1985 (2) TMI 10 - HC - Income Tax

Summary

Issues Involved:
1. Whether the partnership firm was dissolved or merely underwent a change in constitution.
2. Applicability of Section 187 and Section 188 of the Income-tax Act, 1961.
3. Impact of the proviso to Section 187(2) inserted by the Taxation Laws (Amendment) Act, 1984.
4. Correctness of the Tribunal's decision to make two separate assessments.

Detailed Analysis:

1. Whether the partnership firm was dissolved or merely underwent a change in constitution:
The partnership firm, originally constituted under a deed dated October 20, 1969, consisted of four partners and was "at will," meaning it could be dissolved by mutual consent of the partners. On December 31, 1976, one partner retired, and the remaining partners agreed to dissolve the firm, executing a deed of dissolution on January 4, 1977, effective from December 31, 1976. Subsequently, the remaining three partners formed a new partnership, effective January 1, 1977, under a deed dated March 19, 1977. The Tribunal found that the original firm was dissolved, and a new firm succeeded it, necessitating separate assessments for the two periods.

2. Applicability of Section 187 and Section 188 of the Income-tax Act, 1961:
The Income-tax Officer initially aggregated the income for the entire period from April 1, 1976, to March 31, 1977, treating the retirement of a partner as a mere change in the constitution of the firm under Section 187(1). The Tribunal, however, held that the dissolution was genuine and thus Section 188, which deals with succession of one firm by another, was applicable. This necessitated two separate assessments: one for the period up to December 31, 1976, and another from January 1, 1977, to March 31, 1977.

3. Impact of the proviso to Section 187(2) inserted by the Taxation Laws (Amendment) Act, 1984:
The proviso to Section 187(2), effective from April 1, 1975, states that the section does not apply to cases where the firm is dissolved on the death of any partner. The standing counsel argued that this proviso implies that only dissolutions due to death are recognized for separate assessments, while other forms of dissolution should be treated as changes in constitution. The court rejected this argument, stating that the proviso does not derecognize other statutory forms of dissolution under Sections 40 to 44 of the Partnership Act. The court emphasized that a firm dissolved by mutual consent under Section 40 or by notice under Section 43 ceases to exist for all statutory purposes unless expressly saved by a provision in the Income-tax Act.

4. Correctness of the Tribunal's decision to make two separate assessments:
The court upheld the Tribunal's decision, affirming that the dissolution of the partnership on December 31, 1976, and the formation of a new partnership on January 1, 1977, were valid. Consequently, two separate assessments were warranted under Section 188 of the Income-tax Act. The court referenced a similar decision in CIT v. Surana Trade Finance Corporation, which supported the view that mutual dissolution followed by the formation of a new partnership requires separate assessments.

Conclusion:
The court concluded that the Tribunal was correct in determining that the partnership was dissolved on December 31, 1976, and a new partnership succeeded it from January 1, 1977. Therefore, two separate assessments were required for the respective periods. The question referred was answered in the affirmative, in favor of the assessee and against the Revenue, with costs awarded to the assessee.