1994 (10) TMI 49 - HC - Income Tax

Issues Involved:
1. Whether the Tribunal was right in holding that the present was not a case of change in the constitution of the firm.
2. Whether separate assessments should be made on the two firms instead of one consolidated assessment.
3. Whether the income earned by the old dissolved firm should be clubbed with the income of the newly constituted firm and assessed as such in the hands of the reconstituted firm.
4. Interpretation of sections 187, 188, and 189 of the Income-tax Act, 1961.
5. Applicability of the Supreme Court's decisions in Wazid Ali Abid Ali v. CIT and CIT v. Sant Lal Arvind Kumar.

Detailed Analysis:

1. Change in the Constitution of the Firm:
The Tribunal held that the present case was not one of mere change in the constitution of the firm but of dissolution and formation of a new firm. The preamble of the deed of dissolution dated May 2, 1969, indicated that the firm was dissolved due to differences among partners. The new firm was formed with a new partnership deed, although the name and nature of the business remained the same. The Tribunal's decision was based on the distinction between retirement and dissolution, emphasizing that dissolution terminates the relationship between all partners, whereas retirement involves only some partners leaving while the firm continues.

2. Separate Assessments:
The Tribunal directed that separate assessments be made for the two periods: January 1, 1969, to April 30, 1969, for the old firm, and May 1, 1969, to December 31, 1969, for the newly constituted firm. The Income-tax Officer's view that it was merely a change in the constitution under section 187(2) was rejected. The Appellate Assistant Commissioner and the Accountant Member of the Tribunal supported this view, and the Third Member agreed, leading to a majority decision for separate assessments.

3. Clubbing of Income:
The court held that the income earned by the old dissolved firm should not be clubbed with the income of the newly constituted firm. The dissolution of the old firm and the formation of a new distinct firm under a new partnership deed meant that the old firm ceased to exist, and a new firm came into existence. This situation falls under section 188 of the Act, which provides for separate assessments in the case of succession of one firm by another.

4. Interpretation of Sections 187, 188, and 189:
Section 187(1) states that where a change occurs in the constitution of a firm, the assessment shall be made on the firm as it exists at the time of making the assessment. Section 187(2) clarifies what constitutes a change in the constitution. Section 188 provides for separate assessments in the case of succession of one firm by another. Section 189 deals with the assessment of a dissolved firm. The court emphasized that section 187 applies only where the firm continues to exist, whereas section 188 applies in cases of succession involving the formation of a new firm.

5. Applicability of Supreme Court Decisions:
The court referred to the Supreme Court's decision in Wazid Ali Abid Ali v. CIT and CIT v. Sant Lal Arvind Kumar, which laid to rest the controversy involved. The Supreme Court had approved the view that in cases of dissolution and formation of a new firm, separate assessments should be made. The court rejected the Revenue's reliance on the Allahabad High Court's decision in Vishwanath Seth v. CIT, stating that the Supreme Court had not agreed with the view taken by the Full Bench in that case.

Conclusion:
The court endorsed the Tribunal's view that the income derived by the old firm from January 1, 1969, to April 30, 1969, should be assessed separately from the income derived by the newly constituted firm from May 1, 1969, to December 31, 1969. The question referred was answered in the affirmative, in favor of the assessee and against the Revenue. There was no order as to costs since the assessee was not represented.

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