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Commissioner of Income Tax Vs. Palakunnathu Traders - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIT Appeal No. 31 of 2000
Judge
Reported in(2004)186CTR(Ker)343; [2004]269ITR322(Ker)
ActsIncome Tax Act, 1961 - Sections 170, 187 and 188
AppellantCommissioner of Income Tax
RespondentPalakunnathu Traders
Appellant Advocate P.K.R. Menon, Adv.
Respondent Advocate P. Balakrishnan, Adv.
Cases ReferredMavukkarai (N) Estate Tea Factory v. Addl.
Excerpt:
- - 2nd march, 1981, and submitted that clause 14 thereof clearly provides that the firm shall not be dissolved by reason of retirement or death of any partner and on the happening of any such event, the remaining partners shall be entitled to continue the business of the firm as before subject to determination of the share of the retiring or deceased partner. 14th june, 1990, clearly recites that the remaining partner sri. it is possible to distinguish a case like the present from the case of a firm consisting of three or more partners and one of them dying or retiring and the business being continued by the remaining partners with or without new partners, since in such a case the surviving partners are at least two in number and in the eye of law they can constitute a partnership by.....g. sivarajan, j.1. this is an appeal filed by the cit, thiruvananthapuram against the order of the tribunal, cochin bench, in ita no. 23/coch/96, dt. 17th sept., 1999. the matter arises under the it act, 1961 (for short 'the act'). the assessment year is 1991-92; the relevant previous year ending 31st march, 1991. the respondent-assessee is a partnership firm engaged in the business of fertilisers, pesticides, etc. the said firm was originally constituted by a partnership deed dt. 2nd march, 1981 (annexure-b). the firm consisted of three partners, sri p.t. cheriyan, mrs. santha benjamin and mrs. annie thomas. it was granted registration and the same was being continued. however, two of the said partners i.e., mrs. santha benjamin and mrs. annie thomas had expressed their desire to retire.....
Judgment:

G. Sivarajan, J.

1. This is an appeal filed by the CIT, Thiruvananthapuram against the order of the Tribunal, Cochin Bench, in ITA No. 23/Coch/96, dt. 17th Sept., 1999. The matter arises under the IT Act, 1961 (for short 'the Act'). The assessment year is 1991-92; the relevant previous year ending 31st March, 1991. The respondent-assessee is a partnership firm engaged in the business of fertilisers, pesticides, etc. The said firm was originally constituted by a partnership deed dt. 2nd March, 1981 (Annexure-B). The firm consisted of three partners, Sri P.T. Cheriyan, Mrs. Santha Benjamin and Mrs. Annie Thomas. It was granted registration and the same was being continued. However, two of the said partners i.e., Mrs. Santha Benjamin and Mrs. Annie Thomas had expressed their desire to retire from the partnership and gave notice accordingly. On 14th June, 1990, a new partnership deed (Annexure-C) was executed between Sri P.T. Cheriyan, who was the partner in the original partnership deed, Sri. P.B. Titus and Mrs. Mary Thomas as partners.

2. For the asst. yr. 1991-92 the firm filed two separate returns, one for the period from 1st April, 1990 to 13th June, 1990 and the other for the period from 14th June, 1990 to 31st March, 1991. This was on the ground that on the retirement of the two partners of the firm as originally constituted the said partnership ceased to exist by operation of law and subsequently another partnership deed was executed by the remaining partner along with two others. According to the assessee this is a case of succession covered by Section 188 of the Act and, therefore, two separate assessments are contemplated as provided under Section 170 of the Act. The AO, however, took the view that there was no dissolution of the original partnership on 14th June, 1990, when two partners retired and that it was a case of change in the constitution within the meaning of Section 187(2) of the Act when two partners retired and two others were inducted as partners. The AO accordingly completed a single assessment on the partnership firm for the period from 1st April, 1990 to 31st March, 1991. Being aggrieved by the said order the assessee filed appeal before the CIT(A) who by his order dt. 30th Oct., 1995 (Annexure-D) allowed the said appeal by directing the AO to make two separate assessments, one for the period from 1st April, 1990 to 13th June, 1990 and the other for the period from 14th June, 1990 to 31st March, 1991. This order of the CIT(A) was confirmed by the Tribunal in its order dt. 17th Sept., 1999 (Annexure-E). Being aggrieved by the order of the Tribunal the Department has filed this appeal. This Court while admitting the appeal ordered notice on the following question of law :

'(1) Whether, on the facts and in the circumstances of the case, does the case fall under Section 188 of the IT Act as a case of one partnership-firm succeeding another or only a change of constitution within the meaning of Section 187(2) of the IT Act when two partners retired and two others were admitted as new partners ?

