1979 (8) TMI 29 - HC - Income Tax

Summary

Issues Involved:

1. Whether the firm was dissolved on the death of a partner or if it was a mere change in the constitution of the firm.
2. Applicability of Sections 187 and 188 of the Income Tax Act, 1961.
3. Interpretation of relevant provisions of the Indian Partnership Act, 1932.

Issue-wise Detailed Analysis:

1. Dissolution of the Firm vs. Change in Constitution:

The primary issue was whether the firm Mathurdas Govardhandas was dissolved on the death of Govardhandas Binani or if it was merely a change in the constitution of the firm. The original partnership deed dated 17th December 1963 did not provide for the continuation of the firm upon the death of a partner. Upon Govardhandas Binani's death on 19th April 1965, the surviving partners executed a new deed on 7th May 1965, stating that the old partnership stood dissolved and a new firm was constituted. The Tribunal and lower authorities held that the firm was reconstituted rather than dissolved, leading to a single assessment for the year.

2. Applicability of Sections 187 and 188 of the Income Tax Act, 1961:

The Tribunal applied Section 187(2)(a), which deals with changes in the constitution of a firm, and not Section 188, which deals with the succession of one firm by another. The assessee contended that the firm was dissolved under Section 42(c) of the Indian Partnership Act, and a new firm succeeded the old one, necessitating separate assessments under Section 188. The revenue argued that the surviving partners continued the business, indicating a change in the constitution under Section 187.

3. Interpretation of Relevant Provisions of the Indian Partnership Act, 1932:

The court referred to Sections 31, 32, 33, 34, 40, 42, and 46 of the Indian Partnership Act to determine the circumstances under which a firm is reconstituted or dissolved. Section 42(c) states that a firm is dissolved by the death of a partner unless there is a contract to the contrary. The court noted that no such contract existed in the original deed, and the new deed explicitly stated that the old firm was dissolved upon Govardhandas's death.

Judgment:

The court analyzed several precedents, including decisions from the Allahabad High Court (Dahi Laxmi Dal Factory), Gujarat High Court (Harjivandas Hathibhai), and Andhra Pradesh High Court (Vinayaka Cinema). These cases supported the view that if a firm is dissolved by operation of law, there can be no change in its constitution, and Section 187 would not apply. The court disagreed with contrary views from the Punjab and Haryana High Court (Daram Pal Sal Dev) and earlier decisions from the Andhra Pradesh High Court (Visakha Flour Mills).

The court held that the firm was indeed dissolved on the death of Govardhandas Binani, and a new firm succeeded it. Therefore, the provisions of Section 188 were applicable, necessitating separate assessments for the periods before and after the dissolution.

Conclusion:

The question referred was answered in the negative, in favor of the assessee. The court concluded that the Appellate Tribunal was not justified in holding that the provisions of Section 187(2)(a) were applicable, and only one assessment for the whole year was rightly made. The reference was disposed of with no order as to costs.