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Commissioner of Income-tax, (Central), Madras Vs. Alagappa Cotton Mills - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 155 to 159 of 1978 (Reference Nos. 113 to 117 of 1978)
Judge
Reported in(1984)41CTR(Mad)230; [1984]149ITR640(Mad)
ActsIncome Tax Act 1961 - Sections 43(1), 143, 144, 170, 187(2) and 188
AppellantCommissioner of Income-tax, (Central), Madras
RespondentAlagappa Cotton Mills
Appellant AdvocateJ. Jayaraman, Adv.
Respondent AdvocateS. Swaminathan, Adv.
Cases ReferredIn Mavukkarai (N.) Estate Tea Factory v. Addl.
Excerpt:
direct taxation - dissolution - sections 43 (1), 143, 144, 170, 187 (2) and 188 of income tax act, 1961 - whether change in constitution of partners amounts to dissolution of firm which brings into existence new assessable unit - mere change in constitution of partnership under section 187 (2) does not bring into existence new assessable unit - in present case 'karta' entered into partnership in individual capacity by virtue of partition - change in status of 'karta' as individual partner is change in constitution under section 187 (2) and not dissolution of firm - no new assessable unit came into existence. - - the value of the land, buildings, machinery and the good will are said to have been revalued at the time of the partition by the panchayatdars at rs. a revision field against.....ramanujam, j. 1. the assessee in these cases is a firm carrying on business of spinning, manufacturing and of dealing in cotton and other fabrics. the firm was originally constituted by a partnership deed dated august 31, 1955, with three partners, namely, shri alagappa chettiar and his sons, shri annamalai chettiar and shri ramanathan chettiar. shri annamalai chettiar retired on april 12, 1961, and the firm was reconstituted by a deed dated april 13, 1961, by which shri alagappa chettiar, shri ramanathan chettiar and his wife, smt. meyammai achi, became partners. shri alagappa chettiar died on november 22, 1961, and shri ramanathan chettiar as the karta of huf and smt. meyammai achi thereafter carried on the business of partnership with 10 annas and 6 annas shares, respectively. later,.....
Judgment:

Ramanujam, J.

1. The assessee in these cases is a firm carrying on business of spinning, manufacturing and of dealing in cotton and other fabrics. The firm was originally constituted by a partnership deed dated August 31, 1955, with three partners, namely, Shri Alagappa Chettiar and his sons, Shri Annamalai Chettiar and Shri Ramanathan Chettiar. Shri Annamalai Chettiar retired on April 12, 1961, and the firm was reconstituted by a deed dated April 13, 1961, by which Shri Alagappa Chettiar, Shri Ramanathan Chettiar and his wife, Smt. Meyammai Achi, became partners. Shri Alagappa Chettiar died on November 22, 1961, and Shri Ramanathan Chettiar as the Karta of HUF and Smt. Meyammai Achi thereafter carried on the business of partnership with 10 annas and 6 annas shares, respectively. Later, there was a partition of the family properties of Shri Ramanathan Chettiar on September 30, 1964, in which Alagappa Cotton Mills with its buildings and machinery were exclusively allotted to the share of Shri Ramanathan Chettiar. The value of the land, buildings, machinery and goodwill as per books on that day was Rs. 14,61,72. At the time of the partition, the said mill assets were revalued at Rs. 33,50,000. As a result of revaluation of the assets at the time of partition, each of the three minor sons of Shri Ramanathan Chettiar beceme entitled to Rs. 4,00,000 representing the value of his share in the mill assests as revalued. Since, Shri Ramanathan Chettiar was exclusively allotted the mill assets, he Rs. 4,00,000 each in the personal accounts of his three minor sons in the books of the firm which was liable to be paid with interest at 9% per annum to equalise the shares.

2. After the family partition on September 30, 1964, Shri Ramanathan Chettiar continued to be a partner in the firm in his individual capacity and not as the 'karta' of the HUF with his wife, Smt. Meyammai Achi, as the other partner. At that stage, one Shri J. K. K. Natarajan advanced a sum of Rs. 1,50,000 on July 27, 1964, at 12% per annum and a further sum of Rs. 2,00,000 on August 13, 1964, at 9% per annum to the partnership firm for the purpose of carrying on its business. As per an agreement dated October 10, 1964, the said Shri J. K. K. Natarajan and his brother, Shri J. K. K. Munirajan, became partners along with Shri Ramanathan Chettiar and his wife, all of them having equal shares, and a new partnership deed was executed on October 19, 1964, which was to take effect from October 1, 1964. Clause 6 of the said partnership deed provided that the newly admitted partners examined the trial balance of Algappa Cotton Mills on September 30, 1964, and it was agreed that the same will be the basis for finalisation of the account of partnership business. The trial balance of the mill as on September 30, 1964, was also appended to the partnership deed dated October 19, 1964. By October 19, 1964, the total amount of loan advanced by Shri J. K. K. Natarajan and his brother Shri J. K. K. Munirajan amounted to Rs. 9,77,400. Some misunderstanding, however, arose between Shri Ramanathan Chettiar and his wife on the one hand and the other two partners on the other. The amount due as per the books of account as on October 31, 1964, to Shri Ramanathan Chettiar, his wife and his three sons were as under :

Rs. P.1. Shri AL. RM. Ramanathan Chettiar 9,21,056.342. Smt. RM. Meyammai Achi (wife) 82,668.333. Shri Alagappan (minor son) 4,00,000.004. Shri Nagappan (minor son) 4,00,000.005. Shri Meenakshisundaram (minor son) 4,00,000.00

3. On payment of the said amounts by Shri J. K. K. Natarajan and his brother, J. K. K. Munnirajan, Shri Ramanathan Chettiar and his wife retired from the partnership on October 31, 1964, after relinquishing all their rights in the partnership in favour of the two continuing partners, namely, Shri J. K. K. Natarajan and ShriJ. K. K. Munirajan, by a release deed dated November 1, 1964. Subsequent to this, by a partnership deed dated November 1, 1964, a new partnership was constituted with Shri J. K. K. Natarajan and Shri J. K. K. Munirajan as partners. This partnership firm is now the assessee before us.

