Skip to content


Mohatta Brothers Vs. Commissioner of Income-tax, Gujarat, Ahmedabad - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 224 of 1976
Judge
Reported in[1985]153ITR247(Guj)
ActsIncome Tax Act, 1961 - Sections 139, 184, 184(2), 184(7) and 184(8); Indian Partnership Act, 1932 - Sections 42
AppellantMohatta Brothers
RespondentCommissioner of Income-tax, Gujarat, Ahmedabad
Appellant Advocate J.P. Shah, Adv.
Respondent Advocate B.R. Shah, Adv.
Cases ReferredC) and Venkata Subhadrayyamma v. Venkatapati
Excerpt:
.....now, that was precisely the problem which was to be answered in order to determine whether the assessee-firm was entitled to the benefit of continuance of registration which was granted to it in the earlier assessment year, because under s. the aspect, therefore, which has to be effectively adjudicated upon is whether the firm was dissolved or not. in case the admission of the heirs of the deceased partner to the partnership is not considered safe or suitable, the surviving partners shall clear the accounts qua the deceased partner and pay or recover any amount as per the accounts and, therefore, the surviving partners shall be competent to carry on the business. and if it was fount not safe or suitable to do so, the surviving partners were required to clear the accounts and adjust..........and submits a single return as if there was only one assessee during the whole of the previous year, registration can be granted only in relation to the whole of the previous year and not for a part of the previous year. we do not think, how this decision can be of any assistance to the cause of the revenue, since the finding of fact in that case was that the firm had been reconstituted as a result of a change in the constitution of the firm on account of the death of one of the partners, viz., aswathanarayana on october 15, 1963, and admission of his widow, mangamani, to the partnership and the execution of the new partnership deed as a result thereof. that is precisely the question which has to be found here; and unless that finding is recorded, we do not think that the basic and.....
Judgment:

Mehta, J.

1. We are concerned with the assessment year 1970-71 and the accounting period corresponding to the assessment year in question ended on June 30, 1969. The assessee-firm consisted of six partners including one Shri Shivratan G. Mohatta, who died on April 8, 1969. In other words, Shri Shivratan G. Mohatta died about 2 1/2 months before the close of the accounting year. The firm was granted registration in the earlier assessment years. It appears that the surviving five partner claimed the benefit of the continuity of registration granted in the earlier assessment years by filing the prescribed form a required under. 184(7) of the I.T. Act, 1961, (hereinafter referred to as 'the Act of 1961'), read with rule 24 of the I.T. Rules, 1962 (hereinafter referred to as 'the Rules'), for the period till the date of death of the said Shri Shivratan G. Mohatta. It was common ground that no fresh deed of partnership had been executed on the demise of the said partner and no application for registration was filed for the remaining period. The ITO noted that the books of account were closed on the day when the accounting year ended, i.e., on June 30, 1969, and the assessee had filed only one return for the whole period. The assessee claimed before the ITO that the profit or losses may be apportioned for the two periods, i.e. (1) from the date commencement of the accounting year till the date of death of the partner, and (2) from the date of demise till the end of the accounting year. This contention did not find favour with the ITO who held that the profit or loss arose when the accounts were closed; and since no fresh partnership deed was executed, the firm was dissolved and the registration originally granted cannot be continued under s. 184(2) of the Act. The assessee took the matter in appeal to the AAC, who following the decision of the Andhra Pradesh High Court in CIT v. Sri Rama Talkies : [1973]87ITR615(AP) , held that the assessee-firm had been rightly assessed as an unregistered firm; and, therefore, dismissed the appeal. The assessee carried the matter in further appeal to the Tribunal. The Tribunal following the decision of the Andhra Pradesh High Court in Sri Rama Talkies' case : [1973]87ITR615(AP) and of the Allahabad High Court in Panna Lal Babu Lal v. CIT : [1969]73ITR503(All) , held that where only one return of income was filed and the accounts were closed on the last date with only one profit and loss account and balance-sheet drawn up for the whole period, the assessment can be one only and the registration, if at all, that could be granted could be for the whole year. The Tribunal observed that the firm was not dissolved and that the option to take the heir of the deceased partner as a partner was not exercised and the firm was continued under the original partnership deed executed in 1967; and, therefore, the assessee was not entitled to registration. The Tribunal, therefore, dismissed the appeal. At the instance of the assessee, the following question has been referred to us for our advice :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to renewal of registration under section 184(7) ?'

