1985 (7) TMI 85 - HC - Income Tax

Summary

Issues:
1. Whether the Appellate Tribunal was justified in confirming the order of the Appellate Assistant Commissioner directing the Income-tax Officer to pass two separate assessment orders for two different periods due to a change in the constitution of the firm.
2. Interpretation of sections 187 and 188 of the Income-tax Act, 1961 in the context of firm dissolution on the death of a partner.

Detailed Analysis:
The judgment pertains to a reference made by the Tribunal under section 256(1) of the Income-tax Act, 1961, regarding the correctness of directing the Income-tax Officer to pass two separate assessment orders for a firm due to a change in its constitution. The firm in question was initially constituted on January 1, 1968, with four partners, and one partner passed away on June 30, 1975. A new firm was constituted on July 7, 1975, leading to a dispute on whether one assessment should cover the entire period or separate assessments for distinct periods should be made. The Income-tax Officer considered it a case of a change in the firm's constitution, while the Appellate Assistant Commissioner viewed it as a succession, directing two separate assessments based on the two different periods.

The Appellate Assistant Commissioner's decision was upheld by the Tribunal, citing the automatic dissolution of the firm on the death of a partner and the subsequent formation of a new firm. The Tribunal referred to section 42 of the Partnership Act and section 188 of the Income-tax Act, emphasizing the absence of a provision for the firm's continuation upon the death of a partner. The Tribunal's decision was challenged by the Revenue, leading to the reference to the High Court.

The High Court analyzed the amendment in section 187(2) of the Income-tax Act, which clarified that the dissolution of a firm upon the death of a partner excludes the application of certain clauses. The Court noted the retrospective effect of the amendment from April 1, 1975, and concurred with the Tribunal's findings regarding the dissolution of the firm and the necessity for two separate assessments. The Court distinguished previous case laws based on the amended provision and affirmed the Tribunal's decision, holding that the Income-tax Officer should indeed conduct two distinct assessments for the respective periods.

In conclusion, the High Court ruled in favor of the Tribunal's decision, upholding the direction for two separate assessment orders due to the dissolution of the firm on the death of a partner and the subsequent formation of a new firm. The Court found no grounds to overturn the Appellate Assistant Commissioner's order and dismissed the Revenue's appeal, emphasizing the application of the amended provision and the legal requirements under the Income-tax Act.