4. For the assessment years 1967-68 to 1971-72, the assessee claimed depreciation on Rs. 33,50,000 being the value of the mill assets as revalued on September 30, 1964, at the time of the partition between Shri Ramanathan Chettiar and his three sons. But the ITO allowed depreciation only on the written down value in the revaluation of previous year. The ITO found that even in an earlier assessment year, namely, 1965-66, depreciation had been claimed by the assessee on the basis of the notional revaluation of the mill assets on September 30, 1964. But the ITO had held that since the partnership had admittedly undergone certain changes only in its constitution, the written down value of the previous year should alone be taken as the value for the allowance of the depreciation.

5. Aggrieved by the order of the ITO, the assessee went in appeal before the AAC. The Appellate Authority, however, upheld the view taken by the ITO holding that the assess is entitled to claim depreciation only on the written down value and not on the notional revaluation. The assessee then took the matter in appeal before the Tribunal in respect of the orders passed with reference to the assessments for the years 1967-68 to 1971-72.

6. The Tribunal, by order dated July 23, 1974, had called for a remand report form the AAC in respect of the following points :

'1. Whether the alleged partition is true and genuine 2. Whether the revaluation of the mill assets represents their correct market value at the time of partition

3. Whether there was a dissolution of the firm as contended by the assessee 4. Whether the continuing partners obtained release from the retiring partners by actually paying the enhanced value of mill assets 5. Whether the assessee is entitled to claim depreciation on basis of the revaluation of mills assets since the continuing partners are third parties and the cost of mill assets would be the price at which they were actually purchased ?'

7. On points Nos. 1,2 and 4 above the AAC had submitted a remand report stating that the partition was true genuine and the revaluation of mill assets represented the correct market value at the time of partition and the continuing partners obtained represented the correct market value at the time of partition and the continuing partners obtained release from the retiring partners by paying the enhanced value of the mill assets. On points Nos. 3 and 5, the AAC had found in his remand report that there was only a change in the constitution of the firm, and that, therefore, the appellant is not entitled to claim depreciation of on the basis of revaluation of the mill assets notwithstanding the fact that the continuing partners are third parties.

8. Taking note of the findings given in the said remand report by the AAC, the assessee contended before the Tribunal that pursuant to the partition in the family of Shri Ramanathan Chettiar on September 30, 1964, the partnership firm constituted by the deed dated February 26, 1962, with Ramanathan Chettiar as karta of HUF and his wife as partners came to be dissolved that a fresh partnership constituted by Shri Ramanathan Chettiar in his individual capacity and his wife, Smt. Meyammai Achi, came into existence on October 1, 1964, and it was thereafter reconstitutsed by admitting Shri J. K. K. Natarajan and his brother, Shri J. K. K. Munirajan, as partners by a deed dated October 29, 1964, and that therefore, the depreciation should be computed on the basis of the valuetion on which this reconsitituted partnership firm took ovdf the mill assets. In short, the assessee's contention is that since the mill assets were revalued, at the time of the constitution of the new partnership firm on October 19, 1964, and the new partnership took over the mill assets at their enhanced value,depreciation should be computed on the basis of the enhanced value, and that, in theiany event, the assessee is entitled to depreciation on the price at which it took over the mill assets, such price being the cost for which it was allotted to Shri Ramanathan Chettiar at the time of partition. The Revenue, on the other hand, contended that in the absence of a dissolution deed dissolving the old partnership constituted under the deed dated February 26, 1962, in view of s. 187(2), the old firm should be taken to continue with a change in the constitution and the cost of the mill assets should be taken to be the same as the written down value and depreciation can be allowed only on the written down value and not on the notional coat arrived at the time of the partition. On these rival contentions of parties, the Tribunal formulated the following two point for consideration :

'1. Whether on September 30, 1964, the old partnership firm comprising of Shri Ramanathan Chettiar and Smt. Meyammai Achi came to be dissolved and anew firm comprising Shri Ramanathan Chettiar and Smt. Meyammai Achi came into existence on October 1, 1964, and later reconstituted by admitting Shri J. K. K. Natarajan and Shri J. K. K. Munirajan as partners so that depreciation should be allowed on the basis of the valuation at which the assessee took over the mill assets

2. Whether the assessee is entitled to depreciation on the raise of the revaluation of mill assets, even if there is not dissolution or succession to the partnership firm ?'

9. On point No. 1, the Tribunal held that as the entire mill assets have been revalued in the family partition in order to equalise the shares of all the sharers, the revaluation of the mill assets was not notional but real inasmuch as there was equalistion and adjustment in respect of the shares all jotted to the minor sons, that the actual cost of the mill assets to the partnership firm constituted on October 1, 1964, between Shri Ramanathan Chettiar and his wife, Smt. Meyammai Achi, and later reconstitutsed by the deed dated October 19, 1964, by admitting Shri J. K. K. Natarajan and Shri J. K. K. Munirajan must be taken at Rs. 33,50,000 and not the written down value of Rs. 14,61,721.95, that in fact a trail balance of the mill as on September 30, 1964, showing the revaluation of the mill assets has been appended to the partnership deed dated October 19, 1964, that the cost price of the mill assets so far as Shri J. K. K. Natarajan and Shri J. K. K. Munnirajan are concerned, would be the actual cost at which they acquired the mill assets by obtaining the release from Shri Ramanathan Chettiar and his wife, Smt. Meyammai Achi, and that, therefore, they were entitled to depreciation at the price at which they took over the they were entitled to depreciation at the price at which they took over the mills and not on the written down value. On the second point, the Tribunal, following the decision of this court in Kaithari Lungi Stores v. CIT : [1976]104ITR160(Mad) , the assessee's contention that even if there was no dissolution but only a reconstitution of the firm, depreciation has to be allowed on the enhanced value of the mill assets since in a case of reconstitution, the old firm does not cease to exist but continues as reconstituted. Aggrieved by the order of the Tribunal in so far as it holds that the assessee is entitled to claim depreciation on the basis of revaluation of the mill assets, the Revenue sought and obtained reference to this court on the following two questions :

'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that there was dissolution of the firm on September 30, 1964, comprising Shri Ramanathan Chettiar and Smt. Meyammai Achi constituted under the deed dated February 26, 1962

2. Whether, on the facts and circumstances of the case Appellat Tribunal was right in holding that depreciation should be allowed on the enhanced value of the mill assets of the assessee-firm at Rs. 33,50,000 and not on the basis of the written down value of Rs. 14,61,721.95 ?'

