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Y. Baliah Chetty Sons and Co. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 1297 of 1985 (Reference Nos. 803 of 1985)
Judge
Reported in[2000]244ITR870(Mad)
ActsIncome Tax Act, 1961 - Sections 187; Indian Partnership Act, 1932 - Sections 40
AppellantY. Baliah Chetty Sons and Co.
RespondentCommissioner of Income-tax
Appellant AdvocateK. Ramagopal, Adv.
Respondent AdvocateC.V. Rajan, Adv.
Cases Referred(Mad) and Mavukkarai (N.) Estate Tea Factory v. Addl.
Excerpt:
direct taxation - single assessment - section 187 of income tax act, 1961 and section 40 of indian partnership act, 1932 - in view of facts clear that tribunal did not apply proper tests to determine dissolution of firm - under section 40 firm dissolved on execution of deed of dissolution - once dissolution of firm takes place relationship inter se between partners put to end and also firm get dissolved - mere fact that accounts not settled and partners of new firm continued same business immaterial once firm get dissolved - held, single assessment made by income-tax officer on three constituted firms not justified. - .....arose on account of the retirement of the partners. the original partnership was evidenced by a deed of partnership dated march 3,1, 1978, consisting of five partners which continued up to september 30, 1979. at the time of retirement of three male partners with effect from september 30, 1979, a deed of dissolution dated october 1, 1979, was executed by the partners. the remaining two partners admitted two more lady partners being the wives of the two retired partners. this new partnership is evidenced by a deed of partnership dated october 1, 1979. the said firm continued from october 1, 1979, to october 31, 1979, when one lady partner retired from partnership and the remaining partners executed a dissolution deed on november 1, 1979. on the same day a fresh partnership was executed.....
Judgment:

N.V. Balasubramanian, J.

1. At the instance of the assessee, the Appellate Tribunal has stated a case and referred the following question of law for our opinion under Section 256(1) of the Income-tax Act, 1961 :

'Whether, on the facts and in the circumstances of the case, the Tri-bunal was justified in law in holding that a single assessment completed by the Income-tax Officer on the three firms constituted under the deeds of January 31, 1978, October 1, 1979 and November 1, 1979, for the assessment year 1980-81 is in accordance with law ?'

2. The assessee is a registered firm. During the accounting period relevant for the assessment year 1980-81 there were changes in the constitution of the firm. The assessee-firm filed three returns of income for the period from April 1, 1979, to September 30, 1979, consisting of five partners, from October 1, 1979, to October 31, 1979, consisting of four partners and from November 1, 1979, to March 31, 1980, consisting of three partners. It is found that the reduction in the number of partners arose on account of the retirement of the partners. The original partnership was evidenced by a deed of partnership dated March 3,1, 1978, consisting of five partners which continued up to September 30, 1979. At the time of retirement of three male partners with effect from September 30, 1979, a deed of dissolution dated October 1, 1979, was executed by the partners. The remaining two partners admitted two more lady partners being the wives of the two retired partners. This new partnership is evidenced by a deed of partnership dated October 1, 1979. The said firm continued from October 1, 1979, to October 31, 1979, when one lady partner retired from partnership and the remaining partners executed a dissolution deed on November 1, 1979. On the same day a fresh partnership was executed by the remaining partners and this partnership continued thereafter during the course of the accounting year. The Income-tax Officer clubbed the income of the three periods and assessed the total income in the hands of the assessee-firm and spread it over among the partners in the three periods as according to the Income-tax Officer there was only a change in the constitution of the firm within the meaning of Section 187 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). The Commissioner of Income-tax (Appeals) as well as the Appellate Tribunal concurred with the views of the Income-tax Officer and held that the two partners continued to remain in the firm even after several changes having taken place in the constitution of the firm. The assessee has challenged the order of the Appellate Tribu-nal and the Appellate Tribunal has stated a case and referred the question of law set out earlier.

