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Addl. Commissioner of Income-tax, Gujarat Vs. Harjivandas Hathibhai - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 31 of 1974
Judge
Reported in[1977]108ITR517(Guj)
ActsIncome Tax Act 1961 - Sections 143, 144, 170, 187 and 188; Partnership Act - Sections 31 and 32
AppellantAddl. Commissioner of Income-tax, Gujarat
RespondentHarjivandas Hathibhai
Appellant Advocate K.H. Kaji, Adv.
Respondent Advocate K.C. Patel, Adv.
Cases ReferredVinodkumar Ratilal v. Commissioner of Income
Excerpt:
direct taxation - separate assessment - sections 143, 144, 170, 187 and 188 of income tax act, 1961 and sections 31 and 32 of partnership act - dispute related to clubbing of two returns filed by assessee for one accounting year - two separate returns filed on ground that during accounting year there was dissolution of old partnership firm due to death of one partner and formation of new firm - as per facts no agreement between surviving partners and deceased partner that partnership would not dissolve on death of deceased - on death of one of the partner old partnership dissolved - new partnership came into existence - provisions of section 187 not attracted - two separate assessments must be made. - - thereafter, at the instance of the revenue the following three questions have.....divan, c.j. 1. the assessment year under consideration is 1968-69. the assessee is a registered firm and for the year of account which was the relevant previous year, being samvat year 2023, the assessee had filed two return of income for assessment year 1968-69. the first return was for the period november 13, 1966, to may 25, 1967 and the second return was for the period may 26, 1967, to november 2, 1967. samvat year 2023 was from november 13, 1966, to november 2, 1967. the original partnership deed was dated april 29, 1960, and under that deed of partnership, the firm consisted of four partners, each partner having 25 per cent. share in the profits of the firm. the firm was carrying on business in iron and steel, hardware and mill stores. one of the four partners, namely, patel.....
Judgment:

Divan, C.J.

1. The assessment year under consideration is 1968-69. The assessee is a registered firm and for the year of account which was the relevant previous year, being Samvat year 2023, the assessee had filed two return of income for assessment year 1968-69. The first return was for the period November 13, 1966, to May 25, 1967 and the second return was for the period May 26, 1967, to November 2, 1967. Samvat year 2023 was from November 13, 1966, to November 2, 1967. The original partnership deed was dated April 29, 1960, and under that deed of partnership, the firm consisted of four partners, each partner having 25 per cent. share in the profits of the firm. The firm was carrying on business in iron and steel, hardware and mill stores. One of the four partners, namely, Patel Harjivandas Hathibhai, died on May 25, 1967. Thereafter, a new partnership was entered into between the three surviving partners and the widow of the deceased. This new partnership deed was executed on June 15, 1967, and the new partnership was to come into existence from May 26. 1967. Under the new deed of partnership the widow of the deceased was given 10 per cent. share in the profits and the three surviving partners of the old firm were given 30 per cent. share each in the profits of the firm. The assessee contended that two separate assessments should be made on the firm because, on the death of Harjivandas Hathibhai, one of the partners, the firm was automatically dissolved since in the deed of partnership of April 29, 1960, there was no provision in the terms of the partnership of April 29, 1960, there was not provision in the terms of the partnership deed that, on the death of one of the parties, the firm was to continue. It was contended that, on the death of Harjivandas Hathibhai on May 25, 1967, the old firm was dissolved and, thereafter, a new firm came into existence with effect from May 26, 1967. The profits of the business were divided on time-basis between the two firms for the period November 13, 1966 to May 25, 1967, for the undissolved (sic) firm and for the period May 26, 1967, to November 2, 1967, for the new firm. It was contended that the income for the two period mentioned above should not be clubbed together. The Income-tax Officer took various factors into consideration and came to the conclusion that there was a mere change in the constitution of the firm nothing more and, therefore, the provisions of section 187 of the Income-tax Act, 1961, were attracted and the income of the two periods should be clubbed together. Against the decision of the Income-tax Officer, the assessee took the matter in appeal and the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer and dismissed the appeal. The matter was, thereafter, taken in further appeal by the assessee to the Income-tax Appellate Tribunal and the Tribunal held that where there was a dissolution in law, section 187 was not applicable and the Tribunal held that the old firm was dissolved on the death of the partner and, therefore, direct that there should be two separate assessments for the two periods. Thereafter, at the instance of the revenue the following three questions have been referred to us for our opinion :