10. As already stated, the Tribunal has proceeded on the basis that if there is only are reconstitution of the firm on September 30, 1964, depreciation has to be allowed only on the book value of the mill assets and not on the enhanced value of the mill assets. But it has, however, held that there has been a dissolution of the partnership constituted by the deed dated February 26, 1962 and, therefore, depreciation has to be allowed on the revaluation of the mill assets as on September 30, 1964. Thus, the main question for consideration is to see whether there is a dissolution as on September 30, 1964, as has been held by the Tribunal or whether there is only are constitution of the firm on September 30, 1964, as alleged by the Revenue.

11. The facts are not very much in dispute. A partnership firm was constituted by a deed dated August 31, 1955, consisting of Alagappa Chettiar and his sons, Annamalai Chettiar and Ramanathan Chettiar, as partners for the purpose of carrying on the business of manufacture of cotton yarn and cotton fabrics. The firm established a textile mill called 'Alagappa Cotton Mills' at Rajapalayam. Annamalai Chettiar retired on April 12, 1961, and the partnership was reconstituted by a deed dated April 13, 1961, by which Alagappa Chettiar and his son, Ramanathan Chettiar, and his wife, Meyammai Achi, became partners. Alagappa Chettiar died on November 22, 1961, and Ramanathan Chettiar and Meyammai Achi, thereafter carried on the business of partnership with 10 annas and 6 annas shares respectively from February 26, 1962. In the said partnership Ramanathan Chettiar is said to have represented the HUF of himself and his three sons and thus the 10 nannas share held by Ramanathan Chettiar belonged to the HUF. Thereafter, a partition of the family are said to have been valued and the allotments have been made on the basis of the said valuation. In the partition, the interest of the HUF in the partnership was allotted to the share of Ramanathan Chettiar exclusively and Ramanathan Chettiar had to pay each of the three sons a sum of Rs. 4,00,000 representing the share in the value of the mill assets as owelty for equalising the shares of all the shares. The value of the land, buildings, machinery and the good will are said to have been revalued at the time of the partition by the panchayatdars at Rs. 33,50,000 as against the book value of Rs. 14,61,721. In pursuance of the said family arrangement, the said Ramanathan Chettiar had transferred to the credit of each of the minor sons a sum of Rs. 4,00,000 in the books of the reconstituted firm earning interest at 9% per annum. Thus, after the partition in the family on September 30, 1964, Ramanathan Chettiar became a partner in partnership not as 'Karta' representing the HUF but in his own individual capacity with his wife, Meyammai Achi, as the other partner. On October 19, 1964, Ramanathan Chettiar and Meyammai Achi took in two more partners, namely, J. K. K. Natarajan and J. K. K. Munirajan, under a partnership deed dated October 19, 1964. Though this deed was executed on October 19, 1964, the partnership of four partners was to take effect from October 1, 1964. Thereafter, on November 1, 1964, Ramanathan Chettiar and his wife, Meyammai Achi retired from the partnership after Chettiar and his wife, Meyammai Achi retired from the partnership after relinquishing their interest in the partnership in favour of the two continuing partnership is the assessee before us. On these facts, the question is, whether the partnership consisting of Ramanathan Chettiar and Meyammai Achi constituted on October 1, 1964, after the partition in the family on September 30, 1964, is a new firm or whether it came into exists as a result of the reconstitution of the old firm which was in existence as a result of the constitution of the old firm which was in existence before partition. On the admitted facts set out above, it will be clear that the firm that was functioning on or before September 30, 1964, was a firm consisting of Ramanathan Chettiar as 'Karta' of the HUF and his wife, Meyammai Achi, as partners with 10 annas and 6 annas shares respectively. Subsequent to the partition, Ramanathan Chettiar continued to be a partner in the said partnership firm in his individual capacity along with his wife, the profit sharing ratio continuing to be the same as before, i.e., 10 annas and 6 annas share respectively.

12. According to the assessees' learned counsel, since Ramanathan Chettiar became a partner of the firm on October 1, 1964, in a different capacity, the old firm in which he was partner as 'karta' should be taken to have been dissolved on September 30, 1964, the date of partition and a fresh partnership consisting of Ramanathan Chettiar in his individual capacity and his wife as partners came into existence, and, therefore, the cost of the mill assets to the new partnership should naturally be taken at their valuation adopted at the time of the partition. According to the learned counsel, if a new partnership takes over the assets of an old partnership at a particular value, then, such value alone should be taken as the basis for allowing depreciation. In support of the said submission, the learned counsel refers to ss. 170, 187 and 188 and the decisions in Raj Narain Agarwala v. CIT : [1970]75ITR1(Delhi) , R. B. Bansilal Abirchand Spinning and Weaving Mills v.CIT : [1970]75ITR260(Bom) and Mavukkarai (N.) Estate Tea Factory v. Addl. CIT : [1978]112ITR715(Mad)

13. Section 187(1) of the I.T. Act, 1961, says that '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'.

14. Sub-section (2) of the said s. 187 defines the expression 'change in the constitution of the firm' as follows :

'(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 change in their respective shares or in the shares of some of them.'

