1. The Income-tax Appellate Tribunal, Delhi Bench 'C' referred under s. 256(1) of the I.T. Act, 1961, (hereinafter referred to as 'the Act'), the following question to this court :
'Whether, on the facts and in the circumstances of the case, there was a case of change in the constitution of the firm as defined in section 187(2) on December 12, 1967, or whether there were two separate firms in existence during the periods July 9, 1967, to December 12, 1967, and December 13, 1967, to June 26, 1968, respectively, the incomes of which required to be assessed separately ?'
2. M/s. Bal Kishan Dass Hari Kisan Dass, the firm, was constituted by a deed of partnership dated June 26, 1963. It consisted of four partners, namely, Devi Sahai, Bal Kishan, Jagdish Prasad and Ram Gopal. Jagdish Prasad was stated to be a partner in his capacity as a trustee of Radhey Sham Trust. It appears from the deed of partnership dated June 26, 1963, referred to above, that the firm was earlier constituted by a deed of partnership dated September 30, 1957, and the partners were Devi Sahai, Jagdish Prasad and Bal Kishan Dass. Jagdish Prasad was acting for and on behalf of Radhey Sham Trust. This partnership was re-constituted by the deed of partnership dated June 26, 1963, when Ram Gopal taken in as the 4th partner. The partnership was at will and could be determined by mutual consent of all the parties. It was also mentioned that in the event of any party desiring to retire from the partnership, he would give a clear two months' notice in writing and on his doing so, his accounts would be settled by the other parties. Subsequent events showed that the trust on whose behalf Jagdish Prasad was the partner was no longer interested in continuing as a partner and the partnership was dissolved by mutual consent of all the parties with effect form December 12, 1967. On the following day i.e., December 13, 1967, another firm of the same name was constituted by a deed of partnership of the same date. This new partnership consisted of Devi Sahai, Bal Kishan Dass, Ram Gopal, Smt. Pushpa Lata and Smt. Prema Lata as partners. This deed recited the fact that Radhey Sham Trust came to an end by efflux of time and as the erstwhile beneficiaries thereof did not desire to become partners, the partnership which, was constituted by a deed of partnership dated June 26, 1963, was dissolved with effect from December 12, 1967. A deed of dissolution was executed on January 10, 1968, which recorded dissolution of the partnership dated June 26, 1963, with effect from December 12, 1967. Two returns of income were filed, one for the period June 9, 1967, to December 12, 1967, and the other for the period December 13, 1967, to June 26, 1968. The ITO framed a single assessment in respect of both these returns of income. On appeal, however, the AAC accepted the fact of dissolution of the firm on December 12, 1967. She observed that a new partnership was constituted on December 13, 1967, and that separate books of account were maintained by the two firms. She held that it was a case of succession on account of dissolution of the firm and not merely a change in the constitution of the firm. She, thereforee, directed the ITO to frame two separate assessments for the two periods. Thus, though the ITO held it to be a case falling under s. 187(2) of the Act, the AAC held it to be covered by s. 188 of the Act. To complete the narration, it will be appropriate to set out ss. 187 and 188 of the Act, which reads :
'187. (1) Where at the time of making an assessment under section 143 or section 144 it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment :
Provided that -
(i) the income of the previous year shall, for the purposes of inclusion in the total incomes of the partners, be apportioned between the partners who, in such previous year, were entitled to received the same; and
(ii) when the tax assessed upon a partner cannot be recovered from him, it shall be recovered from the firm as constituted at the time of making the assessment.
(2) For the purposes of this section, there is a change in the constitution of the firm -
(a) if one on more of the partners ceases 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 a 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.'
'188. 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 in the predecessor firm and the successor firm in accordance with the provisions of section 170.'
3. Not satisfied, the Revenue filed an appeal before the Income-tax Appellate Tribunal which agreed with the order of the AAC, but, nevertheless, was of the view that a question on law did arise for consideration of the High Court.
4. A host of authorities were cited before us to canvass the proposition as to whether the provisions of the Partnership Act were applicable and whether it was a case of dissolution of the firm or a mere change in the constitution of the firm. The facts in the present case leave on manner of doubt that the earlier partnership was dissolved on December 12, 1967, and the deed of dissolution dated January 10, 1968, is a clear pointer to that. We cannot read into this that it was case of retirement of a partner. Clearly, the parties themselves intended to dissolve the partnership firm.
