1992 (1) TMI 6 - SC - Income Tax

Whether the Tribunal was right in law in holding that there was a change in the constitution of the firm within the meaning of the said expression u/s 187 and, accordingly, the provisions of s. 188 were not applicable - Whether the decision reached by the Tribunal, namely, that the income for the two periods November 3, 1967, to January 22, 1968, and January 23, 1968, to October 21, 1968, was required to be clubbed and assessed as a whole for the assessment year 1969-70 was correct in law

Issues Involved:
1. Whether there was a change in the constitution of the firm within the meaning of section 187 of the Income-tax Act, 1961.
2. Whether the income for the two periods should be clubbed and assessed as a whole for the assessment year 1969-70.

Issue-Wise Detailed Analysis:

1. Change in the Constitution of the Firm:
The primary issue is whether the Tribunal was correct in law in holding that there was a change in the constitution of the firm under section 187 of the Income-tax Act, 1961, and therefore, the provisions of section 188 were not applicable. The facts reveal that the original partnership firm, consisting of two major partners and two minors admitted to the benefits of the partnership, was dissolved on January 22, 1968. A new firm was constituted on January 23, 1968, with a new partnership deed executed on January 24, 1968. The new firm included the same two major partners, one minor partner who had attained majority, and an additional minor admitted to the benefits of the partnership. The Income-tax Officer treated this as a mere change in the constitution of the firm under section 187 and clubbed the income for the two periods. However, the Appellate Assistant Commissioner accepted the assessee's contention that the old firm was dissolved and directed separate assessments for the two periods. The Tribunal reversed this decision, holding that the case fell under section 187.

2. Clubbing and Assessment of Income:
The second issue concerns whether the income for the periods from November 3, 1967, to January 22, 1968, and January 23, 1968, to October 21, 1968, should be clubbed and assessed as a whole for the assessment year 1969-70. The Tribunal's decision to club the income was based on its interpretation that there was only a change in the constitution of the firm, not a dissolution. The High Court, however, found that the facts clearly indicated a dissolution of the old firm and the formation of a new firm, thus necessitating separate assessments under section 188.

High Court's Findings:
The High Court referred to its decision in Addl. CIT v. Harjivandas Hathibhai [1977] 108 ITR 517, which clarified that section 187 applies only to reconstitutions under sections 31 and 32 of the Indian Partnership Act. A dissolution followed by a new firm taking over the business constitutes a succession under section 188, even if some partners are common to both firms. The High Court emphasized that the partnership law does not change under section 187 unless explicitly stated by the Income-tax Act. Therefore, the Tribunal's view that there was a mere change in the constitution of the firm was incorrect.

Supreme Court's Order:
The Supreme Court dismissed the appeal, stating that the issue was fully covered by its decision in Wazid Ali Abid Ali v. CIT [1988] 169 ITR 761, which supported the High Court's interpretation. The appeal was dismissed with no costs.

Conclusion:
The High Court concluded that the Tribunal erred in its interpretation, and the case was one of succession under section 188, not a mere change in the constitution under section 187. The income for the two periods should not be clubbed but assessed separately. The Supreme Court upheld this view, dismissing the appeal.

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