15. Section 188 deals with succession of one firm by another firm. Where a firm carrying on a business or profession is succeeded by another firm, and the case is not one covered by s. 187, separate assessments shall be made on the predecessor firm and the successors firm in accordance with the provisions of s. 170. Section 170 provides that, where a person carrying on any business or profession has been succeeded therein by predecessor shall be assessed in respect of the income of the precious year in which the succession took place up to the date of succession, and the successor shall be assessed in respect of the income of the previous year after the date of succession. Thus, s. 170 will apply to a case falling under s. 188. But that will not apply to a case falling under s. 187.

16. On the facts of this case, it cannot be said that the case falls under s. 188 and it can be said to fall only under s. 187, it being clear case of a change in the constitution of the firm. Before October 1, 1964, the firm consisting of Ramanathan Chettiar as 'karta' of the HUF and his wife as partners with 10 annas and 6 annas shares respectively, carried on the business. After October 1, 1964, the same two partners with the same profit sharing ratio continued to be partners with the only different that after October 1, 1964, Ramanathan Chettiar was a partner in his individual capacity and not as 'karta' of the HUF. Even assuming as contended by the learned counsel for the assesses that Ramanathan Chettiar who was a partner in the firm as karta, before October 1, 1964, and Ramanathan Chettiar in his individual capacity who was a partner in the firm after October 1, 1964, are taken to be two different individuals, so long as the wife continues to be a common partner, the case will fall under s. 187(2)(a), and, therefore, it can be taken to be only a change in the constitution of the firm. Assuming that there has been a change in the share of Ramanathan Chettiar on his becoming a partner in his individual capacity, that should be taken to be a change in the share of one of the partners, the other partner's share remaining the same, and this will attract s. 187(2)(b). Therefore, only a change in the constitution of the firm had taken place and the firm which functioned before September 30, 1964, cannot be taken to have been dissolved.

17. In Raj Narain Agarwal v. CIT : [1970]75ITR1(Delhi) , the assessee, a HUF, was a partner, through its 'karta', in a registered firm, owning three factories. The three factories were valued by experts, the assets were divided into two lots by the assessee and the only other partner had the option to select either of the two lots. The lot comprising two of the factories valued at Rs. 6 lakhs fell to the share of the assessee and the assessee paid a sum of Rs. 4,35,000 to the other partner for equalising the value of the divided assets. In the assessment of the firm for the assessment year 1955-56, the ITO determined the loss suffered by the firm up to the end of the year to be Rs. 3,53,838 and in allocating the loss between the two partners observed in relation to the assessee that 'the loss to be carries forward to future years will be Rs. 1,76,691'. For the assessment year 1956-57, the assessee earned profits from the two factories and claimed depreciation on the basis of Rs. 6 lakhs at which the assets were valued at the time of division and further claimed to set off Rs. 1,57,254 out of the carried forward loss. The Tribunal held that Rs. 6 lakhs was the fair value of the assets for purposes of depreciation in the hands of the assessee, and that, therefore, the whole of the carried forward loss has to be allowed. When the matter reached the High Court, on the question referred at the instance of the Revenue it was contended that the valuation of the assets was only notional and not real, and, therefore, the losses cannot be determined on the basis of such notional value, the Delhi High Court held that the valuation of the assets at the stage of the dissolution of the partnership was not notional, but real, as adjustments have been made by the payment of Rs. 4,35,000 in cash by the assessee to the other partner with a view to equalising their shares, and, therefore, the actual cost of the assets on the date of the partition was Rs. 6 lakhs which was the value given to them for the purpose of allotment. We do not see how that decision can be applied to the facts of this case. In that case, there was in fact a dissolution of the firm consisting of two partners. As a result of the dissolution, the assets were revalued and allotted to each of the partners and there was also equalisation of the shares and one partner had to pay owelty to the other. In those circumstances, the conclusion is inescapable that the value of the assets allotted to each of the partners will be the value given to the assets at the time of the division of the assets and allotment thereof.

18. In this case, the 10 annas share held by the HUF was the subject matter of partition among the members of the family of Ramanathan Chettiar, and the 6 annas share held by Meyammai Achi was not the subject-matter of the partition. It is no doubt true that at the time of the partition among the members of the family, the 10 annas share owned by the family in the partnership was the subject-matter of allotment and the same was allotted to Ramanathan Chettiar on his paying Rs. 4 lakhs to each of his three sons in lieu of their shares. For the purpose of determine the 10 annas share in the partnership which owned the mill, the parties have chosen to revalued the mill and mill assets. Therefore, it cannot be said that there has been a dissolution of the firm and a division of the assets of the firm amongst the erstwhile partners as was the case in the said decision.

19. The decision of the Bombay High Court in R. B. Bansilal Abirchand Spinning and Weaving Mills v. CIT : [1970]75ITR260(Bom) was also a case of a dissolution of a firm and the erstwhile partners adopting revaluation. In that case, a firm consisting of four partners owned a textile mill. That firm was dissolved on October 20, 1939, and the assets of that firm were purchased for a consideration of Rs. 26,11,042 by a new firm consisting of two partners. There new firm was also dissolved on October 18, 1944, and the mill was purchased by Seth Narsingdas Daga, one of the partners, for Rs. 50,00,000 with effect from October, 18, 1944, the date of dissolution of the firm of two partners. A question arose whether the firm consisting of seven partners who took over the mill at a stated consideration could claim depreciation on the basis of the price paid by them for the mill and the mill assets. The court held that the cost of the assets in the hands of the assessee, the firm of seven partners, had to be ascertained by the price that could be paid in the prevailing market conditions, that the written down value of the assets is not relevant in determining the cost of the assets to the purchaser, and that in the absence of fraud, collusion, inflation or false transaction made with ulterior purposes, the income-tax authorities were precluded from going behind the agreement of purchase in determining the purchase price and fix their own valuation. In that case also, there was a dissolution of the earlier partnership and the partnership business was taken over by a new partnership and the new partnership had acquired the mill and the mill assets on payment of certain value. Therefore, it was held that they were entitled to depreciation on their purchase value of the mill and the mill assets on payment of certain value. Therefore, it was held that they were entitled to depreciation on their purchase value of the mill assets. This decision also cannot help the assessee in this case.