2. The problem which is simple enough, viz., whether the assessee-firm is entitled to registration has been complicated by considerations which are not wholly germane to the question at issue. We should remaind ourselves that the assessee-firm had claimed the benefit of the continuity of registration granted in Form No. 12 under rule 24 of the Rules for the period up to the date of dissolution of the firm upon the death of one of the partners of the firm and for the period subsequent to the demise of the said partner, the assessee-firm has thought it fit to allow it to be treated as an unregistered firm. In that context, the whole dispute arose between the assessee and the Department. The assessee-firm claimed that it is entitled to the benefit of the continuity of registration granted earlier till the date of the demise of the partner as a result of which the firm stood dissolved. On the other hand, the Department was claiming that since the condition precedent for the continuity of registration granted earlier has not been satisfied, inasmuch as there was a change in the constitution of the firm, the assessee was not entitled to the benefit of s. 184(7). At the time of hearing of this reference, the grievance made on behalf of the assessee is that the Tribunal has not addressed itself to the relevant aspects of the matter and has decided the question on facts which are not relevant and germane to the controversy. On behalf of the Revenue, it was urged that having regard to the agreement between the erstwhile partners as contained in clause 15 of the partnership deed, the firm would not stand dissolved by the demise of one of the partners and the jural relationship amongst the surviving partners would continue subject to the right of the representative of the deceased partner to join the partnership firm; and, therefore, in the present case there was no dissolution of the partnership , but there was merely a change in the constitution of the partnership so far as the partners and their shares were concerned. In order to answer the question which has been referred to us, we may set out the relevant part of s. 184 so far as is material for the purpose of this reference.

'184. (7) Where registration is granted to any firm for any assessment year, it shall have effect for every subsequent assessment year :

Provided that :

(i) 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

(ii) the firm furnishes, before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139 (whether fixed originally or on extension) for furnishing the return of income for such subsequent assessment year, a declaration to that effect, in the prescribed form and verified in the prescribed manner, so, however, that where the Income-tax Officer is satisfied that the firm was prevented by sufficient cause from furnishing the declaration within the time so allowed, he may allow the firm to furnish the declaration at any time before the assessment is made.

(8) Where any such change has been 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.'

3. The scheme of registration of firms is materially altered than what it was under s. 26A of the Act of 1922. It is not necessary to set out in detail as to what precisely the changes which were effected by the Act of 1961 in the matter of grant of registration to firms. Broadly stated, under the Act of 1922, the registration enured for a year only and fresh application for renewal of registration was required to be submitted every year even in cases where there was no change in the constitution of the firm or shares of the partners. Under the Act of 1961, the benefit of registration once granted continued for subsequent years till a change in the constitution of the firm took place. Under s. 184(7), which we have set out above, the registration once granted to any firm for any assessment year continued to be effective for every subsequent assessment year provided the firm furnishes, before the expiry of the time allowed for funishing the return of income under s. 139, a declaration signed by all the partners that there is no change in the constitution of the firm of in the shares of the partners. However, as provided in sub-s. (8) of s. 184, if and when any change in the constitution of a firm or in the shares of partners takes place, in any accounting year, the firm has to apply for fresh registration. The meaning of the term 'change in constitution of a firm' is well recognised on principle and on authority. In partnership law, a change in the constitution of a firm postulates continued existence of the firm. It would, therefore, cover cases where a partner ceases to be a partner or a new partner is introduced in a firm. The change in the shares of partners of the firm would also result in a change in the constitution of the firm. On authority also, this position is well recognised. (See Addl. CIT v. Harjivandas Hathibhai : [1977]108ITR517(Guj) . In the Income-tax law also, the concept of a change in the constitution of a firm is interpreted on the same lines as in the partnership law, though s. 187 of the Act of 1961 clearly specifies as to what would amount to a change in the constitution of a firm. The meaning which has been given to this concept of change in the constitution of a firm under s. 187 is also applied while considering the question of continuous effect of registration once granted under. 184(7) of the Act of 1961. (See The Law and Practice of Income-tax by Kanga and Palkhivala, seventh edition, volume I, page 1020).

