1997 (11) TMI 90 - HC - Income Tax

A Partner, Change In Constitution Of Firm, Dissolution Of Firm, Firm Consisting, In Part, Partnership Deed, Two Partners

Summary

Issues:
Interpretation of section 187 of the Income-tax Act regarding the dissolution of a partnership firm upon the death of a partner and the subsequent reconstitution of a new partnership.

Detailed Analysis:
The case involved a partnership firm engaged in the business of firewood and timber, initially constituted by two partners. Upon the death of one partner, the firm was dissolved, and a new partnership was formed between the surviving partner and the deceased partner's widow. The key issue was whether this constituted a reconstitution of the firm under section 187 of the Income-tax Act or a succession of one firm by another.

The Court analyzed the relevant provisions of sections 187 and 188 of the Income-tax Act, as well as sections 31 and 42 of the Indian Partnership Act. It was established that upon the death of a partner, the partnership comes to an end, and if the legal representative of the deceased partner joins the surviving partner to continue the business, it constitutes a new partnership. The Court relied on section 42 of the Partnership Act, which states that a firm is dissolved by the death of a partner, supporting the conclusion that the firm ceased to exist upon the death of one of the partners.

Furthermore, the Court referred to previous legal precedents, including the Supreme Court's decision in CIT v. Seth Govindram Sugar Mills, which emphasized that in a partnership with only two partners, the death of one partner results in the dissolution of the firm. The Court also highlighted the importance of consent in introducing a new partner into a firm, noting that in the absence of a provision allowing for the continuation of the partnership after a partner's death, the partnership stands dissolved.

Additionally, the Court mentioned the proviso to section 187, which clarifies that the dissolution of a firm on the death of a partner falls outside the scope of section 187. As the case pertained to an assessment year covered by this proviso, the Court concluded that the dissolution of the firm upon the partner's death precluded the application of section 187.

In conclusion, the Court answered the reference question in the affirmative and in favor of the assessee, holding that the dissolution of the firm upon the death of a partner led to the formation of a new partnership, not a reconstitution under section 187. The reference was disposed of accordingly, with appreciation for the assistance provided by the counsel for the assessee.