20. In Mavukkarai (N.) Estate Tea Factory v. Addl. CIT : [1978]112ITR715(Mad) , a Division Bench of this court to which one of us was a party, considered the scope of s. 187(2) and held that merely because there was a common partner in the two firms, it could not be said that the old firm continued with a mere change and the said observation has been strongly relied on by the learned counsel for the assessee. But that observation came to be made on the special facts of that case. There, four partners of a firm of five partners retired from the partnership on June 30, 1970, after executing a release deed under which the remaining partner, J, took over the rights and liabilities of the firm. On the same day, J formed a new firm with the same name as the old firm by taking in three new partners, the new firm filed two separate returns of income, one for the period September 1, 1969, to June 30, 1970, in respect of the old firm and another for the period July 1, 1970, to March 31, 1971, in respect of the newly constituted firm and claimed that two separate assessments should be made. The ITO, however, considered that there was only a reconstitution of the old firm and, accordingly, made a single assessment on the new firm for the entire period. A revision field against that assessment by the new firm having failed, a writ petition was filed before this court by the new firm challenging the single assessment. It was in those circumstances this court held that even if the extinction of the old firm and the constitution of the new firm took place simultaneously, it must be taken, in law, that the retirement of the partners of the old firm preceded the constitution of the new firm, for, unless the old firm ceases to exist, a new firm cannot come into being. As a result of the retirement of all the partners, the business had become proprietary in the hands of the retirement of all the partners, J, and it was only thereafter that the new firm of partnership was constituted, and that, however small or minute the interregnum may be, there was an extinction of the old firm preceding the constitution of the new firm, and, therefore, the two firms should be treated as separate entities and the new firm cannot be said to be a constitution of the old firm, and, therefore, it cannot be said that the old firm continued to be the same with a mere change in the constitution. In this case, as already stated, there is no dissolution of the old firm and the coming into existence of a new firm and except for the fact that Ramanathan Chettiar was originally a partner in his capacity as 'karta' and, thereafter, he continued to be a partner in his individual capacity, the old firm continues to function with a mere change in the status of one of the two partners. On these facts, the said decision cannot apply to this case at all.

21. The learned counsel for the assessee relied on the following passage in page 22 in 'Lindley on Partnership' - 13th edition :

'An interesting consideration of the principle is to be found in revenue law as applied to a change in the composition of a partnership firm. By section 154 of the Income and Corporation Taxes Act, 1970, re-enacting section 19 of the Finance Act, 1953, if a person charged under Schedule D ceases within the year of assessment to carry on the trade in respect of which the assessment is made and is succeeded by another person, the Commissioners are to adjust the assessment as directed. In Commissioners of Income-tax v. Gibbs and others [1942] AC 402, a partnership of four stockbrokers took in a fifth partner and thereafter continued to carry on business as stock-brokers. It was held by the House of Lords (Lord Russell of Killowen dissenting) that, although in English law a partnership is not a single juristic person, when the four partners took a fifth partner they ceased to carry on business and were succeeded by the partnership of five persons within the meaning of sub-rule 1; so that the Commissioner of Income-tax had jurisdiction under sub-rule 2 to adjust an assessment made on the partnership of four and charge the partnership of five with a fair proportion of the assessment from the time that the latter partnership came into being'.

22. It is no doubt true, the House of Lords had held in Commissioners of Income-tax v. Gibbs [1942] AC 402, that when a partnership of four stock-brokers took a fifth partner and thereafter continued the partnership as stock-brokers, there cannot be a single assessment, but the assessments have to be made on the two partnership separately with reference to the period during which they carried on the business, i.e., treating the two partnership as separate entities. But that decision cannot be straight-away applied to cases arising under the Indian I.T. Act wherein we have a definition of a 'change in the partnership' in s. 187(2) which clearly says that if there is merely an addition of a new partner, it is only a change in the partnership, and, therefore, a single assessment has to be made under s. 187. The footnote in page 22 says that the law as laid down by the House of Lords in that case is now obsolete in view of amendments made to the English Act from time to time.

23. Though the learned counsel for the assessee contends before us that there has been a dissolution of the old firm and the constitution of a new firm on October 1, 1964, it is found that the assessee have all along proceeded on the basis that there has been only a reconstitution of the old firm on October 1, 1964. By a letter dated March 22, 1966, the auditors of the assessee had applied for registration in Form No. 11A for the assessment year 1966-67. That letter also refers to an application for registration filed in Form No. 11A for the assessment year 1965-66, the assessee had given the following details;

SCHEDULE -----------------------------------------------------------------------------Name of partner Address Date of Inter- Salary, Share in Re-admitt- est on commis- the balance marksance to capital sion ori of profitsthe par- or loans other (or loss):tnership (if any) remuner- percentageationfromfirm------------------------------------------------------------------------------1 2 3 4 5 6 7------------------------------------------------------------------------------Upto 30-9-1964 :AL. RM. RamanathanChettiar (HUF) Madras 23-11-1961 R - 0-10-0RM. Meyammai Achi,Kottayur, Ramnmad Dt. 23-11-1961 R - 0-6-0From 1-10-1964 to31-10-1964 :RL. RM. RamanathaChettiar, Madras 1-10-1964 R - 25%RM. Meyammai Achi,Kottayur 23-11-1961 R - 25%J.K.K. Natrajan,Komarapalayam 1-10-1964 R - 25%J.K.K. Munirajan 1-10-1964 R _ 25%------------------------------------------------------------------------------Note :'Shi AL. AM. RamanathanChettiar has been admittedin the partnership in hisindividual capacity from1-10-1964'.