(2) Whether, on the facts and in the circumstances of the case and also in the light of Clause 14 of the partnership deed, the Tribunal is right in law and fact in holding that 'this is a case falling under Section 188 of the IT Act as a case of one partnership firm succeeding another' ?'

3. We have heard Sri P.K.R. Menon, learned senior counsel (Government of India) (Taxes), appearing for the appellant and Sri P. Balakrishnan, learned counsel appearing for the respondent/assessee.

4. According to the senior counsel for the appellant, when two partners of the old partnership retired on 14th June, 1990, and two new partners are inducted simultaneously it was only a case of change in the constitution of the firm attracting the provisions of Section 187(2) of the Act. It is also his contention that in such a case Section 188 of the Act which provides for two separate assessments specifically excludes matters covered by Section 187(2) of the Act. The senior counsel took us to the partnership deed dt. 2nd March, 1981, and submitted that Clause 14 thereof clearly provides that the firm shall not be dissolved by reason of retirement or death of any partner and on the happening of any such event, the remaining partners shall be entitled to continue the business of the firm as before subject to determination of the share of the retiring or deceased partner. He also took us to the provisions of the partnership deed dt. 14th June, 1990, and submitted that the partners of the original firm i.e., Mrs. Santha Benjamin and Mrs. Annie Thomas retired from the said firm only as per the partnership deed dt. 14th June, 1990, that new partners were inducted by the remaining partner only on the basis of Clause 14 of the original partnership deed and, therefore, it is a clear case of change in the constitution of the firm as contemplated under Section 187(2) of the Act. The senior counsel also took us to the provisions of Section 187(2) of the Act and the decision of the Supreme Court in CIT v. Empire Estate : [1996]218ITR355(SC) and contended that it is only in cases where there is a dissolution of the partnership firm and the induction of new partners, the provision of Section 188 of the Act is attracted and that in a case where some of the partners in the original partnership retires and a partnership is reconstituted by the remaining partner by inducting one or more partners, it is a case of reconstitution of the firm attracting the provisions of Section 187 of the Act. .

5. According to the counsel for respondent/assessee, in a case where a partnership was constituted by three persons of the said partnership when two persons retire, the partnership firm cease to exist by the operation of law, for the reason that there cannot be a partnership by one person. He further submitted that on an automatic dissolution of the firm if the remaining partner-enters into a partnership with two other persons, a new partnership comes into existence and if the business carried on by the extinct firm is succeeded by a new partnership it is a case covered by Section 188 of the Act and there is no scope for application of Section 187. The counsel in support of the above relied on the decision of the Supreme Court in Wazid Ali Abid Ali v. CIT : [1988]169ITR761(SC) , the decision of the Delhi High Court in CIT v. Delhi Metal Store : [1995]211ITR622(Delhi) , the decision of the Gauhati High Court in Deorah and Co. v. CIT and decision of a Division Bench of this Court in United Coir Works v. CIT : [1992]195ITR463(Ker) .

