1. The following question of law has been referred to this court by the Income-tax Appellate Tribunal, Madras, for its opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that for the assessment year 1975-76, the provisions of s. 188 were applicable and two separate assessments had to be made, one for the period April 1, 1974, to November 30, 1974, and the other period December 1, 1974, to March 31, 1975 ?'
2. The assessee, which is a registered firm, filed before the assessing authority two returns, one return of income covering the period from April 1, 1974, to November 30, 1974, and another return for the period from December 1, 1974, to March 31, 1975, contending that two separate assessments should be made for the assessment year 1975-76. This claim was made by the assessee on the ground that there was a dissolution of an earlier firm and thereafter a new firm was constituted. The ITO, however, rejected the claim and made a single assessment for the entire assessment year 1975-76. The ITO took the view that there was only a change in the constitution of the firm, that there was a distinction between a dissolution of a firm and a dissolution of a partnership and that if one or two of the partners retired and the surviving partners along with others continued the business, only a single assessment has to be made.
3. Aggrieved by the other passed by the ITO the assessee appealed to the AAC but without success. The assessee thereafter went before the Appellate Tribunal. The Appellate Tribunal accepted the stand taken by the assessee and held that on the facts there was a succession and not a reconstitution of a firm as a dissolution has intervened, and, therefore, the provisions of s. 188 of the I.T. Act, 1961, hereinafter referred to as the Act, stood attracted and consequently two separate assessments have to be made, one for the period April 1, 1974, to November 30, 1974, and the other for the period December 1, 1974, to March 31, 1975. Aggrieved by the decision of the Tribunal, the Revenue has sought and obtained this reference on the question set out above.
4. The following facts are not in dispute in this case. By a deed of partnership dated April 1, 1972, a firm was constituted under the name of M/s. R. Sithan Chetty Sons comprising of two partners, S. Rangaswamy Chettiar and S. Venkatarama Chettiar. The duration of the partnership was at will according to clause 5 of the said deed. It was provided that in all matters not provided in the deed the provision of the India Partnership Act would apply. Subsequently Rangaswamy Chettiar and Venkatarama Chettiar are to have represented their respective branches as partners in the said firm. However, on November 30, 1974, there was a partition between the two brothers of the properties belonging to the HUF. On the same day, that is, on November 30, 1974, they executed a deed of dissolution stating that the firm stood dissolved on and from November 30, 1974. The dissolution of the firm had also been intimated to the Registrar of Firms, Salem, since the firm had been registered earlier with him. Thereafter accounts were drawn up for the period April 1, 1974 to November 30, 1974, including a balance-sheet. Thus, as a consequence of the division of the family properties between the two brothers, the firm also has been dissolved. Subsequently on December 1, 1974, a firm was brought into existence with seven partners including Rangaswamy Chettiar and Venkatarama Chettiar who were partners in the earlier firm. The other partners were Subramaniam, R. Sithan Chetty, R. Sundaramurthy, V. Manickam and V. Chandrasekaran. This firm maintained its accounts from December 1, 1974, and closed its accounts on March 31, 1975. The question is whether on the facts set out above the old firm should be taken to have continued its existence with the addition of new partners of whether the firm with seven partners should be taken to be a new firm.
5. Before the Tribunal it was contended for the Revenue that wherever there are common partners, s. 187(2) stood attracted and only a single assessment should be made. The Tribunal rejected the said contention of the Revenue holding that on the facts of this case the old firm cannot be said to have been reconstituted but should be taken to have been dissolved by the deed of dissolution dated November 30, 1974, which was also given effect to by giving a notice of intimation of the dissolution of the partnership to the Registrar of Firms and by settlement of the accounts of the old firms between the partners on November 30, 1974. According to the Tribunal there is a clear distinction between the reconstitution of a firm and dissolution of firm and the facts of this case establish that there has been a dissolution of the old firm and the coming into existence of a new firm and, therefore, the provisions of s. 188 of the Act stood attracted as there was a succession of one firm by another firm and hence two separate assessments have to be made for the assessment year in question in the assessee's case.
6. On a due consideration of the matter, we are inclined to accept as correct the view of the Tribunal in this case. As has been pointed out by this court in Tyresoles (India), Calcutta v. CIT : 49ITR515(Mad) :
'The dissolution and reconstitution of a partnership are two difference legal concepts. The dissolution puts an end to be partnership but reconstitution keep its subsisting, though in another form. A dissolution followed by some of the erstwhile partners taking over the assets and liabilities of the dissolved partnership and forming themselves into a partnership is not reconstitution of the original partnership. The partnership formed after the dissolution is a new partnership and not a continuation of the old partnership, for it would be a contradiction in terms to say that what ceased to exist was continued. A reconstitution of a firm of partnership necessarily implies that the firm never because extinct, what it denotes is a structural alteration of the membership of the firm, by addition or reduction of the members, and in incidental redistribution of the shares of partners.'