24. In the application for registration under Form No. 11A for the year 1966-67, the following details have been furnished : From 1-4-1964 to 30-9-1964 :

AL. RM. Ramanathan Chettiar 9% to 1,000 h 0-10-0AL. M. Meyammai Achi ' -- 0-6-0From 1-10-64 to 31-10-64 :AL. RM. Ramanathan Chettiar 9% 1/4AL. RM. Meyammai Achi 9% 1/4J. K. K. Natarajan ' 1/4J. K. K. Munirajan ' 1/4From 11-11-64 to 31-10-65 :J. K. K. Natarajan 1/2J. K. K. Munirajan 1/2

25. In their letter dated March 19, 1966, addressed to the ITO, the assessee have given the following details regarding the constitution of the firm :

'Constitution' : The firm consisted of partners, Sri AL. RM. Ramanathan Chettiar and Smt. RM. Meyammai Achi, sharing the profit or loss at 5/8 and 3/8 respectively. The assessment of the firm up to and including the assessment year 1963-64 (year ending March 31, 1963) has been completed. From April 1, 1964, to September 30, 1964, the same constitution continued. From No. 12 for continuation of registration of the firm signed by the then 2 partners is enclosed.

26. As from October 1, 1964, there was a charge in the constitution of the firm. The change relates to Sri J. K. K. Munirajan and Sri. J.K. K. Natarajan who were taken in as partners. From October 1, 1964, to October 30, 1964, i.e., for a period of one month, the firm consisted of partners, four in number, viz., Sri AL. RM. Ramanathan Chettiar, Smt. RM. Meyammai Achi, Sri J. K. K. Natarajan and Sri J. K. K. Munirajan, sharing the profits or loss equally. This change is evidenced by a deed of partnership executed by the partners, dated as October 19, 1964. Proper application for registration regarding this change have already been filed with you.

27. In the same letter, under the head 'RETURN' the following occurs :

'Return' : The return is submitted showing a consolidated loss at Rs. 1,79,314 which has been arrived at as follows : Loss Rs.For the period from 1-4-64 to 30-9-64 47,602For the period from 1-10-64 to 31-10-64 57,997For the period from 1-11-64 to 31-3-65 73,715

28. The books of account have been closed to given effect to the various changes in the constitution of the firm and separate manufacturing, trading and profit and loss accounts have been prepared.

29. Under the Head 'Depreciation', the following passage occurs :

'Depreciation' : Statement showing particulars of depreciation claimed is attached for the period from April 1, 1964 to September 30, 1964. In calculating depreciation for this period, viz., for 6 months' period, the written down values as per the return submitted for the assessment year 1964-65 have been adopted. In calculating depreciation for the period from October 1, 1964, to March 1, 1965, however, valuation of the assets, as revalued, has been taken as this forms the cost to the new partnership. The total depreciation for the period from April 1, 1964, to March 31, 1965, has been calculated and this has been apportioned for the two periods, viz., April 1, 1964, to September 30, 1964, and October 1, 1964, to March 31, 1965.'

30. Thus it is seen that the assessees themselves have proceeded on the basis that there was only a change in the constitution of the firm on October 1, 1964, and they also claimed a consolidated loss treating the old firm to be continuing as reconstituted. As regards depreciation, the assessee has claimed up to the period September 30, 1964, on the basis of the written down value. But for the period September 30, 1964, on the basis of the written down value. But for the period subsequent to October 1, 1964, it is bases on the revaluation said to have been made at the time of the partition of the HUF of Ramanathan Chettiar. It should be noted that Form No. 11A is applicable only when there is a change in the constitution of the firm or in the shares of the partners and the application for registration in Form No. 11A is consistent with the assessee' original stand that the assessee can alter his original stand and contend that in law there is no change in the constitution of the old firm but the coming into existence of a new firm which should be taken to have purchased the mill and mill assets from the old firm so as to claim depreciation on the basis of its purchase value, actually there is no dissolution of the old firm and the coming into existence of a new firm. As already seen, the firm which carried on the business up to September 30, 1964, continued to carry on the same business with two more partners added, with effect from October 1, 1964. Later, on November 1, 1964, the two old partners retired and the two new partners continued the business. Therefore, at no stage, there was a dissolution of the old firm and coming into existence of any new firm. In such circumstances we do not see how the firm's assets could be revalued and depreciation claimed by the assessee-firm on the basis of the revaluation after October 1, 1964.

31. Kanga and Palkhivala in their treatise on the Law and Practice of Income-tax, VII edition, volume I, page 380, have pointed out that a notional or an artificial value can be taken to be the actual cost only in cases falling under Explanations 1 to 7 of s. 43(1). Accepting the contention of the assessee in this case will mean that whenever a change takes place in the constitution of a firm, there should be a revaluation of the assets and the reconstituted firm can claim depreciation on the basis of such revaluation. This contention practically overlooks the dichotomy between s. 187 which applies to changes in the constitution of a firm and s. 188 which contemplates one firm succeeding another firm. In this case, it is clearly not a case of succession of one firm by another as contemplated by s. 188.

32. In Dahi Laxmi Dal Factory v. ITO : [1976]103ITR517(All) , a Full Bench of the Allahabad High Court had dealt with the scope of ss. 187 and 188. In that case, there was a firm of two partners. One of the partners died on June 21, 1969. On the following day, the surviving partner took over the business of that firm and a fresh partnership deed was executed on June 28, 1969. For the assessment year 1970-71, the assessee claimed that on the death of the partner of the firm, the old firm stood dissolved on June 21, 1969, and on the following day, a new firm took over the business, and, therefore, two assessments should be made, one against the old firm and the other against the new firm for the respective periods during which they were in existence during the relevant previous year. The ITO did not accept the claim and passed one assessment order for the whole year against the assessee. When the matter reached the High Court, the High Court by a majority of a Full bench held that s. 187 of the I.T. Act, 1961, applies only where a firm is reconstituted in accordance with ss. 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 law another firm takes over the business, that will be a case of succession governed by s. 188 of the Act, even though some of the partners of the two firms are common. But the said decision of the majority overlooks the fact that s. 188 applies only in cases not covered by s. 187. That s. 187 not only contemplates reconstitution of a firm in accordance with s. 31 of the Partnership Act but also other cases, cannot be disputed. The majority decision has thus given a very restricted scope to s. 187. With respect, we are not, therefore, inclined to accept the said decision as lying down the correct law.