'(1) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that on the death of Shri Harjivandas Hathibhai, the partnership firm was dissolved is erroneous in law

(2) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that section 187 of the Act would not be applicable in the case of the assessee

(3) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in directing that there should be two separate assessments for the two periods from November 13, 1966, to May 25, 1967, and from May 26, 1967, to November 2, 1967 ?'

2. Before discussing the several authorities which have been cited before us, it would be better to refer to the provisions of sections 187, 188 and 189 of the Income-tax Act, 1961. Section 187 provides for change in the constitution of a firm and under sub-section (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 : ....'

3. The proviso to sub-section (1) is not material for the purpose of this judgment. Sub-section (2) of section 187 is in these terms :

'For the purposes of this section, there is a change in the constitution of the firm -

(a) 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, or.

(b) where all the partners continue with a change in their respective shares or in the shares of some of them.'

4. Section 188 deals with succession of one firm by another firm. It provides -

'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 in accordance with the provisions of section 170.'

5. Section 189 deals with the situation where the firm is dissolved or business discontinued. Under sub-section (1) of section 189 :

'Where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the Income-tax Officer shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken place, and all the provisions of this Act, including the provisions relating to the levy of a penalty or any other sum chargeable under any provision of this Act, shall apply, so far as may be to such assessment.'

6. Section 170 deals with succession to business otherwise than on death and those provisions are, by virtue of section 187, to be complied with when there is succession of one firm by another firm.

7. The first contention urged by Mr. Kaji was that in view of the provisions of section 187 and particularly sub-section (2) of section 187, even if there is a dissolution of an old firm and some of the partners continue in the new firm, by virtue of sub-section (2) of section 187, there is, in the eye of the law, particularly the income-tax law, a mere continuation of the firm and not a case of succession of one firm by another. In this connection he has relied upon principally two decisions, one of the Allahabad High Court and another of the Punjab and Haryana High Court.

8. In R. B. Jessa Ram Fateh Chand v. Commissioner of Income-tax : [1971]81ITR409(All) , T, a partner of assessee-firm, dies on August 1, 1958, during the accounting year, October 24, 1957, to November 11, 1958. After the death of T, the business was continued by the remaining eleven partners, a fresh deed of partnership having been executed on August 20, 1958. The assessee-firm filed two returns for the relevant assessment year, one for the period from October 24, 1957, to August 1, 1958, and the other from August 2, 1958, to November 11, 1958, claiming losses in both the periods. The Income-tax Officer did not accept the claim of loss for the first period and made an addition of sum of Rs. 9,305. Both the Appellate Assistant Commissioner and the Appellate Tribunal rejected the assessee's plea that the Income-tax Officer was in error in making two separate assessments for the two periods. On a reference being made to the High Court, the Allahabad High Court held that a change occurred in the constitution of the firm within the meaning of section 26(1) of the Indian Income-tax Act, 1922, and the assessment should have been made on the firm as constituted at the time of making the assessment. The Income-tax Act recognises a firm for purposes of assessment as a unit independent of the partners constituting, it; it invests the firm with a personality which survives reconstitution. Where the firm is dissolved, but the business is not discontinued, there being change in the constitution of the firm, assessment has to be made under section 26(1), and if there is succession to the business, assessment has to be made under Section 26(2). It may be pointed out that provisions of section 26, sub-section (1), of the Indian Income-tax Act, 1922, with which the Allahabad High Court was concerned, were similar to the provisions of section 187, sub-section (1), of the Income-tax Act, 1961, with which we are concerned. Besides their decision on certain observations of the Supreme Court in Shivram Poddar v. Income-tax Officer : [1964]51ITR823(SC) , the learned Judges of the Allahabad High Court who decided the case in R. B. Jessa Ram Fateh Chand v. Commissioner of Income-tax : [1971]81ITR409(All) held on the above lines, the conclusion of the Allahabad High Court was that, on the facts and in the circumstances of the case, change occurred in the constitution of the firm within the meaning of section 26(1) of the Indian Income-tax Act, 1922, and assessment should have been made on the firm as constituted at the time of making the assessment.

