1985 (10) TMI 8 - HC - Income Tax

Summary

Issues:
1. Interpretation of change in the constitution of a firm under section 187 of the Income-tax Act, 1961.
2. Classification of messing expenses as entertainment expenses under section 37(2B) of the Income-tax Act, 1961.

Analysis:
The case involved the interpretation of the change in the constitution of a firm under section 187 of the Income-tax Act, 1961, and the classification of messing expenses as entertainment expenses under section 37(2B) of the Act. The firm, M/s. Metharam Lekhumal, faced a situation where one of the partners, Smt. Ishwari Bai, passed away, and a minor, Sundar Das, was admitted to the partnership in her place with a 10% profit share. The Income-tax Officer rejected the assessee's request for separate assessments based on two different periods, arguing that it was merely a change in the firm's constitution as per the partnership deed executed after Smt. Ishwari Bai's demise. The Appellate Assistant Commissioner upheld this decision, leading to an appeal to the Tribunal.

The Tribunal held that the change in the firm's constitution fell under subsection (2) of section 187 of the Income-tax Act, 1961, requiring assessment in accordance with subsection (1) of the same section. The Tribunal dismissed the appeal, stating that the business continued with a change in the firm's constitution due to Smt. Ishwari Bai's death. Additionally, the Tribunal addressed the issue of messing expenses, determining them to be entertainment expenses under section 37(2B) of the Act, thus disallowing the assessee's claim.

The assessee further challenged the Tribunal's decision, citing various court decisions to support their stance that the situation constituted succession and the formation of a new firm rather than a mere change in the firm's constitution. They argued for separate assessments for the original and new firms, emphasizing that the share of partners in the new firm had indeed changed. Regarding the messing expenses, the assessee contended that they were not entertainment expenses as classified by the Tribunal.

Upon review of the cited court decisions, the High Court agreed with the assessee's arguments. They found no authority contradicting the positions taken in the referenced cases. Consequently, the High Court answered both questions of law in the negative and in favor of the assessee. The court ruled that the situation warranted separate assessments for the original and new firms and that the messing expenses should not be classified as entertainment expenses. Each party was directed to bear their own costs in the case.