1978 (2) TMI 65 - HC - Income Tax

Summary

Issues Involved:

1. Applicability of Section 187 or 188 of the Income-tax Act.
2. Dissolution of the firm on the death of a partner.
3. Continuation of business versus continuation of the firm.
4. Conduct of partners indicating implied contract.
5. Interpretation of relevant case laws.

Issue-wise Detailed Analysis:

1. Applicability of Section 187 or 188 of the Income-tax Act:

The primary issue is whether Section 187 or 188 of the Income-tax Act applies to the case where a firm is dissolved due to the death of a partner. The assessee contended that Section 187 does not apply when a firm is dissolved by law upon the death of a partner, and a new firm is constituted with new partners. The Income-tax Officer, Appellate Assistant Commissioner, and the Appellate Tribunal held that there was no dissolution of the firm and assessed the entire income for the year as a single entity under Section 187. The court referred to the Full Bench decision in Addl. Commissioner of Income-tax v. Vinayaka Cinema [1977] 110 ITR 468 (AP), which held that when a partner dies and the firm is dissolved, it cannot be considered a mere change in the constitution of the firm.

2. Dissolution of the Firm on the Death of a Partner:

The facts of the case reveal that the firm, Messrs. Venkateswara Stone Company, was dissolved upon the death of partner Linga Reddi on September 29, 1972. A new firm was constituted with a fresh partnership deed on June 6, 1973, effective from September 30, 1972. The court examined whether the partnership deed contained any clause preventing dissolution upon the death of a partner. The court found no such clause, indicating that the firm was indeed dissolved by the operation of law under Section 42(c) of the Indian Partnership Act.

3. Continuation of Business versus Continuation of the Firm:

The court distinguished between the continuation of the business and the continuation of the firm. The partnership deed indicated that the business of the firm would continue, but there was no explicit agreement that the firm itself would continue despite the death of a partner. The court emphasized that the continuation of business does not imply the continuation of the firm as a legal entity.

4. Conduct of Partners Indicating Implied Contract:

The revenue argued that the conduct of the partners suggested an implied contract to continue the firm, as the business was not discontinued, and the accounts were not closed upon the death of Linga Reddi. However, the court held that the mere continuation of business and non-closure of accounts do not establish an implied contract to prevent dissolution. The court noted that no separate sets of accounts were opened, and the partnership accounts were not closed for profit and loss, which does not necessarily imply an intention to continue the firm.

5. Interpretation of Relevant Case Laws:

The court referred to several case laws, including the decisions in Addl. Commissioner of Income-tax v. Visakha Flour Mills [1977] 108 ITR 466 (AP) and Commissioner of Income-tax v. T. Veeraraghavulu Chetty & Sons Co. [1975] 100 ITR 723 (AP). The court noted that the Full Bench in Vinayaka Cinema's case [1977] 110 ITR 468 (AP) had affirmed the principle that the dissolution of a firm upon the death of a partner does not constitute a mere change in the constitution of the firm. The court also considered the contrary view expressed by the Punjab and Haryana High Court in Nandlal Sohanlal v. Commissioner of Income-tax [1977] 110 ITR 170 but chose to follow the precedent set by the Full Bench of its own jurisdiction.

Conclusion:

The court concluded that the firm which came into existence after the death of Linga Reddi is distinct and separate from the partnership firm that existed until September 29, 1972. Therefore, Section 188 of the Income-tax Act applies, and the income of the new firm should be taxed separately from the old firm. The reference was answered in favor of the assessee, with no costs and an advocate's fee of Rs. 250.