2000 (1) TMI 5 - HC - Income Tax

Dissolution of firm - new partnership firm - the preamble of the deed of dissolution negatives the contention that it was a case of mere retirement. - Merely because some partners of the old dissolved firm also became partners in the new firm, it cannot be said that it is a continuation of the old firm - The old firm stood dissolved on execution of the dissolution deed - On dissolution of the firm on May 2, 1969, this relationship terminated. It could not continue - Such a firm cannot be said to be a continuation of the old dissolved firm or to have been reconstituted under section 187(2) - Tribunal was right in law in holding that there should be two separate assessments in respect of the periods - section 187(2) will have no application

Summary

Issues:
1. Interpretation of section 187(2) of the Income-tax Act, 1961 regarding separate assessments for different periods due to partnership dissolution and reconstitution.

Analysis:
The High Court of Delhi was tasked with determining whether two separate assessments should be made for distinct periods due to a partnership firm's dissolution and subsequent reconstitution. The case involved a partnership firm, "M/s. Delhi Haryana Dall Mills," which was initially constituted by seven partners through a partnership deed dated April 18, 1970. The firm was dissolved on May 20, 1977, with two partners taking over the business and assets, while the remaining partners were to be paid off. Subsequently, a new partnership deed was executed on May 21, 1977, with three new partners joining. The Assessing Officer initially clubbed the incomes of both periods under section 187(2) of the Income-tax Act, 1961.

The Commissioner of Income-tax (Appeals) disagreed with the clubbing of incomes, stating that section 187(2) was not applicable. The Tribunal upheld this decision, emphasizing that a dissolution had occurred, leading to the formation of a new partnership firm, and section 187 would only apply if the firm continued to exist under the law. The Tribunal's decision was supported by previous court judgments.

The Revenue argued that the Tribunal erred in considering the case as a dissolution rather than a reconstitution of the firm, citing other judgments where new partnership deeds were seen as reconstitutions. However, the High Court clarified that in this instance, the firm was indeed dissolved, as evidenced by the creation of a goodwill account and the settlement of accounts among partners. The court noted that a new partnership deed was executed with different partners, signifying the formation of a new firm post-dissolution. Therefore, section 187(2) was deemed inapplicable.

The court emphasized that the case did not involve a mere retirement but a clear dissolution of the firm and the establishment of a new firm under a fresh agreement. The relationship among partners ceased with the dissolution, leading to the formation of a distinct entity. It was highlighted that the new firm was not a continuation of the old dissolved firm but a separate entity succeeding it, falling within the scope of section 188 of the Act.

Based on the analysis and legal principles, the High Court concluded that section 187(2) did not apply, and two separate assessments for the different periods were warranted. The court's decision was aligned with previous judgments and legal interpretations, ultimately favoring the assessee over the Revenue in this matter.