4. On a construction of s. 184(7) of the Act of 1961, the true effect is that registration once granted to any firm for any assessment year shall be continued to be effective for every subsequent year provided there is no change in the constitution of the firm or the shares of partners as evidenced by the instrument of partnership on the basis of which the registration was obtained and the firm furnishes before the prescribed period a declaration to that effect in the prescribed form. A strenuous debate ensued between the learned counsel for the Revenue and the assessee as to what would be that effect if a partner dies during a given accounting period without jural relationship being snapped and the firm continuing in existence with or without the heir of the deceased partner as a partner in the firm. According to the learned counsel for the Revenue, in such a situation, the firm must obtain a fresh registration and it cannot have the benefit of the continuity of registration granted in the earlier year. On the other hand, the learned counsel for the assessee apprehended that the construction as advanced on behalf of the Revenue would result in deprivation of the benefit of registration to such firms where the event of the demise of a partner takes place on the eve of the close of the accounting year in which case, the firm, if it had not been able to execute a fresh instrument of partnership in that very accounting year, would not be entitled to claim the benefit of registration. The learned counsel for the assessee, in order to make the point more explicit, gave an extreme illustration of the demise of a partner taking place on the last day of the accounting period in which case the fresh partnership deed could not be executed in the very nature of things on the very day of the demise and if executed subsequently in the next accounting year, would be of no avail since the declaration which is required to be furnished for a fresh registration as per so. 184(8) in Form No. 11-A, enjoins an assessee claiming registration to furnish the partnership deed as executed in the given accounting period in which the change has taken place. We have given our anxious consideration to this aspect of the matter; and we do not think that the difficulty is so insurmountable as to result in the apprehensions expressed by the learned counsel for the assessee. Even in an extreme case of the demise of a partner on the last day of the accounting period or for that matter on the eve of the close of the accounting period making it difficult to have the instrument of partnership executed in the very accounting period, we do not think that it would result, ipso facto, in the assessee being deprived of the benefit of registration even though the partnership deed for continuance of the partnership in spite of the death as provided in the agreement might have been executed in the subsequent accounting year. We do not find any limitation as apprehended by the learned counsel for the assessee in the pro forma which has been prescribed for obtaining registration in case of a change in the constitution of the firm. The requirement of the filing of form for obtaining registration is with a view to satisfy the ITO that there is a change in the constitution of the firm, inasmuch as a provided in the partnership deed executed between the surviving partners and the deceased partner, the partnership has not been dissolved as a result of the demise and the firm has continued to be in existence with or without new partners. This fact is to be established not only from the point of view of the assessee but also from the point of view of the Revenue in order to enable the ITO to grant registration as provided in s. 184(8) of the Act of 1961. The fact of a change in constitution of the firm can thus be established by producing the original partnership deed which was executed between the surviving partners and the deceased partner and also by production of the new partnership deed by which the firm is continued with or without new partners. It should be recalled that rule 22(2)(ii) of the Rules provides that the application for registration is to be made in Form No. 11A where any change or changes in the constitution of the firm or shares of the partners had taken place during the previous year before the date of the application. Para 2 of Form 11A requires the assessee to enclose the original or certified copy of the instrument or instruments evidencing the partnership in existence from time to time during the previous year up to the date of the application together with a copy or duplicate thereof. It does not presuppose that the instrument of partnership should necessarily have been executed in a given accounting period in which the change has taken place. The instrument of partnership is to be produced to show the continuous existence of the partnership from time to time; and if there is any change which has taken place in the meanwhile, it can very well be pointed out by reference to the instrument evidencing the partnership in existence during the previous year and by reference to the new deed of partnership that might have come into existence as a result of the change in the partnership by continuance of the partnership firm with or without new partners. The learned counsel for the Revenue also agreed that the Department also does not interpret s. 184(8) of the Act of 1961 together with rule 22 of the Rules read with Form No. 11A, to mean that in order to establish a change in the constitution of the firm, the assessee must annex along with his application, the partnership document evidencing the change in the partnership to have been executed in the accounting period or in the previous year in which the change has taken place. It is in the context of this construction of the section that we have to see whether the Tribunal was right in holding that the assessee-firm was not entitled to the renewal of registration under s. 184(7) of the Act of 1961.

