RAMANUJAM J. - The petitioner herein is challenging the validity of an order passed by the respondent on December 6, 1972, rejecting the petitioners revision petition against the order of the Income-tax Officer making a consolidated assessment for the period from September 1, 1969 to March 31, 1971, consisting of nineteen months. A firm having the same name as the petitioner, was originally constituted under a deed of partnership dated September 1, 1966, with 5 partners and their profits sharing ratio was 1/5th each. That firm was granted registration for the year 1970-71 and 1971-72. During the accounting year relevant for the assessment year 1971-72, four out of five partners retired from the firm on June 30, 1970. The accounts were settled as amongst the partners and a release deed was executed on July 1, 1970, by the retiring partners. The said release deed states that the four partners had retired from the firm on receipt of a sum of Rs. 17,500 and the remaining partner, T. K. Joghee Gowder, took over the rights and liabilities of the erstwhile partners in the firm. On the same day, the said Joghee Gowder formed a new firm, the petitioner herein, with three other new partners, under the same name, and the said new firm continued to carry on business from July 1, 1970.
This new firm filed two separate income-tax returns, 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. It claimed that on the basis of the said two returns, two separate assessments will have to be made by the Income-tax Officer. But the Income-tax Officer made a single assessment on the firm for both the periods thinking that it is merely a reconstitution of the old firm. According to the Income-tax Officer, there were no two different entities to warrant two separate assessments and that the new firm had been formed by the reconstitution of the old firm. The petitioner, aggrieved by the said order of the Income-tax Officer dated October 16, 1971, took the matter in revision before the respondent. The respondent in his order dated December 6, 1972, confirmed the order of the Income-tax Officer holding that as there was no interregnum between the dissolution of the old firm and the constitution of the new firm, the old firm should be deemed to continue as reconstituted, that on the facts there was only a change in the constitution of a firm as distinguished from succession, and that under section 187(2)(a), the old firm should be taken to continue for the purpose of assessment. The view taken by the respondent in the said order has been challenged in this writ petition.
According to the learned counsel for the petitioner, four out of the five partners having retired on June 30, 1970, there remained only one partner, and as such the firm had ceased to exist, as one individual cannot constitute a partnership firm. The mere fact that on the same day, T. K. Joghee Gowder, who took over the business of the firm under the terms of the release deed dated July 1, 1970, executed by four retiring partners, took three other partners for the purpose of carrying on the business will not lead to the inference that the old partnership still continues. In the circumstances of this case, the old partnership and the new partnership are two different entities, and there cannot be any continuation of the old firm to enable the assessing authority to make a consolidated assessment on the new firm for both the periods.
According to the learned counsel for the petitioner, the moment the four out of five partners retired from the firm, the partnership came to an end automatically, as the remaining single individual cannot constitute a partnership and the new partnership which he entered into later with three other individuals on July 1, 1970, cannot be taken to be a re-constitution of the old firm which in law had ceased to exist. Section 187(2) of the Income-tax Act, 1961, does not alter the legal position, that a single individual cannot constitute a firm
The learned counsel for the petitioner refers to the following decisions in support of his stand that on the retirement of all the partners of a firm, except one, the firm automatically comes to an end : (1) Tyresoles (India), Calcutta v. Commissioner of Income-tax : 49ITR515(Mad) Dahi Laxmi Dal Factory v. Income-tax Officer : 103ITR517(All) Kaithari Lungi Stores v. Commissioner of Income-tax : 104ITR160(Mad) Addl, Commissioner of Income-tax v. Vinayaka Cinema : 110ITR468(AP) , and submits that though there is no direct decision on the point in question, the principle laid down in the decisions referred to above will clearly support the proposition which he is contending.
In : 49ITR515(Mad) (Tyresoles (India), Calcutta v. Commissioner of Income-tax), a Division Bench of this court has observed :
'The dissolution and reconstitution of a partnership are two different legal concepts. The dissolution puts an end to the partnership, but reconstitution keeps it 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 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 became extinct. What it denotes is a structural alteration of the membership of the firm, by addition or reduction of members, and an incidental redistribution of the shares of the partners'.
The above decision has been cited with approval by a Full Bench of the Allahabad High Court in Dahi Laxmi Dal Factory v. Income-tax Officer : 103ITR517(All) . In that case it has been held that section 187 applies only where a firm is reconstituted in accordance with section 31 and 32 of the Indian Partnership Act, 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. In that case a firm had been constituted by two partners. On the death of one partner, the surviving partner took over other persons 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 of a new entity. As already stated, the court took the view that as the erstwhile firm stood dissolved by operation of law on the death of one of the partners, the firm which was constituted by the surviving partner and others cannot be said to be a reconstitution of the old firm.
A similar view has also been taken by this court in Kaithari Lungi Stores v. Commissioner of Income-tax : 104ITR160(Mad) . That was a case in which the dissolution was brought about the 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. The court pointed out that a change in the constitution of a firm is different from the dissolution of the firm, 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' in section 187(2) of the Income-tax 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.
In Addl. Commissioner of Income-tax v. Vinayaka Cinema : 110ITR468(AP) , a Full Bench of the Andhra Pradesh High Court has agreed with the view expressed in the above three decisions. After referring to the principles laid down in the above decisions, the court in that case observed that the very basic concept underlying section 187(1) is that one and the same firm must be continuing throughout the year under consideration, that 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 section 42 of the Partnership Act, the relationship of the partners inter se comes to an end and thereafter the firm can no longer be said to continue as before. The court further observed 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.
In this case four out of the five partners retired from the partnership on June 30, 1970, and as a result of this the firm had ceased to exist. It has been held in Vedachala Mudaliar v. Rangaraju Naidu : 39ITR308(Mad) that where out of the two partners of the firm, one partner severs his connection with the firm, there is a dissolution of the firm and not merely on retirement of the partner and that retirement occurs only when one out of more that two partners severs his connection and the business is carried on by the remaining two or more partners.
As already stated the impugned order proceeds on the basis that as there is no interregnum between the extinction of the old firm and the coming into existence of the new firm, the old firm should be taken to continue. Even if the extinction of the old firm and the constitution of the new firm took place simultaneously, in law it must be presumed 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. Apart from this, the terms of the release deed also throw considerable light. Under its terms, four partners have agreed to retire after receiving a sum of Rs. 17,500. The sole remaining partner, T. K. Joghee Gowder, took over the assets and liabilities of the business. This shows that at least for a moment the business had become proprietary in his hands and it is only thereafter the new firm of partnership with three other partners was constituted. Merely because there is a common partner in the two firms, it cannot be said that the old firm continues with a mere change in the constitution. However small or minute the interregnum may be, there is an extinction of the old firm preceding the constitution of a new firm. We are, therefore, clearly of opinion that in this case the two firms are separate entities and that the petitioner firm cannot be said to be a continuation of the old firm. The learned counsel for the revenue would, however, point out that since one of the partners is common, section 187(2) of the Income-tax Act, 1961, squarely applies. We do not see how the existence of a common partner, in the circumstances of the case, will attract the said section. The existence of a common partner may arise on different contingencies. But the contingency of the partnership ceasing to exist on most of the partners except one retiring from the partnership and a new partnership coming into existence with the remaining partner and others does not fall within the purview of section 187(2) of the Income-tax Act, 1961. In this view, we have to set aside the impugned order.
The writ petition is allowed and the matter is remitted back to the Income-tax Officer to make separate assessments for the said two periods on two, different entities. The petitioner will be entitled to his costs. Counsels fee Rs. 250 (rupees two hundred and fifty only).