2004 (9) TMI 60 - HC - Income Tax

Firm - 1. Whether Tribunal was justified in law in holding that the two firms were entirely distinct and separate entities and therefore on the basis of two returns filed for the periods April 1 1978 to May 31 1978 and June 1 1978 to March 31 1979 two separate assessments have to be made by the Income-tax Officer? 2. Whether Tribunal was justified in law in upholding the order of Commissioner directing the Income-tax Officer to grant registration to the assessee-firm for the assessment year 1979-80 in question? - We answer the first question of law in the negative i.e. in favour of the Revenue and against the assessee and the second question of law in the affirmative i.e. in favour of the assessee and against the Revenue.

Summary

Issues:
1. Whether two separate assessments should be made for two firms considered distinct entities?
2. Whether registration should be granted to the assessee firm for the assessment year in question?

Analysis:
1. The case involved a partnership firm engaged in hire purchase of trucks for the assessment year 1979-80. Initially, the firm had 12 partners, but it underwent a change when 6 existing partners and 2 new partners formed a new partnership after dissolution. The Income Tax Officer made only one assessment under section 187 of the Act, treating it as a case of change in the constitution of the firm. However, the Appellate Assistant Commissioner directed two separate assessments based on the returns filed and granted registration to the firm. The Tribunal upheld this decision, leading to the current reference to the High Court.

2. The counsel for the revenue argued that the change in partners constituted a new firm under section 188 of the Act, warranting a single assessment. He also contended that the new partners were benamidars, disqualifying the firm from registration. On the other hand, the respondent's counsel asserted that the dissolution of the previous firm and the formation of a new one did not amount to a change in constitution but a succession under section 188. He further supported the grant of registration based on the new partners' contributions, citing relevant case laws.

3. The High Court examined the provisions of sections 187 and 188 of the Act. It noted that a change in partners where some continue after the change constitutes a change in constitution under section 187, while succession applies when a firm is succeeded by another, not covered by section 187. Referring to precedent cases, the court emphasized that dissolution followed by a new partnership is considered succession. The court agreed with the view that such cases fall under section 188, not section 187.

4. The court highlighted the importance of partnership deed provisions in determining dissolution and reconstitution scenarios. It cited cases where dissolution by death or agreement led to succession, emphasizing the distinction between dissolution and reconstitution. The Apex Court's ruling on partnership dissolution due to death was also referenced to differentiate between constitution changes and successions.

5. Ultimately, the High Court ruled in favor of the revenue for the first issue, stating that the case fell under section 187, requiring a single assessment. However, for the second issue, the court sided with the assessee, affirming the grant of registration based on the partners' contributions and profit-sharing arrangements. The court emphasized the validity of the Management Board's decisions and the lack of specific challenges to certain findings by the revenue.

In conclusion, the High Court's judgment clarified the distinction between changes in constitution and successions in partnership firms, leading to a nuanced decision on assessments and registration for the involved firm.