5. We must state that the question has not been happily framed, But we will try to answer the reference on the question as it is framed since it has been urged that inasmuch as the assessee has not sought the question on the matter of dissolution of the firm, it is not entitled to argue that aspect of the question. In view of this contention advanced on behalf of the Revenue, we have thought it fit not to reframe the question. The next problem, as we have stated above, is whether the assessee-firm is dissolved or whether there is merely a change in the constitution of the firm. So far as the assessee is concerned, in the present case, it claims that the firm has been dissolved. It has, as a matter of fact, filed a declaration in Form No. 12 where if has been stated, inter alia, that there has been no change in the constitution of the firm or the shares of partners since the last day of the previous year relevant to the assessment year 1969-70 up to the date of demise of the partner, viz., April 7, 1979. In other words, the assessee-firm is claiming that the firm has been dissolved since the date of demise of the partner, Shivratan Mohatta. Now, that was precisely the problem which was to be answered in order to determine whether the assessee-firm was entitled to the benefit of continuance of registration which was granted to it in the earlier assessment year, because under s. 184(7), the registration which has been granted in the earlier assessment years continued to be effective for the subsequent year provided there was no change in the constitution of the firm or in the shares of the partners. The aspect, therefore, which has to be effectively adjudicated upon is whether the firm was dissolved or not. Now, the Tribunal has not addressed itself to this relevant aspect of the matter and it appears, with respect, that it proceeded to determine the ultimate question on a misapprehension of similarity of facts involved in Sri Rama Talkies : [1973]87ITR615(AP) and Panna Lal Babu Lal's case : [1969]73ITR503(All) , before the Andhra Pradesh and the Allahabad High Courts, respectively. It is no doubt, true that one or two circumstances in those two cases appear to be similar with the facts in the present case. With respect, we are of the opinion, that that cannot be conclusive on the crucial problem, viz., whether the firm had been dissolved or not. The ITO has found that the firm has been dissolved on the reasons which again, with respect to him, are not conclusive. The ITO has held that the firm was dissolved since no partnership deed was executed on the death of the partner and no registration application was filed. On the other hand, the Tribunal held that the firm was not dissolved since a new deed of partnership was not executed and though the partners had an option to admit the heirs of any of the deceased partner as a partner, no such option was exercised in the present case. With respect to the Tribunal, we are of the opinion that the factors which have been considered by the ITO or the Tribunal cannot conclude the matter. Section 42 of the Indian Partnership Act provides that a firm is dissolved, inter alia, upon the death of a partner subject to a contract to the contrary between the partners. The principle underlying the rule that the death dissolves the partnership is that the partnership is founded on the doctrine of delectus personae, which means that the persons who enter into the partnership do so on their confidence in the personal character, credit, substance, knowledge and ability of partners inter se. The death of a partner, in most of the cases, destroys qua others. But the rule is subject to a contract to the contrary. An agreement between the partners may show that they agreed that the death of any of the partners would not dissolve the partnership and the jural relationship between the surviving partners may continue even after the death. The question whether, in a given case, there has or has not been an agreement may be decided on the proof in the form of an express declaration to that effect. It may be decided even on the basis of the conduct of the parties and other facts and circumstances of the case. The question as to whether the partnership has been dissolved or not is to be answered by the court by finding out whether the jural relationship between the parties who had agreed to share the profit and/or loss of business carried on by them had come to an end; and it can be inferred also from certain proved facts. (See Vazirbhai Sultanbhai Tamboli v. Gadmal Nathmal Marwadi [1940] 42 BLR 511). Whether the firm is dissolved or not is a question to be answered with reference to the previous and particularly subsequent conduct of the partners in the absence of a regular deed of dissolution, since the subsequent conduct may be determinative of the fact as to whether the partners intended to terminate the jural relationship existing between them or not. (See Desai's Law of Partnership in India, fifth edition, page 197) and Mu Thaung v. Mu Than [1974] 51 Cal 374 (PC) and Venkata Subhadrayyamma v. Venkatapati [1925] 48 Mad 230 (PC)). The court has to consider all the circumstances of the case and arrive at the conclusion without attaching undue weight to any particular fact. We are afraid that the Tribunal has not considered this aspect of the matter as it should, as to whether the parties intended to put the jural relationship between them to an end. We must admit that there is an enabling provision as contained in clause 15 of the partnership deed in question before us to the effect that if a partner dies, it shall be open to the surviving partners to admit the heirs of the deceased partner to the partnership if they are willing to join on the same terms and conditions as the deceased partner had agreed to in the past. In case the admission of the heirs of the deceased partner to the partnership is not considered safe or suitable, the surviving partners shall clear the accounts qua the deceased partner and pay or recover any amount as per the accounts and, therefore, the surviving partners shall be competent to carry on the business. In other words, the effect of this clause is that the jural relationship would not be terminated in case the heirs of the deceased partner are admitted as partners in the firm; and if it was fount not safe or suitable to do so, the surviving partners were required to clear the accounts and adjust accordingly between them. It is an admitted fact that the heirs of the deceased partner did not join the partnership. It is also an admitted fact that no new partnership deed was drawn up. It is not clear whether the surviving partners had made up the accounts and adjusted amongst themselves accordingly. Unless, therefore, a clear finding is recorded in this behalf, it is difficult for us to answer the question which has been referred to us. As stated above, it is the overall conduct of the parties which will be determinative of the fact whether the jural relationship between the partners has been terminated or not; and unless that question is answered, it would be difficult for us to say whether the firm was entitled to the benefit of continuity of registration granted to it in the earlier years. In that view of the matter, therefore, the only course open to us is to declined to answer the question. The learned counsel for the Revenue, therefore, attempted to persuade us that unless a specific question to that effect has been sought by the assessee as to whether the firm has been dissolved or not, it would not be open to the learned counsel for the assessee to agitate that question. We are afraid that this is too specious. The question whether the assessee-firm was entitled to the benefit of the continuity of registration or was required to apply of renewal of registration was a question which would depend on the determination of the question whether the firm was dissolved or not and/or whether there was only a change in the constitution of the firm. Unless that question is precisely answered, it would be difficult to determine the question whether the assessee-firm is entitled to the benefit available under s. 184(7) or s. 184(8), as the case may be. We do not think that it is necessary for the assessee to seed a specific question since a question has been framed in general terms and referred to us for our advice. It is well settled that if a question of law is framed in general terms and in dealing with it several aspects fall to be considered, they have to be considered by the High Court even though the Tribunal may not have considered them (vide Keshav Mills Co. Ltd. v. CIT : [1965]56ITR365(SC) , at page 366; and Bhanji Bagawandas v. CIT : [1968]67ITR18(SC) ).