3. The Tribunal has given three reasons to hold that there was only change in the constitution of the firm. The first reason is that there was no extinction of the firm, secondly, it came to the conclusion that the affairs were not finally and completely wound on October 1, 1979, and November 1, 1979 and thirdly, no dissolution accounts were drawn up and the accounts of the partners were not settled among the partners. From the above three premises, the Tribunal came to the conclusion there was only change in the constitution of the firm and there was no dissolution of the firm. We are of the opinion that the three reasons given by the Appellate Tribunal are not legally sustainable in law to hold that there was only a change in the constitution of the firm. Admittedly, the deed of dissolution was executed on both the occasions and the dissolution took place within themeaning of the Indian Partnership Act, 1932. When there is a dissolution deed, and it was acted upon, it is not open to the partners to go behind or against the terms of the dissolution deed and contend that there was no dissolution. The rights and liabilities of the partners as well as erstwhile partners would be settled and they would be governed and determined by the deed of dissolution. Under Section 40 of the Indian Partnership Act, the firm may be dissolved with the consent of all the partners or in accordance with the contract between the partners. In this case, the firm is dissolved with the consent of all the partners and the new partners agreed to take over the assets and liabilities of the erstwhile firm relating to the earlier period. Therefore, once the dissolution of the firm takes place, it is not possible to treat the firm that there is a mere change in the constitution of the firm. The mere fact that the same business was continued is not a material consideration to hold that there was no dissolution as it cannot be said that the partners who continued to carry on the business were not the same partners who prior to the dissolution carried on the said business. So also the rights and liabilities of the partners who went out of the firm would be governed by the deed of dissolution as well as by the provisions of the Indian Partnership Act. The third circumstance that is relied upon by the Tribunal is that the accounts of the partners were not settled is a ground to hold that there was no dissolution of the firm as it is always open to the partners who went out of the firm to demand their dues or file a suit for accounts and claim amount due from the partnership firm under the partnership law. The three circumstances relied upon by the Appellate Tribunal do not establish that the firm continued with the same changes taking place in the constitution of the firm. Once the dissolution deed was executed and on that basis the new firm carried on the business, the rights and liabilities of the partners would be governed by the new partnership deed. The erstwhile partners rights, who went out of the firm would be governed by the deed of dissolution of the firm and, therefore, the three circumstances relied upon by the Appellate Tribunal do not establish that the firm continued only with the change in the constitution of the firm.

4. In CIT v. R. Sithan Chetty Sons : [1984]145ITR306(Mad) , this court has taken the view that in view of the deed of dissolution having been executed and the accounts having been closed as on the date of dissolution, the firm with the new partners could not be deemed to be a continuation of the old firm. Though on the facts of the case there was no settlement of the account, when the firm was dissolved by the consent of all the partners, the new firm constituted cannot be regarded as a continuation of the old firm. This court in CIT v. Meenakshi Bankers : [1985]152ITR132(Mad) , has held that if there is factually a dissolution of a firm and there was a reconsti-tution of a new firm after such dissolution, it should be taken to be asuccession of one firm by another and it cannot be taken to be a recon-stitution of the old firm by the new firm so as to attract, the provisions of Section 187 of the Act. This court held that the old firm ceased to exist and the relationship of the partners inter se came to an end. Therefore, when the firm was dissolved, it can no longer be said to continue or that there was only a change in the constitution of the firm. The principle laid down in the above decisions would apply to the facts of the case as the relationship between the parties came to an end by the execution of the deed of dissolution and the old firm ceased to exist dissolved in the eye of law and it can no longer be said that the firm continued and there was only a change in the constitution of the firm. In the view we have taken, it is not necessary to consider other decisions relied upon by learned counsel for the Revenue, viz., Kaithari Lungi Stores v. CIT : [1976]104ITR160(Mad) and Mavukkarai (N.) Estate Tea Factory v. Addl. CIT : [1978]112ITR715(Mad) . We are of the opinion that the Tribunal has not applied proper tests to determine whether there was a dissolution of the firm. We hold that under Section 40 of the Indian Partnership Act the firm was dissolved on the execution of the deed of dissolution and once the dissolution of the firm takes place, the relationship inter se between the partners is put an end to and the firm is also dissolved and all the legal consequences flowing from and arising out of dissolution have to be given effect to. The mere fact that the accounts were not settled and the partners of the new firm continued the same business which was carried on by the erstwhile firm are all immaterial considerations once the firm is dissolved. Therefore, we are of the opinion that the Appellate Tribunal was not correct in holding that a single assessment made by the Income-tax Officer on the three firms constituted was justified. Accordingly, we answer the question referred to us in the negative and in favour of the assessee. However, in the circumstances, there will be no order as to costs.


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