6. We will first deal with the facts and circumstances of the case as also the finding of facts entered by the Tribunal A partnership firm by name M/s Palakunathu Traders was constituted as per partnership deed dt. 2nd March, 1981. The partners were Sri P.T. Cherian, Mrs. Santha Benjamin and Mrs. Annie Thomas. Clause 14 of the said partnership deed provided that, 'the firm shall not be dissolved by reason of retirement or death of any partner and on the happening of any such event, the remaining partners shall be entitled to continue the business of the firm as before, subject to determination of the share of the retiring or deceased partner'. Clause 15 provides that, 'any partner may retire at any time from the business of the firm by giving three months notice in writing to the other partners'. Clause 16 provides that, 'the terms and conditions of this partnership deed could be altered, modified, varied, added or cancelled by any agreement arrived at between and signed by all the partners hereof. Another partnership deed dt. 14th June, 1990, was executed between Sri. P.T. Cherian, Sri. P.B. Titus and Mrs. Mary Thomas. In the said partnership deed, in the recital portion, it is stated that Mrs. Santha Benjamin and Mrs. Annie Thomas expressed their desire to retire from the partnership and gave notice accordingly. It is also stated in the recital that the first partner P.T. Cherian decided to relieve Mrs. Santha Benjamin and Mrs. Annie Thomas from the partnership and to continue the business in partnership admitting Sri. P.B. Titus and Mrs. Mary Thomas as partners. Here it must be noted that the partnership deed dt. 14th June, 1990, is not one of dissolution-cum-reconstitution. The said deed is a partnership between the continuing partner Sri P.T. Cherian and two new partners. This partnership deed, it must be noted, is the one executed by the said three persons only as is evidenced from the opening paragraph and the details of the signatures of the said deed occurring in the last paragraph of the said deed. Thus, it is clear that this is a new partnership deed after the dissolution of the existing partnership by operation of law. Since the partnership deed dt. 14th June, 1990, clearly recites that the remaining partner Sri. P.T. Cherian had decided to continue in the business in partnership admitting Sri. P.B. Titus and Mrs. Mary Thomas as partners, it must be treated that the new partnership is the successor of the business carried on by the original partnership firm. In such a case, there is no question of applying the provision of Section 187 of the Act. It is a clear case of succession falling under Section 188 and consequently the assessment for the year 1991-92 has to be made as directed by the CIT(A) and the Tribunal.

7. In this context since the senior counsel for the appellant submitted that in the instant case there is no dissolution of the original partnership by the retirement of two partners, we will refer to the decision of the Supreme Court in CIT v. Seth Govindram Sugar Mills : [1965]57ITR510(SC) . That was a case of a partnership consisting of only two partners and the deed contained a contract to continue the partnership in the case of death of a partner by admitting the legal representatives or nominees of the deceased partner. The ITO denied registration to the partnership on the ground that after the death of one of the partners, the partnership automatically got dissolved and thereafter the surviving partner and the heir of the deceased partner could be treated only as an AOP. This view of the AO was affirmed upto the Tribunal. However, the High Court did not approve the findings of the Tribunal. The Department carried the matter before the Supreme Court and contended that Section 42 of the Indian Partnership Act, 1932, which stipulated, inter alia, that subject to contract between the partners, a firm is dissolved with the death of a partner, applies only to a partnership having more than two partners. Counsel for the assessee argued that the heir automatically be inducted into the partnership, and, therefore, it was not a case of dissolution. Reliance was placed on Section 30 of the Indian Partnership Act and argued that subject to the 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, and in that context the Supreme Court observed thus :

'The fundamental principle of partnership, therefore, is that the relation of partnership arises out of contract and not out of status.... Section 42 can be interpreted without doing violence either to the language used or to the said basic principle. Section 42(c) of the Partnership Act can appropriately be applied to a partnership where there are more than two partners. If one of them dies, the firm is dissolved; but if there is a contract to the contrary, the surviving partners will continue the firm. On the other hand, if one of the two partners of a firm dies, the firm automatically comes to an end and, thereafter, there is no partnership for a third party to be introduced therein, and, therefore, there is no scope for applying Clause (c) of Section 42 to such a situation. It may be that pursuant to the wishes or the directions of the deceased partner, the surviving partner may enter into a new partnership with the heir of the deceased partner, but that would constitute a new partnership. In this light Section 31 of the Indian Partnership Act falls in line with Section 42 thereof.'

