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Issues:
1. Interpretation of section 187 of the Income-tax Act, 1961 regarding the application to a firm in case of the death of a partner and the subsequent formation of a new firm with common partners. 2. Determination of whether two separate assessments should be made for the periods before and after the formation of the new firm. Detailed Analysis: The judgment pertains to a reference made by the Commissioner of Income-tax, Agra, under section 256(1) of the Income-tax Act, 1961, concerning the assessment year 1977-78. The primary issue was whether section 187 of the Act is applicable when a firm dissolves due to the death of a partner and a new firm is formed with common partners. The case involved a firm, B. M. Jain and Co., which was reconstituted after the death of a partner, Bengali Mal Jain, with some partners from the dissolved firm forming a new partnership. The Income-tax Officer initially made a single assessment, but the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal held that two separate assessments were required for the distinct periods. The judgment delves into the distinction between a change in the constitution of a firm under section 187 and the succession of one firm by another under section 188 of the Income-tax Act. It references previous decisions, including a Full Bench ruling in Dahi Laxmi Dal Factory v. ITO, which clarified that section 187 applies to reconstitution of a firm under the Indian Partnership Act, while section 188 deals with the succession of one firm by another. The judgment emphasizes that dissolution of the earlier firm marks the line between a change in constitution and succession. The court further discusses the findings of the Income-tax Appellate Tribunal, which determined that the case in question constituted a succession under section 188 due to the dissolution of the original firm. The judgment highlights that the proviso to subsection (2) of section 187, inserted by the Taxation Laws (Amendment) Act, 1984, clarifies that if a firm dissolves upon the death of a partner, section 187 does not apply. The court affirms that in the present case, section 187 is inapplicable, and two separate assessments were warranted. Ultimately, the court answers both questions in favor of the assessee, concluding that it was a case of succession under section 188 and not a change in constitution under section 187. The judgment upholds the decision for two separate assessments based on the returns filed by the assessee. The ruling aligns with the understanding that a dissolution leading to the formation of a new firm signifies succession rather than a mere change in the firm's constitution. In conclusion, the judgment provides a detailed analysis of the application of sections 187 and 188 of the Income-tax Act in cases involving the dissolution of a firm and the formation of a new partnership. It clarifies the legal distinction between reconstitution and succession, emphasizing the significance of dissolution in determining the appropriate tax treatment and assessment requirements for such scenarios.
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