1985 (8) TMI 49 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal was justified in holding that the firm was dissolved on the death of a partner on July 1, 1974.
2. Whether the Tribunal was justified in holding that there should be two assessments (one up to July 1, 1974, and the other from July 1, 1974, up to the end of the accounting year) and not one assessment for the whole accounting year.

Issue-Wise Detailed Analysis:

Issue 1: Dissolution of the Firm on the Death of a Partner
The primary issue was whether the firm was dissolved upon the death of a partner, Surajbhan, on July 1, 1974. The firm in question was a partnership at will, as defined under section 7 of the Partnership Act. According to clause 11 of the partnership deed, the firm was to continue by the surviving partner and the legal heirs or representatives of the deceased partner, provided they agreed on the terms and conditions.

The Tribunal concluded that the old firm was dissolved after Surajbhan's death and a new firm was constituted. This conclusion was influenced by the fact that the partnership consisted of only two partners, Surajbhan and Om Prakash. Upon Surajbhan's death, the firm automatically came to an end as per section 42(c) of the Partnership Act, which states that a firm is dissolved by the death of a partner unless there is a contract to the contrary.

The Tribunal's decision was supported by the precedent set in CIT v. Seth Govindram Sugar Mills [1965] 57 ITR 510 (SC), where it was held that if a partnership consists of only two partners, the firm is dissolved upon the death of one partner. The surviving partner cannot induct new partners into the old firm; instead, a new partnership must be formed.

Thus, the Tribunal was justified in holding that the firm stood dissolved on July 1, 1974, upon the death of Surajbhan.

Issue 2: Two Assessments for the Accounting Year
The second issue was whether there should be two separate assessments for the accounting year: one for the period up to July 1, 1974, and the other from July 1, 1974, to the end of the accounting year. Given the dissolution of the old firm on July 1, 1974, and the formation of a new firm thereafter, the Tribunal held that two assessments were necessary.

The Tribunal's decision was based on the interpretation of section 42(c) of the Partnership Act and the precedent in Seth Govindram Sugar Mills' case. Since the old firm was dissolved and a new firm was constituted, it was appropriate to have two separate assessments for the two distinct periods.

The Tribunal's conclusion that there should be two assessments was further supported by the fact that the new partnership deed, executed on July 13, 1974, explicitly stated that the new firm took over the assets and liabilities of the dissolved firm from July 1, 1974.

Thus, the Tribunal was justified in holding that there should be two assessments for the accounting year, one up to July 1, 1974, and the other from July 1, 1974, to the end of the accounting year.

Conclusion
Both questions referred to the court were answered in the affirmative, in favor of the assessee and against the Revenue. The Tribunal's decisions on the dissolution of the firm and the necessity for two assessments were upheld. The parties were instructed to bear their own costs, and the Tribunal was to be informed of this order as per section 260(1) of the Act.