1. The point referred to us for assessment year 1972-73 is concerned with is to occur when an assessed partnership firm which is registered is dissolved and, consequently, a new firm takes over the business. The question referred to us is as follows :
'Whether, on the facts and in the circumstances of the case, the Tribunal was legally right in holding that it was not a case of a change in constitution under the proviso to section 187(2) of the Income-tax Act, 1961, and in directing that separate assessments be made on the two firms instead of one consolidated assessment ?'
2. As it happens, this question has been decided by a Bench decision of this court in CIT v. San Lal Arvind Kumar : 136ITR379(Delhi) . It was there held that s. 187 of the I.T. Act, 1961, was not applicable to a case where a firm was dissolved by law under the Partnership Act. We have had occasion to follow the said judgment in other cases. In the present case, both the learned counsel for the assessed as well as the Department have taken a fresh line regarding how ss. 187, 188 and 189 have to be applied to the facts of the present case.
3. The facts shortly stated are that one of the partners of the firm, Shri Dwarka Dass died on May 15, 1971. There was nothing in the partnership deed which prevented the operation of the Partnership Act to dissolve the firm. Consequently, the firm would stand dissolved on May 15, 1971, under s. 42 of the Partnership Act. On May 17, 1971, a new partnership firm between the remaining four partners of the original firm and the son of Shri Dwarka Dass, Shri Mohan Lal was formed. Shri Mohan Lal was given the same share as his father had in the original firm. Thus, there was a new firm created on May 17, 1971. According to the Income-tax Department these two firms were to be assessed as one unit for the assessment year in question on the assumption that there was a mere change in the constitution of the firm.
4. In his contentions before us, learned counsel for the assessed urged that even if there were two firms and was constituted having some common partners of the previous firm, the Finance Act did not allow the income of the two firms to be clubbed for the purpose of assessment. He has tried to refer to various sections of the Act as well as the Finance Act for this purpose. One of his main arguments has been that under s. 184(7), registration granted to a firm for any assessment year continues for subsequent years, but there is a proviso to this sub-section which excludes its operation when there is a change in the constitution of the firm. References is also made to sub-s. (8) of s. 184 which can conveniently be reproduced here. It reads :
'(8) where any such change has taken place in the previous year, the firm shall apply for fresh registration for the assessment year concerned in accordance with the provisions of this section.'
5. It is, thereforee, urged that even if a firm is reconstituted, which is previously a registered firm, it is, thereforee, another registered firm. He submits that there is no power in the Act to assess two registered firms as if there was one registered firm.
6. On the other hand, we are of the view that this question, though an interesting one, should not be adjudicated upon by us in this case for several reasons. In our view, ss. 187, 188 and 189 from a composite procedure to be adopted in such cases. There are three possible situations - (a) when a firm is reconstituted, i.e., the firm continues with a change either in the partnership members or in the profit sharing ratio, (b) when the firm's business is passed on the some firm, and (c) when the firm dissolves by operation of law. In the case of (a), i.e., reconstitution, the firm remains alive but there is a change therein, and it appears that in law there should be two assessments on the two firms. But, s. 188 seems to visualise that a single assessment has to be made. Whether the income is to be clubbed or this is done for convenience, we refuse to answer in this case because the question does not arise.
7. As far as we are concerned, this is case of dissolution of the firm by operation of law. When a firm dissolves, then the Provisions of s. 189 apply, which state that the firm is to be assessed as if it was not dissolved. Thus, for the Purpose of such an assessment, it will be deemed that Shri Dwarka Dass is still alive and his share has to be apportioned accordingly. The case of a dissolved firm is not to be included in s. 187, but is to be included in s. 189. The judgment of this court in Sant Lal, Arvind Kumar's case : 136ITR379(Delhi) , is to the same effect, namely, that the Partnership Act has to Prevail when there is a dissolution under the Partnership Act. The same is reinforced by reference to ss. 187, 188 and 189. It must, thereforee, be understood that changes in the constitution of a firm under s. 187 are changes which do not bring about the dissolution of the firm, s. 189 deals with those cases where firm is dissolved and s. 188 deals with the question of succession which may nor may not be to a firm has common partners; it may be a completely different firm or it may be a firm which has many common partners. When the three section are harmoniously read together, the meaning is plain and it is the same as in the Partnership Act. We accordingly follow the aforementioned judgment of this court and answer the question referred to us in the affirmative, i.e., in favor of the assessed and against the Department. We leave the parties to bear their own costs.