5. In CIT v. Pigot Chapman & Co. : 135ITR620(SC) , the Supreme Court held that (p. 626) 'the principle is well settled that it is on an examination of relevant documents and relevant facts and circumstance that the court had to be satisfied in each case as to whether there had been a succession or a mere change in the constitution of the partnership. It cannot be disputed that 'dissolution' and 'reconstitution' are two distinct legal concepts, for a dissolution bring the partnership to an end while a reconstitution means a continuation of the partnership under altered circumstances but, in our view, in law there would be no difficulty in a dissolution of a firm being followed by the constitution of a new firm by some of the erstwhile partners who may take over the assets and liabilities of the dissolved firm'. The Supreme Court did not accept the contention of the Revenue that upon dissolution of a firm, succession to the old business by another person would arise only if a solitary partner takes over the assets and liabilities and carries on the business as a sole proprietor thereof, or it some of the erstwhile partners along with some strangers take over the assets and liabilities of the old firm and carry on the business. The Supreme Court further observed (p. 627) :
'Under s. 40 of the Partnership Act, 1932, a firm can be dissolved with the consent of all the partners or in accordance with the contract between the partners; under s. 43 a partnership at will can be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm and upon such notice being giving the firm gets dissolved as from the date mentioned in the noticed as the date of dissolution and, if no date is so mentioned, as from the date of the communication of the notice, while s. 44 contemplates dissolution of a firm by and under orders of the court in certain contingencies mentioned therein. It is quite conceivable that in cases of dissolution of the firm brought about by a notice under s. 43 or by an order of the court under s. 44 some of the erstwhile partners may take over the assets and liabilities and carry on the same business by constituting a new firm and even such cases would be cases of succession to the old business within the meaning of s. 25(4) of the 1922)1922 Act. In our view, the question whether there had been a dissolution of the firm and upon such dissolution a new firm had succeeded to the business of the old firm, is a question which depends upon the intention of the parities to be gathered from the document of documents, if any, executed by and between the partners and other facts and surrounding circumstances of the case.'
6. In view of this clear statement of law by the Supreme Court, it is perhaps not necessary to note any other decision except one of the Delhi High Court in CIT v. Sant Lal Arvind Kumar : 136ITR379(Delhi) . This judgment decided two references, facts of which were almost similar, and it will be sufficient to record the facts of one reference only. The firm M/s. Sant Lal Arvind Kumar, was constituted by four partners. One partner died. There was no provision in the partnership deed that the death of any partner would not dissolve the firm and it was the admitted case of the parties that on the death of the partner there was dissolution of the firm. The books of account of the firm were closed on the date of death of the partner. Three days after the death, a new partnership deed was executed under which the grandson of the deceased partner was taken in as a partner though with a somewhat reduced share. Two separate returns of income were filed in the name of the firm, It was contended that on the death of the partner the earlier firm had been dissolved and consequently there were two separate and independent firms in existence for the two periods and they were to be assessed separately. The ITO, however, took the view that it was only a change in the constitution of the firm within the meaning of s. 187 of the Act, the death of one of the partners notwithstanding. After a detailed examination of the facts and the law on the subject, this court came to the conclusion that it was a case of succession and not one of change in the constitution, and that separate assessments had to be made for the two periods. The court referred to s. 42(c) of the Indian Partnership Act, 1932, and held that in view of this position under the partnership law, the ITO was not entitled to proceed on the basis as if the same firm continued to be in existence throughout the accounting year, and nothing but a change in the constitution took place on the death of the partner. The court also held that it was not correct to say that s. 187(2) of the Act contemplated a change in all cases where the business continued though in the hands of a different firm provided there were common partners.
7. We may also note that Shri O. P. Dua, learned counsel for the assessed, produced before us a chart showing that the preponderance of the view of the various High Courts was the same as that of the Delhi High Court. But, as stated above, it is unnecessary for us to refer to all these decisions one way or the other.
8. We, thereforee, hold that there were two separate firms in existence during the periods July 9, 1967, to December 12, 1967, and December 13, 1967, to June 26, 1968, the incomes of which are required to be assessed separately, and answer the question accordingly in favor of the assessed. The Commissioner will pay costs to the assessed.