1987 (11) TMI 4 - SC - Income Tax

Cash Credits - Income from Undisclosed Sources - Whether Tribunal was justified in holding that for the period covered by the old constitution, the income was assessable in the hands of the assessee as a registered firm - Whether there was any dissolution of the partnership on the date of death of Shri Sarabhai Chimanlal and that, therefore, there should be separate assessment till the date of his death - Whether the provisions of section 187(2) apply to the facts of the case

Issues Involved:
1. Whether the death of a partner results in the dissolution of a firm or a change in its constitution.
2. Whether a firm is entitled to the continued benefit of registration under Section 184(7) of the Income-tax Act, 1961, after the death of a partner.
3. Whether separate assessments should be made for the periods before and after the death of a partner.

Issue-wise Detailed Analysis:

1. Death of a Partner: Dissolution or Change in Constitution
The primary issue was whether the death of a partner results in the dissolution of the firm or merely a change in its constitution. The judgment discussed the partnership deed's clause, which stated that the firm would not be dissolved on the death of a partner but would continue with the remaining partners and the heir of the deceased partner who resides in India, subject to mutual agreement. The High Court held that the death of Qamaruddin and the inclusion of his son, Fariduddin, constituted a change in the firm's constitution rather than its dissolution. The Supreme Court agreed with this view, emphasizing that the partnership deed's terms must be adhered to, indicating a change in the constitution rather than dissolution.

2. Continued Benefit of Registration under Section 184(7)
The second issue was whether the firm was entitled to the continued benefit of registration under Section 184(7) of the Income-tax Act, 1961, after the death of a partner. The Tribunal had held that the firm was entitled to the benefit of registration up to June 4, 1964, when Qamaruddin was alive, and should be assessed as a registered firm for that period and as an unregistered firm for the remaining period. The High Court disagreed, stating that the continued benefit of registration must apply to the entire assessment year. The Supreme Court, however, found the Tribunal's view correct, stating that the firm should be assessed as a registered firm up to the date of the partner's death and as an unregistered firm thereafter, as this approach is logical, equitable, and supported by the Act's provisions.

3. Separate Assessments for Different Periods
The third issue was whether separate assessments should be made for the periods before and after the death of a partner. The Tribunal and the High Court of Gujarat had held that the firm should be assessed separately for the periods before and after the death of a partner, treating the firm as dissolved upon the partner's death. The Supreme Court upheld this view for the Gujarat case, where the Tribunal found that the firm was dissolved upon the partner's death, and the subsequent activities were part of the winding-up process. Therefore, separate assessments were justified.

Conclusion:
The Supreme Court allowed Civil Appeal No. 1792 of 1974, setting aside the Allahabad High Court's judgment and upholding the Tribunal's view that the firm should be assessed as a registered firm up to the date of the partner's death and as an unregistered firm thereafter. Civil Appeal No. 609 of 1975 was dismissed, affirming the Gujarat High Court's judgment that the firm was dissolved upon the partner's death, necessitating separate assessments for the periods before and after the death. The Court emphasized the importance of the partnership deed's terms and the equitable application of the Income-tax Act's provisions.

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