9. This decision of the Allahabad High Court was relied on by the Punjab and Haryana High Court in Dharam Pal Sat Dev v. Commissioner of Income-tax . In the case before the Punjab and Haryana High Court, D, S and R were carrying on business as partners. R died on June 6, 1966. There was no provision in the partnership deed for the continuance of the business in the event of death of any partner. On June 9, 1966, a new partnership was formed between S, D and SL, son of the deceased, R. Two returns were filed for the assessment year 1967-68, the first for the period from December 18, 1965, to June 8, 1966, and the second for the period from June 9, 1966, to March 31, 1967. The Income-tax Officer clubbed the income of the two firms and passed a single assessment order holding the view that it was a case of change in the constitution of the firm. That order was confirmed on appeal. On a reference, it was contended for the assessee that the firm of which R was a partner stood dissolved on the death of R in view of the provisions of Section 42(c) of the Indian Partnership Act, that a completely new partnership came into being on June 9, 1966, and, therefore, it was a case of succession of one firm by another to which section 188 of the Income-tax Act, 1961, was applicable, and that the provisions of section 187(2) were wrongly applied by the tax authorities. The Division Bench of the Punjab and Haryana High Court held that the provisions of the Partnership Act can be referred to only if it is found that a particular situation is not covered by the provisions of the Income-tax Act. In this case, two partners remaining the same and there being a change only in one partner - one partner ceasing to be a partner on account of his death and another partner entering the partnership-this answers the description of section 187(2) of the Act and the taxing authorities rightly held that this constituted only a change in the constitution of the firm. According to the Punjab and Haryana High Court a particular case can be covered by section 188 of the Act only when it is a succession of one firm by another, meaning thereby that there is a complete change and no one of the partners in the previous firm continues to be a partner in the later firm, which is not the present case. Consequently assessment for both the period was justified in view of the provisions of section 187(2) of the Act. At page 308 of the report, Dhillon J., who delivered the judgment of the Division Bench, has referred to the decision of the Allahabad High Court in R. B. Jessa Ram Fateh Chand v. Commissioner of Income-tax : [1971]81ITR409(All) .

10. Now, it may be pointed out that recently a Full Bench of the Allahabad High Court in Dahi Laxmi Dal Factory v. Income-tax Officer : [1976]103ITR517(All) has in terms overruled the earlier decision of the Division Bench in R. B. Jessa Ram Fateh Chand v. Commissioner of Income-tax : [1971]81ITR409(All) . The majority of the learned Judges constituting the Full Bench, namely, Gulati and C. S. P. Singh JJ., held that the decision in R. B. Jessa Ram Fateh Chand's case : [1971]81ITR409(All) was not correctly decided. The third learned Judge, H. N. Seth J., dissented from this view but ultimately the matter was decided in accordance with the majority view. Gulati J., delivering the majority judgment of the Full Bench, observed at page 529 :

'The case of R. B. Jessa Ram Fateh Chand v Commissioner of Income-tax : [1971]81ITR409(All) has been decided on the basis of the observations quoted above in the case of Shivram Poddar's case : [1964]51ITR823(SC) . In my opinion the learned Judge did not notice the context in which these observations were made and were clearly misled. That decision, in my opinion, does not lay down the law correctly.'

