1. This is a reference under Section 256(1) of the I.T. Act, 1961 (hereinafter to be referred to as 'the Act'), and the following question of law has been referred to the High Court for its decision :
' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that Section 187(1) of the Income-tax Act.1961, was not applicable in this case, and further that separate assessments be made against the two firms for the assessment year 1967-68 '
2. The brief facts giving rise to this reference are as follows:
Firm M/s. Hind Agencies, Khanda Manak Chowk, Jaipur, was a partnership firm having the following members :
1. Shri Girdhari Lal s/o. Shri Tulsi Das
2. Shri Shyam Sunder s/o. Shri Chand Narang
3. Shri Raj Kumar s/o. Shri Girdharilal
4. Shri Suresh s/o. Shri Girdhari Lal
5. Shri Ramesh Kumar s/o. Shri Girdharilal.
3. A partnership deed was executed among the parties on June 17, 1964. The shares of the partners were equal. This partnership provided that if any partner unfortunately dies or retires from the firm in the middle of the accounting period and, if a new partner is taken during the same accounting period, the same account books can be kept till the end of the accounting period and the profit and loss, if any, shall be divided at the end of that period according to the time factor. The firm will not stand dissolved on the death of any of the partners. There was a further term in the partnership deed that the above terms and conditions can be varied or altered or other terms added as may be expressed in writing, or implied from the conduct of the parties hereto. One of the partners, Shri Raj Kumar, who was unmarried, died on November 4, 1965, in an accident. A dissolution deed was executed among the remaining partners on November 20, 1965, to the effect that the firm stood dissolved with effect from November 4, 1965, and the partners, Girdhari Lal, Suresh and Ramesh Kumar, both sons of Girdhari Lal, alone will be entitled to the name and goodwill of the firm and Shyam Sundar, son of Shri Cband Narang, will have no right or interest in the same and that Shri Shyam Sundar has understood the accounts fully well and will have no objection if the business of the firm is carried on by the three partners themselves, or in partnership with others either in the same name or in some other name. Two days later, on November 22, 1965, another partnership deed was executed in which the following were the partners :
1. Shri Girdhari Lal s/o. Shri Tulsi Das 25%2. Shri Suresh s/o. Girdhari Lal 25%3. Shri Ramesh Kumar s/o. Girdharilal 10%4. Miss Maya d/o. Shri Kishanchand Salvani 20%
and Shri Chandra Kumar, son of Shri Girdharilal, was also admitted to the benefits of partnership to the extent of 20% profit and it was further mentioned that this partnership shall come into being from November 5,1965. It was also mentioned that Miss Maya was taken as a partner because she had a lot of connections in Punjab and was otherwise going to render great help and assistance to the firm in securing some agencies. Then Miss Maya later on got married to Ramesh Kumar, partner of the said firm, after about six months. On Chandra Kumar's attaining majority, another partnership deed was executed among these partners on January 26, 1966, wherein Shri Chandra Kumar was given the full-fledged status of partner. During the assessment year 1967-68, the firm filed two returns for two periods, one for the period up to November 4, 1965, and the other from November 5, 1965 (to end of the year). The ITO did not treat the two periods separately as concerning two different firms, but considered the whole period as one. He found that there was actually no dissolution and that there was only a change of some partners. The assessee filed an appeal to the AAC, who reversed the decision of the ITO and held that there had been a proper dissolution and the firm could be assessed on the basis of two returns filed for the two periods. The Department preferred a second appeal before the Tribunal and submitted that the present case was covered by Section 187(2) of the I.T. Act, 1961 and, therefore, cessation of one or two partners and admittance of others simply resulted only in a change in the constitution of the firm. But this contention was not accepted by the Tribunal and it dismissed the appeal. Thereupon, the Department filed an application under Section 256(1) of the Act requiring the Appellate Tribunal to make a reference to the High Court on a question of law mentioned above, and the Tribunal having come to the conclusion that a question of law does arise out of the order of the Tribunal had referred the above question to the High Court and made a reference under Section 256(1) of the Act.
4. Nobody appeared on behalf of the assessee despite notice. We have heard Shri Surolia, the learned counsel for the Department.
5. He has submitted that the provisions of Section 187(2) of the I.T. Act, 1961, should apply in the facts and circumstances of the case. A special meaning has been given to the expression 'change in firm's constitution' and this should include cessation of some partners and the admittance of others, or changes in their respective shares and, since it is a special Act, the firm cannot dissolve automatically as provided in Section 42 of the Partnership Act. Reliance has been placed on Nandlal Sohanlal v. CIT a Full Bench Decision of the Punjab & Haryana High Court. We have considered the whole matter very carefully and also gone through the relevant record and documents annexed with the statement of the case. It is not disputed that the name of the firm remained the same and there wasno change. Under the provisions of Section 42 of the Partnership Act, the death of a partner results in dissolution of a firm unless there is a contract to the contrary. In the present case, the earlier partnership deed provided that such death would not result in dissolution of the firm. However, at the same time, it was also provided that the partners can vary the terms and conditions of the partnership deed. In the present case, Shri Raj Kumar, partner, died on November 4, 1965, dissolution deed was executed on November 20, 1965, and a new partnership deed was executed on November 22, 1965, and, merely because a new partnership deed was executed after about 18 days, it cannot be said that it is a sham transaction. In the partnership deed dated November 22, 1965, it has been clearly provided that the new partnership started from November 5, 1965, as the old partnership stood dissolved on November 4, 1965 ; and, merely because the intimation regarding the dissolution of the firm was sent to the bankers on March 21, 1966, and to the Registrar of Firms in September, 1966, it cannot be inferred that it was the same firm and should be assessed as such. However, on the death of one of the partners, it is obvious that the other family members would be grief stricken and attending to the ceremonies and rituals which continue for about 13 days. Hence, the delay in executing the new partnership deed is quite natural, and no adverse inference can be drawn.
6. As regards the legal aspect, we have held in D.B. Income-tax Reference No. 25 of 1973, decided on January 30, 1984 [Addl. CIT v. M.K.M. Moosa Bhoy Amin ] that the view of the Punjab and Haryana High Court in Nandlal Sohanlal's case has been dissented from by the other High Courts and we have also not followed the view taken by the Punjab & Haryana High Court, but have agreed with the view expressed by other High Courts, including Allahabad, Calcutta, Andhra Pradesh, Gujarat and Madras. We may only refer to the latest authority of the Delhi High Court in CIT v. Sant Lal Arvind Kumar : 136ITR379(Delhi) .
7. In view of the above discussion, the reference is answered in the affirmative.