33. In Addl. CIT v. United Commercial Co. : [1977]108ITR264(Guj) , the Gujrat High Court dealt with the scope of s. 187(2). In that case, there was a partnership deed and clause 8 of the partnership deed provided that the partnership will not be discontinued or closed on account of the retirement and/or death of a partner and that the business will be carried on with the remaining partners, on the terms they decide with the heirs of the deceased partners. One of the partners died on March 9, 1963, On his death, the accounts were closed and the profits were credited to the respective partners' accounts. Thereafter, the business was continued by the surviving partners with the heirs of the deceased partner. The ITO held that there was only a change in the constitution of the firm. When the matter came on reference to the High Court, the court pointed out that since the partners had by mutual agreement decided to dissolve the firm with effect from March 9, 1963, on the death of one of the partners, it should be taken to be a dissolution of the firm when the accounts were settled with effect from that date. Thus, on the facts of that case, the court inferred dissolution by consent of partners and, therefore, it held that there was no change in the constitution of the firm as contemplated by s. 187(2). In CIT v. Pigot Chapman & Co. : [1982]135ITR620(SC) , the Supreme Court considered the scope of s. 25(4) of the Indian I.T. Act, 1922. In that case, there was a firm by name Messrs. Pigot Chapman and Company acting as foreign exchange brokers. The constitution of the firm had undergone several changes. The firm was reconstituted for the short periods and whenever any partner retired, he gave up his claim to the partnership assets which vested in the continuing partners. On May 18, 1933, a deed of partnership came to be executed after reciting the various deeds executed in the earlier years and also providing that the partnership will be continued for a period of six years from April 1, 1953, and shall expire on March 31, 1959. By a deed of variation dated April 7, 1955, a new partner was admitted for one year. By another deed of variation dated April 30, 1956, another new partner was admitted for the rest of the term. On June 29, 1959, a fresh deed of partnership came to be executed reciting that the partnership created by the partnership deed dated March 30, 1959, should be taken to have been mutually dissolved from April 1, 1959, and the business of the firm shall be carried on by the remaining partners under the same name and style of Messers. Pigot Chapman and Company. A question or whether the transaction amounted to a change in the constitution or whether it is a dissolution of the old firm succeeded by a new firm. The supreme Court held on the facts that that was not a case of a mere change in the constitution of a firm but one of a new firm succeeding to the old business and, therefor, the assessee was entitled to the relief under s. 25(4) of the Indian I.T. Act, 1922. It has been pointed out by the Supreme Court that the question whether there has been a dissolution of the firm and upon such dissolution a new firm has succeeded to the business of the old firm is a question to be decided upon the intention of the parties to be gathered from the document or documents, if any, executed by and between the partners and other facts and surrounding circumstances of the case. There, the document bringing into existence the new partnership had specifically stated that the old firm has been dissolved by mutual consent and in view of those special circumstances, the court held that it was a case of dissolution of the old firm and coming into existence of a new firm. However, in this case, the partnership deed dated October 19, 1964, does not proceed on the basis that the earlier partnership consisting of Ramanathan Chettiar and his wife had been dissolved. Therefore, the said decision of the Supreme Court is inapplicable to the facts of this case.

34. The learned counsel for the assessee refers to the following decisions in support of his plea that the revaluation fixed for the mill and the mill assets at the time of the partition in the family of Ramanathan Chettiar should be taken to be the actual price for which the firm consisting of four partners, namely, Ramanathan Chettiar, his wife, Meyammai Achi, J. K. K. Natarajan and J. K. K. Munirajan took over the mill and the mill assets from the firm consisting of Ramanathan Chettiar and his wife on October 1, 1964, and that should be the value for the purpose of depreciation which the new firm will be entitled to. S.N.A.S.A. Annamalai Chettiar v. CIT : [1951]20ITR238(Mad) ,is a decision of this court in which the HUF consisting of a father and his son carrying on money-lending business under different vilasams was partitioned on March 28, 1939, under which some of the vilasams were allotted to the father and the rest were allotted to the son (assessee). For the assessment year 1939-40, the assessee claimed that there was a discontinuance of the business within the meaning of s. 25(3) of the Indian I.T. Act, 1922, and, therefore, the business of the joint family was not liable to be taxed for the period from April 13, 1938, to March 28, 1939. The Income-tax Officer, however, took the view that there was no discontinuance of the business, and, therefore, the assessee was not entitled any relief under section 25(3). When the matter came to this court on reference, this court held that, on partition, as the assets of the joint family properties were split up, the joint family business no longer continued its existence but was terminated. Therefore, there was a discontinuance within the meaning of s. 25(3), and, therefore, the family was entitled to the benefit of that sub-section. It was pointed out in that case that it was a case of disintegration of a unit into its component parts as to annihilate the unity of the business, that when a unit is divided into parts, the part is not identical with the whole, and that all the parts taken together, no doubt, constitute the whole but when the unifying principle of that whole no longer exists, the parts gain their individuality and become separate and distinct. We do not see how that decision will help the assessee in this case. Here, the joint family was carrying on a business with another in partnership with 10 annas share. There was disruption in the joint family and the 10 annas share in the business was allotted to the 'karta' and after the partition, the 'karta' in his individual capacity continued the business along with the other partner with the same 10 annas share. Therefore, the business of the partnership has not been split up though there was disruption of the joint family of Ramanathan Chettiar, the unity of the business was not disrupted and the business continued to be carried on by the same two partners. Therefore, the principle that as a result of the partition in the joint family and the division of assets of the joint family, there is a discontinuance of the business, cannot be applied to the facts of the case on hand. Kalooram Govindram v. CIT : [1965]57ITR335(SC) , on which strong reliance has been placed by the learned counseled for the assessee, also deals with a case of a partition of a Hindu joint family which carried on a business in which the assets of the joint family business had been divided. In that case, there was a decree for partition of a Hindu joint family in which one branch was given 10/16th share and the other branch 6/16th share. The assets of the joint family which could not be physically divided were auctioned between the two branches. In this process, one sugar mill was purchased by one of the branches for Rs. 34 lakhs. In the income-tax proceedings, depreciation under s. 10(2)(vi) of the Indian I.T. Act, 1922, was claimed on the above valuation of Rs. 34 lakhs. The claim was rejected by the ITO as well as the AAC on the ground that the value for the purpose of depreciation was not the price determined at the family auction, but the original cost to the erstwhile larger joint family. The Tribunal held that the 6/16ths share of the other branch was purchased at the auction and its value had to be taken as the basis of the price determined at the auction. But the appellant's own share of 10/16ths was not purchased at the auction, and, therefore, had to be valued at the original cost to the larger joint family. On a reference, the High Court held that the distinction made by the Tribunal was wrong and that the shares of both the branches had to be valued on the basis of the original cost to the larger family. When the matter came before the Supreme Court, the Supreme Court by a majority of 2:1 took the view that though in strict legal theory, partition may not involve a transfer, when an entire joint family property, acquires an absolute title to a specified property, the cost of the property to the member on the date of partition would be the value given to it for the purpose of allotment, provided it was real, or the price at which he purchased it in auction or the value of it ascertained otherwise, and that, therefore, the cost of the property to the assessee cannot be taken to be the original cost to his predecessor but the actual cost to him at the time of the purchase and in such case the valuation given to the property at the time of partition or auction was not notional, but a real one, as such the value entered into the scheme of partition. The principle laid down in that case has also no application here. Here, there is no allotment of the business as a whole. But the 10 annas share in the partnership which carried on the business was the subject-matter of the partition between the members of the family of Ramanathan Chettiar. In those circumstances, it cannot be said that Ramanathan Chettiar was allotted the entire partnership business or he purchased the business as a whole as was the case before the supreme Court. If at all, the said Ramanathan Chettiar can be said to have acquired as a result of the partition in his family the 10 annas share in the partnership. The entire assets of the partnership or the 6 annas share belonging to Meyammai Achi were not the subject-matter of allotment as was the case before the Supreme Court.