11. Gulati J., has pointed out in the course of the majority judgment that under the Partnership Act two notions of 'reconstitution of a firm' and 'dissolution of a firm' are to be noticed and the two concepts are altogether distinct. He has pointed out that under section 31 of the Indian Partnership Act one mode of reconstitution of a firm, namely, by the introduction of a new partner with the consent of the existing partners unless there is a contract between the partners to the contrary as a result of which a new partner may be added without the consent of all the existing a partners, is provided. Section 32 similarly provides for the retirement of a partner. As a result of retirement of a partner also a change takes place in the constitution of the firm but the firm as such continues to be in existence as before. These are the only two contingencies under the Partnership Act which provided for the reconstitution of a firm without in any way affecting its continuity. According to the learned Judges of the Allahabad High Court who constituted the majority of the Full Bench, section 187 of the Income-tax Act, 1961, clearly contemplates the reconstitution of a firm in accordance with sections 31 and 32 of the Indian Partnership Act where a partner may be added or a partner may retire without breaking the continuity of the firm. Sub-section (2) of section 187 does not contain a definition of the 'reconstitution of a firm'. It merely and by way of abundant caution, provides, in clause (a) of sub-section (2) that even where the reshuffling of partners is so drastic that in the reconstituted firm only one of the partners of the original firm is left, it shall still be treated to be a case of reconstitution and clause (b) provides that where there is no change in the partners but their shares are altered that will still be a case of reconstitution. But this provision does not change the concept of reconstitution of a firm as understood in the Indian Partnership Act nor does it obliterate the distinction between reconstitution and dissolution. When section 187 talks of a partner ceasing to be a partner it refers to section 32 of the Indian Partnership Act and when it talks of admission of a new partner it refers to section 31 of the Indian Partnership Act. Gulati J. emphasised the fact by restating that by incoming and outgoing of a partner the firm is not dissolved. But once a firm is dissolved either by agreement or by operation of law, the question of reconstitution does not arise even when the new firm has common partners and takes over the same business. A firm in order to be reconstituted must remain in existence. The following passage from the decision of the Supreme Court in Commissioner of Income-tax v. A. W. Figgies & Co. : [1953]24ITR405(SC) was cited by Gulati J. :

'It is true that under the law of partnership a firm has no legal existence apart from its partners and it is merely a compendious name to describe its partners but it is also equally true that under that law there is no dissolution of the firm by the mere incoming or outgoing of partners. A partner can retire with the consent of the other partners and a person can be introduced in the partnership by the consent of the other partners. The reconstituted firm can carry on its business in the same firm's name till dissolution. The law with respect to retiring partners as enacted in the Partnership Act is to a certain extent a compromise between the strict doctrine of English common law which refuses to see anything in the firm but a collective name for individuals carrying on business in partnership and the mercantile usage which recognizes the firm as a distinct person or quasi-corporation.'

12. As regards the effect of section 188 of the Income-tax Act, 1961, Gulati J., observed - See : [1976]103ITR517(All) :

'This section deals with succession of one firm by another which means that when the business of a firm is taken over by another firm as a going concern. The expression in this section `and the case is not covered by section 187' presents to difficulty. In a sense a reconstituted firm is also a new firm but where the new firm comes into existence as a result of a change in its constitution, as explained above, assessment may be made under Section 187 on the reconstituted firm. But where the new firm comes into existence after the dissolution of a firm such a case would not be covered by section 187 and it would be case of a new firm succeeding to the old firm' and he has quoted the following passage occurring at page 895 of the sixth edition of Palkhivala's Commentaries on the Law of Income-tax :

'Likewise, if a firm is dissolved and some of the partners take over the firm's business or carry on a similar business, with or without new partners, this section (section 187) would not apply, although there would be some common partners between the old firm and the new firm; in such a case the new firm may be held to succeed to the old firm attracting the application of section 188.' The legal position that emerges on an examination of the different authorities has been summarized by Gulati J. in the following words at page 526 of the report : 'To sum up, the legal position that emerges is that section 187 applies only where a firm is reconstituted in accordance with sections 31 and 32 of the Indian Partnership Act, namely, when a new partner is taken or an existing partner retires with the consent of all the partners or without their consent if the contract of partnership so provides. But, where 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 even though some of the partners of the two firms are common.'

13. We respectfully agree with the reasoning of the majority of the learned judges of the Allahabad High Court in Dahi Laxmi Dal Factory's case : [1976]103ITR517(All) and with respect to the learned Judges of the Punjab and Haryana High Court who decided the case in Dharam Pal Sat Dev v. Commissioner of Income-tax and the learned Judges of the Allahabad High Court who decided the earlier case of R. B. Jessa Ram Fateh Chand v. Commissioner of Income-tax : [1971]81ITR409(All) , we are unable to agree with their conclusions.

14. Even apart from the decision of the learned Judges of the Allahabad High Court in the Full Bench decision referred to above, it is obvious on general principles that unless the words of the Income-tax Act compel us to do so, it would not be correct to depart from the well-known principles of partnership law. The partnership law contemplates retirement of a partner and even though a partner retires, the firm continues as before. What is meant by a change in the constitution of the the firm is coming in of a new partner with the consent of all the existing partners or by the retirement of a partner with the consent of all the partners; in such cases there is a mere change in the constitution of the firm and nothing more. The same firm continues as before. The question of dissolution of a firm either by operation of law or by act of parties is a different thing altogether. When a firm is dissolved, the old relationship comes to an end and a new relationship comes into existence and if the succeeding partnership firm continues the old business, then there is succession of one firm by another as contemplated by section 188. Sub-section (2) of section 187 merely specifies two kinds of changes in constitution of the firm. Clause (a) of sub-section (2) of section 187 refers to the continuance of the firm on one or more of the partners ceasing to be partners or one or more new partners being admitted. It deals with cases of retirement of partners and introduction of new partners but the firm under the Indian Partnership Act would continue in such a case. Therefore, all that sub-section (2) of section 187 points out is that with the retirement of one or more of the partners, so long as one of the old partners continues and with the introduction of new partners so long as one of the old partner continues, there is a mere change in the constitution of the firm. Again under clause (b) of sub-section (2) of section 187, by a mere variation in the respective shares of the partners or shares of some of the partners, there is not change in the firm itself. The old firm still continues and that is emphasized by sub-caluse (b) of sub-section (2) of section 187. It is, therefore, not correct to say that a special provision of law has been introduced by the interpretation clause in sub-section (2) of section 187. We are, therefore, unable to accept the first contention urged on behalf of the revenue by Mr. Kaji. In our opinion, section 187 of the Income-tax Act, 1961, does not introduce any change in the relationship between the parties and does not introduce a change from the general law of partnership as laid down by the Indian Partnership Act. We, therefore, reject the first contention urged on behalf of the revenue by Mr. Kaji.

15. The second contention urged by Mr. Kaji is certainly sustainable. This second contention is that even if circumstances arise which would ordinarily give rise to a dissolution of a firm, there may be, on the facts and circumstance of the particular case, sufficient material to justify an inference that originally there was an agreement between the partners of the firm as originally constituted, that on the death of one of the partners, the firm should not stand dissolved. Mr. Kaji is right when he says that the provisions of section 42(c) of the Indian Partnership Act do not require that there must be an agreement in writing between the partners that, on the death of one of the partners, the firm will not stand dissolved. Even if there is no such express term in the partnership agreement and even if in some cases the partnership deed comes to provide that by the death of one of the partners the firm should stand dissolved, from the circumstances of the case it may be possible to infer that before the death of the partner who died there was an agreement between the surviving partners and the partner who died that in the even of death on one of the partners the firm should not stand dissolved. It is an inference to be drawn from the conduct of the parties but it must be borne in mind that the conduct which is material is of the surviving partners and the agreement that is to be inferred is agreement between the surviving partners and the deceased partner and not an agreement between the surviving partners and the heirs of the deceased partner, because all that section 42(c) provides is that there should be an agreement to the contrary. That agreement may be in the form of express words as set out in one of the terms of the partnership deed or that agreement may be an agreement to be inferred from the facts and circumstances of the case but the agreement must be of the surviving partners and the deceased partner and of no one else. To that extent there cannot be any quarrel with the legal proposition.

