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Assessment of firm after a change in constitution - Interpretation of sections 170, 187, and 188 of the Income-tax Act - Application of section 187 in a case involving dissolution and reconstitution of a partnership firm. Analysis: The case involved a partnership firm where a partner died, leading to the dissolution of the firm, settlement of accounts, and reconstitution of the partnership with the remaining partners. The issue was whether the assessment should be made on the total income of the entire previous year or separately for the periods before and after reconstitution, as per sections 170, 187, and 188 of the Income-tax Act. The Appellate Assistant Commissioner upheld the Income-tax Officer's decision to assess the firm's total income for the entire year under section 187. The Tribunal also ruled against the assessee, emphasizing the importance of interpreting section 187 regarding changes in the constitution of a firm for assessment purposes. The High Court analyzed sections 170, 187, and 188 of the Act to distinguish between cases of succession and changes in the firm's constitution. Section 187 mandates assessment on the reconstituted firm, with profits apportioned between partners for the relevant periods. In contrast, section 188 applies to cases of one firm succeeding another, requiring separate assessments for the predecessor and successor firms. The Court highlighted that a change in the constitution occurs when partners cease or new partners are admitted, with old partners continuing or with changes in profit-sharing ratios. In this case, the death of a partner led to the dissolution of the first firm and the creation of a new entity, not a mere change in the constitution as defined by section 187(2). Citing relevant case law, the Court concluded that section 187 was incorrectly applied, and separate assessments under section 170 should have been conducted. Therefore, the total income for the year of change in constitution was not liable to be assessed under section 187 but under section 188 read with section 170. In the final judgment, the Court ruled in favor of the assessee, emphasizing the correct interpretation and application of the Income-tax Act provisions. No costs were awarded, and both judges concurred with the decision. This detailed analysis clarifies the interpretation and application of sections 170, 187, and 188 of the Income-tax Act in cases involving changes in the constitution of a partnership firm, providing a comprehensive understanding of the legal principles and their implications on assessment procedures.
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