1978 (12) TMI 12 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Section 187 of the Income-tax Act, 1961.
2. Applicability of Section 188 of the Income-tax Act, 1961.
3. Determination of whether a single assessment or separate assessments should be made for the assessment year 1969-70.

Issue-wise Detailed Analysis:

1. Applicability of Section 187 of the Income-tax Act, 1961:
Section 187(1) states that if a change occurs in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment. Section 187(2) defines "change in the constitution of the firm" as occurring if one or more partners cease to be partners, or one or more new partners are admitted, provided that one or more of the original partners continue as partners after the change.

For M/s. D. Thiagasundara Mudaliar, the firm consisted of only two partners. Upon the death of one partner, Govindaraja Mudaliar, the firm automatically dissolved, as there was no clause in the partnership deed to continue the firm undissolved. The surviving partner, D. Thiagasundara Mudaliar, became the sole owner of the business. The Supreme Court in CIT v. Seth Govindram Sugar Mills [1965] 57 ITR 510 held that a firm with only two partners cannot continue if one dies, even if there is a contrary provision in the partnership deed.

For M/s. V. Muniswamy Mudaliar & Company, though there were four partners, the partnership deed also did not contain a clause for continuation despite the death of a partner. Thus, the death of Govindaraja Mudaliar dissolved the firm under Section 42(c) of the Partnership Act, 1932.

2. Applicability of Section 188 of the Income-tax Act, 1961:
Section 188 states that where a firm carrying on a business is succeeded by another firm, separate assessments shall be made on the predecessor and successor firms.

In both cases, the Tribunal held that Section 187 did not apply because the original firms dissolved upon the death of Govindaraja Mudaliar, and new firms were constituted thereafter. This required separate assessments under Section 188.

3. Determination of whether a single assessment or separate assessments should be made for the assessment year 1969-70:
The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) initially held that there was merely a change in the constitution of the firms, necessitating a single assessment under Section 187. However, the Tribunal disagreed, ruling that the firms had dissolved and new firms had been constituted, thus requiring separate assessments under Section 188.

For M/s. D. Thiagasundara Mudaliar, the Tribunal's decision was supported by the Supreme Court's ruling that a firm with only two partners dissolves upon the death of one partner. The new firm constituted on January 17, 1969, was entirely different from the dissolved firm.

For M/s. V. Muniswamy Mudaliar & Company, the Tribunal noted that the partnership deed did not prevent dissolution upon a partner's death. Therefore, the firm dissolved upon Govindaraja Mudaliar's death, and a new firm succeeded it.

Conclusion:
The High Court affirmed the Tribunal's decision, holding that Section 187 did not apply to either firm. Consequently, separate assessments were required for the periods before and after the death of Govindaraja Mudaliar. The court answered the referred question in the affirmative, in favor of the assessee, and awarded costs to the assessee.

Costs:
The assessee is entitled to costs from the department, with counsel's fee set at Rs. 250 in each reference.