6. In the view of the matter which we are inclined to take, we do not think it necessary to refer a number of decisions which were cited at the Bar. But the two decisions which have weighed with the Tribunal, viz., CIT v. Sri Rama Talkies : [1973]87ITR615(AP) , decided by the Andhra Pradesh High Court and Panna Lal Babu Lal v. CIT : [1969]73ITR503(All) , decided by the Allahabad High Court are of no assistance to the cause of the Revenue. The obvious reason is that Panna Lal's case decided by the Allahabad High Court was one under s. 26 of the Indian I.T. Act, 1922, where the Allahabad High Court held that assuming that the death of the partner did not dissolve the partnership firm which continued even thereafter, it was impossible for the surviving partners to certify as required by clause (2) of the form provided under rule 6 of the I.T. Rules, 1922, that the constitution of the firm was the same as the constitution when the instrument of partnership was registered and, hence, there was a material defect in the application for renewal warranting its dismissal. The case, therefore, turned on the impossibility of furnishing the requisite declaration. We do not, therefore, think that this case can assist the cause of the Revenue. It is true that in Sri Rama Talkies' case : [1973]87ITR615(AP) , the Andhra Pradesh High Court was concerned with the question as to whether the firm was entitled to the benefit of continuity of registration granted to the firm in that case in the earlier assessment years. The Andhra Pradesh High Court, on the facts and in the circumstances of the case, opined that where a firm ceased to exist or is succeeded by a different firm during the course of the previous year, it may be permissible to grant registration for the assessment year in relation to the part of the previous year during which it existed. But, where the assessee claims to be the same firm throughout the previous year and submits a single return as if there was only one assessee during the whole of the previous year, registration can be granted only in relation to the whole of the previous year and not for a part of the previous year. We do not think, how this decision can be of any assistance to the cause of the Revenue, since the finding of fact in that case was that the firm had been reconstituted as a result of a change in the constitution of the firm on account of the death of one of the partners, viz., Aswathanarayana on October 15, 1963, and admission of his widow, Mangamani, to the partnership and the execution of the new partnership deed as a result thereof. That is precisely the question which has to be found here; and unless that finding is recorded, we do not think that the basic and ultimate question can be answered. The result is that we are required to adopt the course suggested by the Supreme Court in CIT v. Indian Molasses Co. P. Ltd. : [1970]78ITR474(SC) , by declining to answer the question on the ground that the Tribunal has failed to consider and decide on correct principles the aspect of the matter whether the firm has been dissolved or not and/or whether there was a change in the constitution of the firm. It will be open to the Tribunal to dispose of the appeal in the light of the observations made by this court after determining this aspect of the question which ought to have been decided. The reference is disposed of accordingly with no order as to costs.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //