1980 (9) TMI 22 - HC - Income Tax

Summary

Issues Involved:
1. Whether the case involves a change in the constitution of the firm under Section 187(2)(a) of the Income-tax Act, 1961.
2. Whether the case involves the succession of one firm by another under Section 188 of the Income-tax Act, 1961.
3. Whether one assessment of the income of the assessee for the entire period should be made.

Issue-wise Detailed Analysis:

1. Change in Constitution of the Firm under Section 187(2)(a):
The core issue is whether the death of a partner and the retirement of another resulted in a change in the constitution of the firm as defined by Section 187(2)(a) of the Income-tax Act, 1961. The facts are undisputed that the original firm, M/s. Ganesh Dall Mill, was constituted by four partners. Upon the death of one partner and the retirement of another, a new partnership deed was executed, including new partners and minors admitted to the benefits of the partnership. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) held that this scenario constituted a change in the constitution of the firm under Section 187, leading to a single assessment for the entire accounting period.

2. Succession of One Firm by Another under Section 188:
The assessee argued that the original firm dissolved upon the death and retirement of partners, resulting in a new firm that should be considered a successor under Section 188 of the Income-tax Act, 1961. This would necessitate separate assessments for the periods before and after the dissolution. The Tribunal upheld the ITO and AAC's decision, rejecting the assessee's contention. The court examined the provisions of the Partnership Act and the Income-tax Act, noting that the terms "change in the constitution of a firm" and "dissolution of a firm" are distinct and defined within the Partnership Act. The court concluded that Section 187(2) emphasizes continuity of the original firm despite changes in partnership, which contradicts the concept of dissolution.

3. Single Assessment for the Entire Period:
The court analyzed whether a single assessment for the entire period was appropriate. It was argued that the continuity of the firm under Section 187 implies that a single assessment should be made. However, the court noted that the terms used in the Income-tax Act align with those in the Partnership Act, which differentiates between changes in constitution and dissolution. The court referred to various case laws and legal commentaries, concluding that a dissolution followed by the formation of a new firm cannot be considered a mere change in constitution under Section 187. Therefore, the appropriate action would be to make separate assessments under Section 188.

Conclusion:
The court held that the Tribunal was not correct in law in holding that it was a case of change in the constitution of the firm under Section 187(2)(a) and not a case of succession under Section 188. The court concluded that the newly constituted firm was a successor firm, necessitating separate assessments for the two periods. The court's answer to the referred question was in the negative, against the revenue, and in favor of the assessee. No order as to costs was made.