7. Here a partnership has been formed after the dissolution of the old partnership. Hence the new partnership cannot be taken to be a continuation of the old one. Reconstitution of a firm implies that the firm never became extinct. In this case, admittedly, a deed of dissolution has came into existence and the accounts as between the partners have been settled as on the date of dissolution. The Registrar of Firms has also been informed about the dissolution. Therefore, in fact in law the old firm has ceased to exist. When the old firm ceased to exist, there is no question of that firm which has ceased to exist being continued as reconstituted.
8. In Dahi Laxmi Dal Factory v. ITO : 103ITR517(All) , a full Bench of the Allahabad High Court has dealt with a somewhat similar question. In that case it has been held that s. 187 applies only where a firm is reconstituted in accordance with ss. 31 and 32 of the Indian Partnership Act, but where the 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 s. 188 of the Act, even though some of the partners of the two firms are common. In that case a firm had been constituted by two partners. On the death of one partner, the surviving partner took over other person as partners and thereafter carried on the partnership business. The question arose whether there was a reconstitution of the old partnership or whether it is a succession of the business by a new entity. The court took the view that as the erstwhile firm stood dissolved by operation of law on the death of the partners, the firm which as constituted by the surviving partner and others cannot be said to be a reconstitution of the old firm. Though that decision was rendered in the context of death of one of the two partners of a firm which brought about a dissolution by operation of law, the principle of that decision will also apply here where the dissolution has been brought about by agreement of partners.
9. Similar view has been taken by this court in Kaithari Lungi Stores v. CIT : 104ITR160(Mad) . That was a case in which the dissolution was brought about by the death of one of the partners and another firm coming into existence by some of the surviving partners taking in other persons as partners. This court pointed out that a change in the constitution of a firms is different from the dissolution of the firms, that a change in the constitution of a firm can occur by reason of the death of the partner provided there are at least two surviving partners and the deed of partnership permits the continuation of the firm even after the death of the partner and that the words 'ceasing to be partners' occurring in 187(2) of the I.T. Act, 1961, would also include a case of death of a partner when such death by reason of the contract to the contrary or by reason of any law did not bring about the dissolution of the partnership. A similar view has been taken by a Full Bench of the Andhra Pradesh High Court in Addl. CIT v. Vinayaka Cinema : 110ITR468(AP) , wherein the court has observed that the very basic concept underlying s. 187(1) is that one and the same firm must be continuing throughout the year of assessment and even if there is a change in the constitution of the firm, the firm as an entity must continue as one and single throughout the period, and that, therefore, in cases where the firm ceases to exist as contemplated by s. 42 of the Partnership Act, the relationship of the partners inter se comes to an end and thereafter the firm can not longer be said to continue as before. The court further held that once a firm is dissolved, it comes to an end and thereafter there cannot be a continuity of the firm so as to say that there is a mere change in the constitution of the firm.
10. The same view has also been taken by this court again in Mavukkarai (N) Estate Tea Factory v. Addl. CIT : 112ITR715(Mad) . In that case four of the five partners of the firm retired from the partnership on June 30, 1970, after executing a release deed under the which the remaining partner took over the right and liabilities of the firm. On the same day the remaining partner 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 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. When that claim was rejected, the assessee came to this court by way of a writ petition. On these facts this court held that even if the extinction of the old firm and the constitution of the new firm took place simultaneously, in law it must presumed that the retirement of the partners of the old firm preceded the constitution of the new firm, that the terms of the release deed indicated that at least for a moment the business had become proprietary in the hands of the remaining partner and it was only thereafter that the new firm of partnership was constituted and that merely because there was a common partner in the two firms, it cannot be said that the old firm continued with a mere change in the constitution and that once there is an extinction of the old firm preceding the constitution of the new firm, the two firms should be taken to be separate entities. Ultimately this court held that on those facts s. 188 of the Act stood attracted and the case will not fall under s. 187(2) of the Act.
11. Having regard to the legal position enunciated in the decisions set out above, we are of the view that the Tribunal has come to the right conclusion in this case. We have to, therefore, answer the question in the affirmative and against the Revenue. The Revenue will pay the costs of the assessee. Counsel's fee Rs. 500.