16. Mr. Kaji's alternative contention before us has been that in the instant case the Tribunal has not taken into consideration the relevant circumstances which were taken into consideration by the Income-tax Officer and Mr. Kaji again urged them before us at the time of hearing of this reference for the purpose of persuading us to hold that from these facts and circumstances an inference should be drawn that during the lifetime of the deceased partner, Patel Harjivandas Hathibhai, there was an agreement between the surviving partners and the deceased partner that in the event of the death of one of the partners the firm should not stand dissolved. Mr. Kaji's grievance on this aspect of the case is justified. In paragraph 7 of the order the Tribunal has observed :

'In our view, there can be a dissolution of the firm as a matter of fact or under the law. Further, section 187 does not say that the relevant provision of the Indian Partnership Act would have no application. Here in the absence of any agreement to the contrary, on the death of a partner the partnership would have to be treated as dissolved. Section 187, in our view, would not be applicable in such cases where there is dissolution in law. No doubt had there not been any dissolution the factors pointed out by Shri Taishete, namely, the accounts were not closed and that the profits were ascertained at the end of the year and distributed on the basis of days for which the two deeds were executed, it would have been possible to hold that in fact there was no dissolution but, in our view, the legal position being clear there is no scope for finding out whether in view of these facts the firm was dissolved or not.'

17. With respect, the correct approach which the Tribunal should have adopted was whether there being no specific agreement to the contrary as required by section 42(c) of the Indian Partnership Act, from the facts and circumstances of the case an inference can be drawn that there must have been an agreement between the surviving partners and the deceased partner that in the even of the death of one of the partners of the firm should not stand dissolved. No effort was made by the Tribunal to find out whether there was such an agreement or not or whether such an agreement could or could not be inferred.

18. Mr. Kaji has taken us through several decisions of the different High Courts for the purpose of pointing out that there can be such an agreement which has to be inferred from the facts and circumstances of the case but since we agree with him on this proposition, we have not discussed in detail these different authorities cited by him at the bar for this purpose. There are decided cases of this High Court, for example, in Vinodkumar Ratilal v. Commissioner of Income-tax : [1975]100ITR564(Guj) and the decision in Income-tax Rference No. 7 of 1972 decided on November 26, 1973 [Addl. Commissioner of Income-tax v. United Commercial Co. [1977] 106 ITR 264], where we have taken into consideration the facts and circumstances of the case and tried to ascertain whether the agreement of the type that Mr. Kaji is insisting upon in the present case did or did not exist in those two particular cases but, ultimately, it will depend upon the facts of each case whether an inference about the existence of such an agreement to modify the terms of the general law should or should not be drawn. The Income-tax Officer in the instant case has relied upon eight circumstances for the purpose of holding that there was an agreement to the contrary, namely not be dissolve the firm. The eight circumstances on which the Income-tax Officer has relied were as follows :

(1) No dissolution deed has been drawn up on the death of one of the partners.

(2) The assessee-firm has not notified the Registrar of Firms about the dissolution of the firm.

(3) The assessee has also not notified the bank of the dissolution of the firm.

(4) The assessee-firm has not determined the rights and liabilities of the partners immediately on the death of one of the partners. But the same books of accounts are continued and the same trading account is also continued.

(5) There is a single profit and loss account for combined period of the firm, and profit has been distributed between the partners on time basis.

(6) Were this a new firm the assessee should have filed return of the income with the Income-tax Officer, Circle VIII-B, Ahmedabad, who would have jurisdiction over the new case.