The above observation made by the Supreme Court makes the position clear that in a case where two out of the three partners of the partnership firm retire, there is an automatic dissolution of the firm by operation of law. If this is so even in a case where the partnership deed provided that the firm shall continue notwithstanding the retirement or death of a partner there exists no partnership firm in the eye of law for a third party to be inducted therein, If any new firm is constituted by the continuing partner by inducting one or more persons it would constitute a new partnership. The view which we have taken above is supported by this decision of the Supreme Court. Since the parties have referred to various decisions of the Supreme Court and the High Courts, we will deal with some of those decisions also. The Madras High Court in Mavukkarai (N) Estate Tea Factory v. Addl. CIT : [1978]112ITR715(Mad) had considered a case of four out of the five partners of a partnership firm retiring and the remaining partner after taking over the assets and liabilities entering into the partnership with others on the same day. The above firm filed two separate returns of income, one for the period 1st Sept., 1969 to 30th June, 1970, in respect of the old firm and for the period 1st July, 1970 to 31st March, 1971, in respect of the newly constituted firm and claimed that two separate assessments should be made. The ITO was of the view that there was only a reconstitution of the old firm and accordingly made a single assessment on the new firm for the entire period. The assessee filed a revision against the said order before the CIT. The same was dismissed confirming the order of the officer holding that as there is no interregnum between the dissolution of the old firm and the constitution of the new firm, the old firm should be deemed to continue as reconstituted, that on the facts there was only a change in the constitution of a firm as distinguished from succession and that under Section 187(2)(a) the old firm should be taken to continue for the purpose of the assessment. This order was challenged before the Madras High Court in a writ petition. It was contended by the petitioner before the Court that when four out of the five partners having retired on 30th June, 1970, there remained only one partner and as such the firm had ceased to exist, as one individual cannot constitute a partnership firm and that when the remaining partner who took over the business of the firm under the terms of the release deed dt, 1st July, 1970, executed by four retiring partners, took three other partners for the purpose of carrying on the business will not lead to the inference that the old partnership and the new partnership are one and the same entity, and there cannot be any continuation of the old firm to enable the assessing authority to make a consolidated assessment on the new firm for both the periods. It was also contended that Section 187(2) of the Act does not alter the legal position that a single individual cannot constitute a firm. The petitioner had also relied on inter alia the decisions of the Full Benches of the Allahabad and Andhra Predesh High Courts which according to it, will support the case pleaded. The Division Bench after considering the principles laid down in the said decisions observed that, even if the extinction of the old firm and the constitution of the new firm took place simultaneously, in law it must be presumed that the retirement of the partners of the old firm preceded the constitution of the new firm, for, unless the old firm ceased to exist, a new firm cannot come into being. It was also observed that, merely because there is a common partner in the two firms, it cannot be said that the old firm continues with a mere change in the constitution and however small or minute the interregnum may be, there is an extinction of the old firm preceding the constitution of a new firm. The Division Bench accordingly held that the two firms are separate entities and that the petitioner firm cannot be said to be a continuation of the old firm. With reference to the contention based on Section 187(2), the Division Bench observed that the existence of a common partner may arise on different contingencies but the contingency of the partnership ceasing to exist on most of the partners except one retiring from the partnership and a new partnership coming into existence with the remaining partner and others does not fall within the purview of Section 187(2) of the Act.

