2009 (4) TMI 104 - HC - Income Tax

Assessment of a Firm Dissolution versus Change in Constitution - Tribunal hold that two separate assessments be made for the separate periods ignoring the fact that this is a case covered under section 187(1) of the Income-tax Act 1961 tribunal has allowed depreciation for both the periods assessee was a firm and was constituted with 13 partners which was engaged in the manufacturing of M S Rounds. With effect from July 1 1977 two partners retired and by mutual consent the partnership was treated as dissolved - On July 1 1977 two other persons joined as partners along with the eleven remaining partners of the firm and a new partnership deed was executed on July 2 1977 which was made effective from July 1 1977 itself Held that case is covered under section 187(1) of the Act and the Tribunal was not justified in deleting the addition of Rs. 2, 00, 155 on the ground that there was no question of any addition to be made in the hands of new firm and has ignored the provisions of section 187(1) of the Act Only one assessment be made.

Summary

Issues:
1. Whether separate assessments should be made for different periods due to a change in the firm's constitution?
2. Whether the addition of a specific amount should be deleted in the hands of a new firm?
3. Whether depreciation should be allowed for both periods due to a firm's dissolution?

Analysis:

Issue 1:
The case involved a firm with 13 partners engaged in manufacturing. Two partners retired, and two new partners joined, leading to a new partnership deed. The Assessing Officer made a single assessment for the year, considering it a change in constitution, but the Tribunal directed two separate assessments. The court analyzed the provisions of section 187(1) of the Income-tax Act, which define a change in the firm's constitution. The court held that the deed of dissolution did not change the fact that it was a reconstitution, not a succession. Citing relevant case law, the court concluded that the Tribunal was not justified in ordering separate assessments.

Issue 2:
Regarding the addition of Rs. 2,00,155, the Tribunal deleted it, stating it was paid by the dissolved firm. The court disagreed, emphasizing that the firm's reconstitution under section 187(1) meant no separate assessments were warranted. The court held that the addition should not have been deleted, as it was a case covered by the Act.

Issue 3:
The Tribunal allowed depreciation for both periods, considering it a case of firm dissolution. However, the court found that as per section 187(1), it was a reconstitution, not dissolution, and thus, depreciation could not be allowed for both periods. The court emphasized that the Tribunal's decision to allow depreciation for both periods was incorrect.

In conclusion, the court ruled in favor of the Revenue, stating that the case fell under section 187(1) of the Act. The court allowed the appeal, holding that the Tribunal's decisions on separate assessments and depreciation were not justified. The parties were directed to bear their own costs.