(7) Were this a new firm, the assessee should have paid some suo motu advance tax as provided under section 212(3) of the Income-tax Act, and

(8) The application for registration has been filed in Form No. 11-A, which applied only in cases of change in the constitution.

19. At the hearing of the reference before us, Mr. Kaji on behalf of the Commissioner has urged before us circumstances (2), (3) (4), (5) and (8) out of these eight circumstances relied upon the Income-tax Officer. We will examine each of those circumstances, but, before we do so, it must be pointed out that under the partnership deed of April 29, 1960, clause 8 provided that if any partner retired or left the firm for any reason or died, then in such an event no amount was to be taken into consideration for the goodwill of the firm and none of the partners so leaving the firm would be entitled to get anything as an by way of a share in the goodwill of the firm. Thus, by mutual agreement between the partners, by clause 8 it was agreed that the partner leaving the firm either by retirement or by death would not be entitled to any share in the goodwill. Once there was no goodwill allottable to the share of the deceased as a result of the death of Harjivandas Hathibhai, it is obvious that there was no question of taking the account in the middle of the year, namely, as on May 25, 1967, and distribution of the profits between the two parties on the basis of actual taking of accounts instead of on mere time-basis. It may be pointed out that in Vinodkumar Ratilal's case : [1975]100ITR564(Guj) the distribution of the profits was on time-basis and on that basis the whole matter was argued out before this court. Therefore, the distribution of profits on time-basis is also a well-know method of distributing profits between the two firms when the same business has been continued and afterwards when the periods have been separated. Under this circumstances the fact that the profits were divided on time-basis cannot work against the assessee and cannot lead to an inference by itself that there was an agreement between the surviving partners and the deceased partner that the firm should continue after the death of one of the partners and should not stand dissolved. The fact that instead of asking for a registration for the new firm in Form No. 11 of the assessee-firm asked for continuance by intimating merely change in the constitution of the firm, does not alter the legal position because what we have to consider is not the conduct of the heirs nor the conduct of the surviving partners but the facts and circumstances of the case which must enable us to come to the conclusion that there must have been an agreement between the surviving partners and the deceased partner that in the event of the death of one of the partners the firm would not stand dissolved. Even if all the eight factors which appealed to the Income-tax Officer or all the five factors which Mr. Kaji has pressed into service are taken, the cumulative effect of these factors or some of them is not to lead to an inference that there must have been such an agreement not to dissolve the firm. Not notifying the bank about the dissolution of the firm or not notifying the Registrar of Firms about the dissolution of the firm cannot alter the legal position and it is possible that the partners themeselves were not very clear about their exact relationship but the important point is whether from the way the surviving partner worked and behaved after the death of Harjivandas Hathibhai, can it be necessarily inferred that there must have been an agreement between the surviving partners and Harjivandas Hathibhai that the firm should not stand dissolved We are unable to find any factors in the facts and circumstances of the case that would lead to such an inference. Neither each factor by itself nor the cumulative effect of all the factors or some of those factors would lead to an inference about the existence of an agreement not to dissolve the firm in the event of death of one of the partners.

20. Under these circumstances, though the approach adopted by the Tribunal does not appear to be correct, ultimately, our conclusion is the same as that reached by the Tribunal. In its order the Tribunal has stated that it might have been possible to hold that there was no dissolution. Now the correct approach is not whether there was any dissolution or not but whether there was an agreement established by an inferential process of reasoning amongst the partners of the old firm that the firm should not stand dissolved in the event of death of one of the partners. That is the only question that can arise for consideration in a case like the present one.

21. Under these circumstances we answer the questions referred to us as follows :

Question No. (1) : In the negative and in favour of the assessee.

Question No. (2) : In the affirmative and in favour of the assessee.

Question No. (3) : In the affirmative since section 188 would apply.

Question No. (3) is answered in favour of the assessee.

22. The Commissioner will pay the costs of this reference to the assessee.


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