8. A Division Bench of the Gauhati High Court considered this question very elaborately in Deorah and Co.'s case (supra) mentioned above. In that case the assessee-firm was originally constituted by two partners, U and G, under a partnership deed dt. 1st April, 1973. U retired from the partnership w.e.f. 30th June, 1976, and all the assets, liabilities and business of the firm were taken over by G. He and three others, i.e., M as guardian of his minor son R, S as guardian of his minor son P, and SU, mutually agreed and determined the value of goodwill of the firm at Rs. 20,000 as on 30th June, 1976, and the three latter persons agreed to pay 75 per cent of the value to the pre-existing partner. G, M, S and SU entered into a deed of partnership on 22nd Sept., 1976, under the existing name and style and mutually agreed upon terms and conditions agreed upon. For the asst. yr 1977-78 the assessee filed two returns one for the period ending 30th June, 1976 and the other for the period 1st July, 1976 to 31st March, 1977. The ITO took the view that it was a case of reconstitution of the firm as contemplated under Section 187. The AO passed an assessment order under Section 185 against the reconsideration (sic) of the firm. The CIT(A) allowed the, appeal filed by the assessee but the Tribunal in appeal by the Department held that since G was a partner of the firm as initially constituted and continued to be a partner in the firm with a new partner, Section 187 of the Act was attracted and Section 188 would not apply. The High Court considered the question as to whether the facts and circumstances of the case attract Section 187 of the Act or Section 188 of the Act, The Division Bench noted that various High Courts have taken different views on the question arising in cases where after the death of a partner or partners, the business of the firm had been continued taking in new partners and in some of the cases, the deed of partnership stipulated that notwithstanding the death of a. partner, the partnership is to be continued taking the heir of the deceased partner as a new partner. It was observed that a Full Bench of three Judges of the Andhra Pradesh High Court in Addl. CIT v. Visakha Flour Mills (1977) 108 ITR 466 , the High Court of Kerala in CIT v. Kelukutty : [1972]85ITR102(Ker) , the Madhya Pradesh High Court in Vimal and Amar Talkies v. CIT : [1982]138ITR660(MP) , a Full Bench of the Punjab and Haryana High Court in Nandlal Sohanlal v. CIT , a Full Bench of the Karnataka High Court in CIT v. Shambulal Nathalal and Co. : [1984]145ITR329(KAR) and the Madras High Court in CIT v. Alagappa Cotton Mills : [1984]149ITR640(Mad) , have taken the view that, in the facts and circumstances, death of a partner followed by the taking of a fresh partner did not result in dissolution of partnership and that since some pre-existing partners continued to be partners of the firm, there was a change in the constitution of the firm as explained in proviso (a) to Sub-section (2) of Section 187 of the Act. It was also noted that some of these decisions have taken the view that even where there was succession of one firm by another as contemplated by Section 188 of the Act, since the case would attract Section 187 also it is the former section which would govern and hence assessment has to be made for the whole year on the firm as in existence at the time of the assessment. The Division Bench also noted that a Full Bench of the Allahabad High Court in Dahi Laxmi Dal Factory v. CIT and Anr. : [1976]103ITR517(All) , the Gujarat High Court in Vinodkumar Ratilal v. CIT : [1975]100ITR564(Guj) and in Addl. CIT v. Harjivandas Hathibhai : [1977]108ITR517(Guj) , a Full Bench of five Judges of the Andhra Pradesh High Court in Addl CIT v. Visakha Flour Mills [sic-reference should be to the case of Addl. CIT v. Vinayaka Cinema : [1977]110ITR468(AP) ], have taken the contrary view, i.e., that death of a partner led to the dissolution of the firm and the mere fact that one or more partners of the pre-existing firm continued to be partners of the firm as constituted at the time of the assessment would not attract Section 187 of the Act and it would be a case of succession of one firm by another governed by Section 188 of the Act and, therefore, separate assessments have to be made on the predecessor firm and the successor firm in accordance with Section 170. The Division Bench thereafter, observed that, it is unnecessary for them to go into an elaborate discussion of the above decisions since the principle of law which would govern the facts of the case appears to be clear and unambiguous and observed as follows :

'The present is a case of a firm originally constituted with only two partners where one of them died, the death being followed by taking in new partners. By virtue of Section 2(23) of the Act, the expressions 'firm', 'partner', 'partnership', have the same meaning as assigned to them in the Indian Partnership Act, 1932. According to the definition, 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. 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'. The firm is not a legal entity, except in a very minor and limited sense for the purpose of the CPC and the IT Act, but is only a collective or compendious name for all the partners. One of the basic elements of partnership is the agreement entered into between the persons concerned. In order that there should be an agreement there must at least be two persons willing to join as partners. Whatever be the legal consequence of one among the three or more partners dying or retiring, there can be no controversy that when one among the only two partners dies or retires, the partnership de jure and de facto ceases to exist. It may be that ultimately the surviving partner takes over the entire business of the firm paying off the retiring partner or the heirs of the deceased partner or having done so he takes a new partner and they together pay off the retiring partner or the heirs of the deceased partner or he takes as partner the heir of the deceased partner. Whatever be the contingency which may happen, the inevitable consequence of one among the two partners dying or retiring is the total extinction in the eye of law of the partnership or firm, since one partner alone remains at the point of time of retirement or death and one partner cannot constitute the remnant firm. It is possible to distinguish a case like the present from the case of a firm consisting of three or more partners and one of them dying or retiring and the business being continued by the remaining partners with or without new partners, since in such a case the surviving partners are at least two in number and in the eye of law they can constitute a partnership by themselves, The absence of plurality of partners surviving the death or retirement of a partner, it appears to us, makes all the difference and distinguishes the present case from those cases.'

