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Issues: Assessment of income for two different periods under two different firms, application of section 187 of the Income Tax Act, 1961, determination of whether there was a change in the constitution of the firm or succession, interpretation of various judicial decisions on similar matters.
Analysis: The case involved a reference under section 256(1) of the Income Tax Act, 1961, regarding the assessment of income for the assessment year 1968-69 for a partnership firm engaged in a wholesale business in cotton cloth. The primary question was whether there were two separate firms in existence for different periods or if it was a case of a change in the constitution of the firm governed by section 187 of the Act. The firm was initially constituted under a partnership deed dated April 9, 1962. Following the death of a partner on March 30, 1967, a new partnership deed was executed on April 25, 1967, with retrospective effect from April 1, 1967. Two separate returns were filed for the income earned during different periods, one for the period June 23, 1966, to March 31, 1967, and the other for April 1, 1967, to June 30, 1967. The Income Tax Officer (ITO) made a single assessment for the entire period but allocated the income for the two periods separately. The Appellate Assistant Commissioner (AAC) upheld the ITO's decision, considering it a reconstitution of the firm under section 187(2) of the Act. However, the Income-tax Appellate Tribunal disagreed, citing the legal effect of the death of a partner leading to the dissolution of the old firm and the creation of a new firm. The Tribunal set aside the assessment and directed the ITO to make separate assessments for the two firms. The Tribunal's decision was based on various judicial precedents, including decisions from the Bombay High Court, Allahabad High Court, Madras High Court, Andhra Pradesh High Court, and Calcutta High Court. The High Court, after considering the precedents and the Division Bench's analysis in a previous case, concluded that in situations where a partner's death leads to the formation of a new partnership with the surviving partners taking on a new partner, it constitutes succession rather than a mere change in the constitution of the firm. Therefore, separate assessments must be made for the income earned during different periods under the respective firms. The court sided with the assessee, ruling against the Department. The judgment highlighted the importance of partnership deeds in determining the legal implications of partner changes and affirmed the need for distinct assessments in cases of succession within a partnership firm.
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