35. On the facts of this case, it can only be said that a business which was carried on by a firm of a joint family of Ramanathan Chettiar and Meyammai Achi from February 26, 1962, continued to be carried on by a firm in which Ramanathan Chettiar in his individual capacity and Meyammai Achi were partners from October 1, 1964. Since, there is another partner, namely, Meyammai Achi, in both the firms, it can only be taken as a mere change in the constitution of the partnership under s. 187(2) of the Act, and such a change does not bring into existence a new assessable unit or a distinctive assessable unit, and in such case, there is no devaluation of a business as a whole. Dealing with a similar situation, the supreme court in CIT v. A. W. Figgies and Co. : [1953]24ITR405(SC) , held that a mere change in the constitution of the firm will not result in the discontinuance of the business. In that case, a firm consisting of three partners carried on a business. There were several changes in the constitution of the firm since its original constitution, resulting in a change in the shares of the partners. Thereafter, in 1949, the partnership was converted into a limited company, and the assessee claimed relief under s. 25(4). The ITO disallowed the claim on the ground that the partners of the firm in 1939 being different from the partners of the firm in 1947, no relief could be given to the assessee. The Appellate Tribunal and the High Court allowed the assessee's claim on the firm, the business of the firm as originally constituted continued right from its inception till the time it was succeeded by the limited company and that it was the same unit all through, carrying on the same business at the same place and there was no censer of that business or any change in the unit. The Supreme Court upheld that view and held that the assessee was entitled to the relief under s. 25(4). In that case, the Revenue had contended that since the partners of the firm in 1939 when it was originally constituted were different from the partners of the firm in 1947 when the firm was converted into a limited company, no relief should be given to the assessee. But this was rejected by the Supreme Court holding that though there was a change in the constitution of the firm and a change in the share holdings of the partners, such a change will not bring about discountenanced of the business. That decision squarely applies to the facts of this case. Here, there has been no change in the share holding of the partners in the firm on September 30, 1964, as a result of the partition. The partition has merely resulted in Ramanathan Chettiar becoming a partner in his individual capacity as against his original status as 'karta' of the joint family. Such a change cannot in any sense be taken to be one bringing about a devolution or transfer of the business as a whole and the firm which is an assessable unit continued to be the same and the partition of the family has not brought into existence any distinct assessable entity.

36. The learned counsel for the assessee, as a last resort, contends that whatever be the legal position with reference to s. 187, under the law of partnership, if there is a change in the constitution of the firm or a change in the shareholding as between the partners in a firm, the original firm and the reconstituted firm should be taken to be two separate and independent entities, and for the purpose of claiming depreciation, the assessee can claim that it had taken over the assets of the old firm at a price. However, we are of the view that s. 187(2) to a certain extent modifies the law of partnership for the purpose of assessment under the I.T. Act, and it is, therefore, unnecessary to go into the question as to whether under the general law, a reconstituted partnership firm should be taken to be a separate and independent entity as contended by the learned counsel for the assessee.

37. As a result of the above discussion, we have to hold that there was no dissolution of the firm consisting of Ramanathan Chettiar and Meyammai Achi constituted under the deed dated February 26, 1962, and that as the same assessable entity has continued even after September 30, 1964, the assessee can claim depreciation allowance only on the written down value of Rs. 14,61,721.95 and not on the notional value of Rs. 33,50,000 at which the mill and the mill assets were valued at the time of the partition of the family of Ramanathan Chettiar which owned 10 annas share in the partnership.

38. We have to, therefore, answer both the questions in the negative and against the assessee. The assessee will pay the costs of the Revenue. Counsel fee Rs. 500 (one set).


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