The Division Bench then considered the cases which dealt with a partnership of two partners which are the Full Bench decision of the Allahabad High Court in Dahi Laxmi Dal Factory's case (supra), the decision of the Gujarat High Court in Vinodkumar Ratilal's case (supra). The Division Bench also referred to the decision in CIT v. Sant Lal Arvind Kumar : [1982]136ITR379(Delhi) which was considered by the Supreme Court in Wazid Ali Abid Ali's case mentioned above. The Pull Bench of the Delhi High Court in Dahi Laxmi Dal Factory's case (supra) has dealt with the case of a partnership firm of two partners with three minors admitted to the benefits of the partnership and one partner died and on the next day his son and the surviving partner took over the business and a fresh partnership deed was executed admitting the three minors to the benefits of the partnership. The High Court held that Section 187 of the IT Act applied only when a firm is reconstituted as per Sections 31 and 32 of the Indian Partnership Act, but when a firm is dissolved either by agreement of the partners or by operation of law and another firm takes over the business, that will be a case of succession governed by Section 188 of the Act, The High Court observed that even if there had been a stipulation for non-dissolution in the event of death of a partner the firm could not have been saved from dissolution caused, after the death of Jethalal only one partner was left and one man cannot constitute a firm. The Allahabad High Court in CIT v. Ram Bilas Purshottam Dass : [1993]200ITR461(All) was also concerned with a case of a firm of two partners, one of whom died and the partnership deed did not contain a contract to the contrary. The surviving partner took a new partner after a few days. The Court observed that a contract to the contrary may prevent dissolution of a partnership notwithstanding the death of a partner and assure continuity of the firm, but the position is different when the firm consists of only two partners because the moment one of the two partners dies, the firm automatically comes to an end. In such circumstances, it was held that the proviso to Clause (a) of Sub-section (2) of Section 187 did not apply. The Delhi High Court in Sant Lal Arvind Kumar's case (supra) where a partnership firm of four partners of which one died, the deed did not stipulate that the firm would not stand dissolved on the death of a partner. On the death of a partner the other partners took as partner a grandson of the deceased. It was held that Section 187 of the Act would not apply but Section 188 would apply. The High Court also pointed out that there is difference between the change in the constitution of the firm and that the provisions of the IT Act do not purport to alter or modify the principles of the Partnership Act. The Supreme Court in Wazid Ali Abid Ali v. CIT (supra) referred to the decision of the Delhi High Court in Sant Lal Arvind Kumar's case (supra) which held that Section 187 of the IT Act came into operation and applied only when there was in the eye of law a firm with continued existence and not to a case where under the law one firm had ceased to exist and another came into existence. The Supreme Court further observed as follows :

'The High Court observed that the purpose of Sub-section (2) of Section 187 was not one of expansion of the normal concept of a change in the constitution of a firm but was really one of limitation; the purpose was not to say that a firm would continue in spite of dissolution but rather to say that, even in a case where there was only a change in the constitution, Sub-section (1) would not apply if the partners before or after the change were not common. It is not correct, according to the High Court, to say that Section 187(2) contemplated a change in all cases where the business continued though in the hands of a different firm provided there were common partners. The High Court was of the view that though creating a mild ambiguity, the language of Section 188 is not only not inconsistent or contradictory but in a way is to clarify the meaning of Section 187 and to exclude the possibility of the common law doctrine regarding the personality of a firm even in cases of a mere change in the Constitution, The concept of partnership, it was held, is one of agreement between the partners. If the partners agreed, not that one partner should go out and another should come in, but that on a particular event happening, the firm should be treated as dissolved, they are entitled to say so, and what the partners have disrupted, it is not for the Department to unite unless there is specific authorisation in the Act.

Where there is, however, no agreement to treat the firm as continuing notwithstanding the death of a partner, the partners have no option to treat the firm as continuing, Under the Indian Partnership Act, 1932, the firm gets dissolved and the ITO is not entitled to ignore this consequence. There is nothing in the language of Section 187, 188 or 189, according to the High Court, which precludes the application of the partnership law principles even under the IT Act. It was accordingly held by the High Court that where the partnership deed of a firm did not contain any provision that the death of a partner would not dissolve the firm one of the partners of the firm died in the middle of the accounting period and thereafter a fresh deed was executed under which the surviving partners took a fresh partner in the place of the deceased and continued to carry on the business, the case was one of succession and not one of change in the constitution and separate assessments had to be made in regard to the incomes. With respect, we agree that where in a case, there is a change in the constitution of the firm by the taking of a new partner and the old firm is succeeded by a new firm then, in such a case, there might be succession and there could be two assessments as contemplated under Section 188 of the Act. We accept the reasoning of that decision.'

