution of the firm.
16. K.C. Trunk & Bucket Factory's case does not give any additional reasons but merely follows the ratio of the Calcutta High Court in Kejriwal Trader's case : 71ITR463(Cal) . With great respect to the learned judges, we are unable to subscribe to the view that although section 26A fell for consideration in the aforesaid decision, the relevant law is unchanged in the 1961 Act. We have pointed out the significant changes made by the Legislature in Form No. 12 appended to the rules. In Jawaharlal Khandelwal's case : 110ITR884(Orissa) , the Orissa High Court was influenced solely by the fact that the assessed had filed one return for both the periods which showed that there was no claim for making two separate assessments. On the facts, it was held that the business continued till the end of the year in the same manner. In that case, during the previous year ended October 31, 1968, one of the partners died on August 31, 1968. The assessed-firm's claim to be treated as a registered firm up to August 31, 1968, was held as having no force. A firm is dissolved, but only subject to a contract between the partners, by the death of a partner. It is not clear from the report whether there was any clause in the partnership deed that death of one partner shall not dissolve the firm. In the absence of such a clause, the effect of death vis-a-vis dissolution of the firm is not considered. No reasoning was advanced as to why the application made in Form No. 12 claiming the benefit of registration up to the period August 31, 1968, when the previously registered firm continued as such with all the existing partners was rejected. Form No. 12 clearly provides that the declaration under section 184(7) for continuation of the registration up to the date of the dissolution of the firm can be filed.
17. The declaration in Form No. 12 in the case before us is dated June 28, 1966, and, admittedly, filed along with the return of income for the relevant assessment year. It is a declaration under section 184(7) for continuance of registration. The declaration says that the firm, Sunder Lal Banwari Lal, was granted registration for the assessment year 1964-65, vide order dated November 16, 1964, passed by the Income-tax Officer (for 65/66 no order received). Then it contains the declaration that there has been no change in the constitution of the firm or the shares of the partners since the last date of the previous year relevant to the assessment year 1965-66 up to the last date of the previous year relevant to the assessment year 1966-67. The declaration is signed by the three partners and by 'Chand Kiran as legal heir of Mukat Behari Lal'. It is also mentioned in Form No. 12 that Mukat Behari Lal died on March 3, 1965. This is clearly a declaration in the letter and spirit of rule 24. The application is signed in the manner provided by rule 22(5). It is only required to be signed, in the case of a dissolved firm, personally by all the persons who were partners in the firm immediately before its dissolution and by the legal representatives of any such partner who is deceased. There is no dispute in the law cited that if a firm desires to have the benefit under section 184, it must conform strictly to the requirements prescribed by law. We have no hesitation in holding that, on the facts and in the circumstances of the case, the dissolution occurred on the death of Mukat Behari Lal. It is not possible to treat the firm constituted under the instrument of partnership dated July 10, 1959, as continuing as there was no clause in the deed providing that in the event of the death of one of the partners, the firm was not to be dissolved. The right to the continuance of registration was claimed in accordance with the statutory provisions though erroneously without specifying the period up to March 3, 1965. The Tribunal was thus right in its conclusion.
18. We answer the reference in the affirmative, i.e., against the Department and in favor of the assessed. As the assessed has not put in appearance, there will be no order as to costs.