1981 (2) TMI 5 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to the benefit of registration for the assessment year 1970-71.
2. Status of the firm for assessment purposes after the death of a partner.

Issue 1: Entitlement to the Benefit of Registration for the Assessment Year 1970-71

The primary issue was whether the assessee, a partnership firm, was entitled to the benefit of registration for the assessment year 1970-71 despite the death of one of its partners, Velayutha Nadar, on December 7, 1969. The firm had been registered under the Income-tax Act, 1961, till the assessment year 1969-70. After the partner's death, the firm was dissolved as per Section 42 of the Indian Partnership Act, 1932. However, the surviving partners and the legal representatives of the deceased partner filed a declaration in Form No. 12, seeking continuation of registration till March 31, 1970.

The Income-tax Officer (ITO) rejected the declaration, citing defects in the form, particularly the claim that the firm's constitution remained unchanged till March 31, 1970, despite the partner's death. The Appellate Assistant Commissioner (AAC) upheld this decision. However, the Tribunal found that the firm was dissolved upon the partner's death and that no new partnership was formed. Therefore, the Tribunal held that the firm was entitled to registration till December 7, 1969, and directed the ITO to recognize the firm as a registered entity for the period up to that date.

Issue 2: Status of the Firm for Assessment Purposes After the Death of a Partner

The second issue was whether the firm should be assessed as a registered or unregistered entity for the period following the partner's death. The Tribunal decided that after December 7, 1969, the firm should be assessed as an unregistered entity. This decision was based on the fact that no new partnership was formed after the dissolution caused by the partner's death.

Detailed Analysis:

Entitlement to the Benefit of Registration

Sections 184 and 185 of the Income-tax Act, 1961, govern the registration of firms. Section 184(7) allows for the continuation of registration if there is no change in the firm's constitution or the partners' shares. Form No. 12 is used to declare that there has been no such change. In this case, the declaration was signed by the surviving partners and the heirs of the deceased partner, stating that there was no change till March 31, 1970. However, this was incorrect since the firm was dissolved on December 7, 1969.

The Tribunal noted that the ITO should have followed the procedure under Section 185(3), which mandates that the ITO inform the firm of any defects in the declaration and provide an opportunity to rectify them. The Tribunal held that the ITO's failure to do so was unjustified. The Tribunal concluded that the firm was entitled to registration till December 7, 1969, and the ITO should have granted the continuation of registration for that period.

Status of the Firm for Assessment Purposes

The Tribunal's decision to assess the firm as an unregistered entity after December 7, 1969, was based on the dissolution of the firm upon the partner's death. The Tribunal held that the declaration in Form No. 12 was valid only up to the date of dissolution. The Tribunal's decision was consistent with the provisions of the Income-tax Act, 1961, and the Indian Partnership Act, 1932.

The Department's counsel argued that the firm continued its business till March 31, 1970, and should be considered as having a change in its constitution. However, the Tribunal found that no new partnership was formed, and the firm was merely winding up its business.

Conclusion:

The High Court upheld the Tribunal's decision, stating that the firm was entitled to registration till December 7, 1969, and should be assessed as an unregistered entity thereafter. The ITO's failure to follow the procedure under Section 185(3) was a significant factor in the decision. The Court emphasized the importance of the ITO's duty to assist assessees in rectifying defects in their declarations, as mandated by the statute.

The references were answered in the affirmative, and the Commissioner was directed to pay the costs of the assessee.