The Division Bench of the Gauhati High Court finally observed as follows :

'In the present case, one of the two partners constituting the firm retired and subsequently the surviving partner and a new partner continued the business under a new deed. It is clear that the partnership ceased to exist on the retirement of one of the two partners. That was the logical consequence of retirement of one of the only two partners. There is nothing in the scheme of Section 187 of the Act indicating a legislative intention to totally ignore fundamental principles underlying a partnership as laid down in the Partnership Act and creating a situation where the firm would be deemed to have survived with only one partner surviving. This cannot be regarded as a case of reconstitution of a firm under the proviso to Sub-section (2) of Section 187 at all. It is a case of dissolution and a new firm taking over the business of the old firm, a case of succession covered by Section 188 of the Act. The assessment in this case should have been made under Section 188 and not Section 187 of the Act and two separate assessments ought to have been made for the two parts of the year separated by the date of dissolution. Therefore, we hold that the order of the GIT in this behalf is correct and that of the Tribunal is wrong'.

The Division Bench of this Court in United Coir Works' case (supra) was concerned with a case where a registered firm with the partners C.V. Mathew, C.M. George and CM Mathew has carried on business for the period from 17th Aug., 1974, to 15th April, 1975. This business was sold to a new firm with the partners C.V. Mathew, C.M. George, C.M. Mathew and P.I. Alexander, constituted on 16th April, 1975. The assessee filed two returns of income, one for the period from 17th Aug.,' 1974 to 15th April 1975 and the other for the period from 16th April, 1975 to 16th Aug., 1975. It was contended before the AO that the assessment is required to be made under Section 188 of the Act, The AO, however, took the view that the assessee could not be said to be the successor-firm, within the meaning of Section 188. According to the AO, the partnership deed dt. 16th April, 1975, constituting the firm had effected only a change in the constitution of the old firm, and, as such, there is no scope to make the assessment under Section 188. He accordingly made a single assessment for the whole year. Appeals filed by the assessee before the CIT(A) and before the Tribunal ended in dismissal confirming the order of the assessing authority. The Division Bench considered the question whether the assessment made in terms of Section 187 is sustainable or not. It was observed that the answer depends upon the construction of Sections 187 and 188 r/w Section 170 of the Act. After adverting to the said provision it was observed that the provision of Sections 187 and 188 are concerned only with the person upon whom the liability for the tax can be imposed. Adverting to the provisions of Section 187 of the Act it was observed that if a change in the constitution of the firm occurs in the course of the assessment, i.e., before the assessment is made, the firm which will be made liable to tax is the firm as constituted at the time of assessment. To say that there is a change in the constitution of the firm it shall be shown that, at least one of the partners of the firm before the change continues as a partner after the change and further observed it does not mean that the firm which succeeds the firm carrying on business or profession cannot claim an assessment under Section 188 if some of its partners happen to be the partners of the firm which it succeeded. The Division Bench thereafter observed as follows :

'The answer must be in negative : because, first of all Section 188 does not contain any such prohibition. Secondly this section envisages a case of succession of the firm carrying on business or profession by another firm and to determine as to whether there is any such succession, reference shall be made not to Section 187 but only to Section 170. To substantiate succession, the two elements that should be established are the identity and continuity of business. If these two are established, in our view, the succession contemplated under Section 188 is also established. It should, in this connection, be remembered that it is not the partners of the firm who succeed the firm carrying on business or profession, but only a different and distinct firm which also is a legal entity distinct and different from the partners who constitute it, for the purposes of assessment. Under Section 170, the firm succeeding the firm carrying on the business is called the 'successor' and the firm carrying on the business is called the 'predecessor'. The effect of this section is that the predecessor is assessable in respect of the income of the successor firm upto the date of succession whereas the successor can be made liable for tax only in respect of the income after the date of succession. In other words, the income of the year of succession requires to be apportioned between the 'predecessor' and 'successor' for the purpose of assessment and the actual assessment shall be made under Section 188. If that be the position, it is unnecessary or rather irrelevant to decide the issue whether the successor firm is constituted by partners of whom some are partners of the predecessor firm. Merely because some of the partners of the predecessor happen to be partners of the successor firm will not disentitle the successor firm to claim the assessment made under Section 188. To put it briefly, to have an assessment under Section 188, it is enough if it is established that, during the relevant year of assessment, there existed two distinct and different firms, and the firm carrying on the business or profession was succeeded by the other firm. These principles shall be borne in mind while deciding the issue, namely, whether the assessment requires to be made under Section 187 or under Section 188'.

The Supreme Court in Empire Estate's case mentioned above considered a case of a partnership consisting of three partners of which one died, there being no provision in the deed of partnership contemplating continuance of the partnership in the event of the death of a partner, the partnership stood dissolved. No deed of dissolution was executed but the surviving partners executed a fresh deed of partnership for carrying on the business on and from 13th Jan., 1974. and it mentioned that the earlier partnership had stood dissolved on 12th Jan., 1974. The assessee filed two returns of income for the period 1st June, 1973 to 12th Jan., 1974, and the other for the period 13th Jan., 1974 to 30th June, 1974. The assessee contended that the earlier partnership had stood dissolved on the death of a partner on 12th Jan., 1974, and, that, therefore, this was a case of succession contemplated by Section 188 of the Act and not a case of reconstitution of the partnership within the meaning of Section 187 of the Act, The officer rejected the contention, This was confirmed in appeal by the CIT(A) also. However, on further appeal, the Tribunal held that there is difference of opinion between different High Courts and following the view taken by the Allahabad, Andhra Pradesh and Gujarat High Courts, the Tribunal held that the assessee's case did not fall within the expression 'change in the constitution of the firm' under Section 187 and directed the ITO to make two separate assessments for the aforementioned two periods. The Supreme Court after referring to Sections 187 and 188 of the Act and after noting that the proviso to Section 187 was inserted by Taxation Laws (Amendment) Act, 1984, with retrospective effect from 1st April, 1975, observed that the assessee's case is not affected by the proviso since the partner died on 12th Jan., 1974. The Supreme. Court observed that Section 42 of the Indian Partnership Act, 1932, Clause (c) thereof is relevant for the purpose of this case. It was noted that the partnership deed did not provide that the death of a partner would not dissolve the partnership and, therefore, by reason of Section 42 of the Partnership Act, the firm stood dissolved on 12th Jan., 1974, by reason of the death of one of the partners. The Supreme Court after adverting to the provisions of Sections 187 and 188 and the definition of 'change in the constitution of the firm' contained in Section 187(2) observed that these provisions would apply to a firm which survives upon the death of a partner. They would apply to the case of a partnership where a partner dies and the partnership deed provides that death shall not result in the dissolution of the partnership, that such provision is lawful because Section 42 of the Partnership Act contemplates that if there is no such provision and a partner dies, the partnership stands dissolved. The partnership does not then survive upon the death of the partner. The case is not one of a change in the constitution of the partnership, that it falls outside the scope of Section 187, that when the surviving partners in such a case continue the business in partnership, Section 188 is attracted for there is a succession of one by another partnership. The Supreme Court also observed that, the question is covered by the decision of the Supreme Court in Wazid Ali Abid Ali's case mentioned above. Referring to a clause contained in the partnership deed which provided for continuation of a partnership business even after the death of a partner and the decisions rendered considering such a clause, the Supreme Court held that the death of a partner did not dissolve the partnerships and the businesses were continued by reconstituted partnerships.

9. Here, it must be noted that this decision of the Supreme Court is one rendered in the context of the death of a partner and the partnership continued with the remaining partners but in the absence of a clause in the partnership deed providing for continuation of the partnership business even after the death of the partner, the Supreme Court has taken the view that there is an automatic dissolution of the partnership deed by the operation of law and the continuation of the business by the surviving partners amounts to a different partnership business. The Supreme Court in such a situation has held that Section 187 is not attracted and Section 188 would apply. In other words, the Supreme Court did not have an occasion to consider a case of a partnership which automatically comes to an end with the retirement of the partner leaving one partner alone. According to us, the principles laid down by the Supreme Court with reference to the death of a partner will squarely apply to a case of succession of partnership business by the retirement of partners leaving one partner alone. In such a case the principles laid down by the Supreme Court in Seth Govindram Sugar Mills's case (supra) extracted above would squarely apply. The decisions discussed above also support the view taken by us that when two out of the three partners of the assessee-firm retired, there is an automatic cessation of the partnership business which tantamounts to dissolution of the firm and the subsequent constitution of a new partnership firm by the remaining partner by inducting two more partners, will result in a new partnership coming into existence and to such a case the provisions of Section 187(2) has no application and the assessment has to be completed under Section 188 r/w Section 170 of the Act.

In the light of the above discussion we answer the aforesaid two questions against the Revenue and in favour of the assessee.


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