1986 (1) TMI 125 - AT - Income Tax

Issues Involved:
1. Whether the insertion of the proviso to s. 187(2) of the IT Act, 1961, by the Taxation Laws (Amendment) Act, 1984, gives the surviving partners the right to dissolve the firm against the terms of the partnership deed.
2. Whether there was a change in the constitution of the firm warranting one assessment under s. 187 of the IT Act, 1961, or two separate assessments for the two periods as claimed by the assessee.

Issue-wise Detailed Analysis:

1. Insertion of Proviso to s. 187(2) and Its Implications:

The primary contention revolves around the proviso added to s. 187(2) by the Taxation Laws (Amendment) Act, 1984, which states, "nothing contained in cl. (a) shall apply to a case where the firm is dissolved on the death of any of its partners." The assessee argued that this proviso allows the firm to be considered dissolved on the death of a partner, irrespective of any contrary clause in the partnership deed.

The ITO's position was that the firm was not dissolved due to a specific clause in the partnership deed stating, "the death of any parties hereto shall not dissolve the partnership." The ITO relied on the partnership deed and the decision in CIT vs. M/s. Mangaldas Mohanlal (1975) to conclude that there was no dissolution, only a change in the constitution of the firm, and thus, a single assessment was warranted.

However, the CIT(A) accepted the assessee's argument, emphasizing the conduct of the partners and the subsequent execution of a new partnership deed. The CIT(A) directed the ITO to make two separate assessments, referencing the decision in Addl. CIT vs. Harjivandas Hathibhai (1977), which supports the dissolution of the firm upon the death of a partner.

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

The Revenue's appeal argued that the CIT(A) erred in directing two separate assessments, citing the Gujarat High Court's decision in CIT vs. M/s. Mangaldas Mohanlal, which held that the firm was not dissolved but merely underwent a change in constitution. The Revenue maintained that the partnership deed's clause should prevail, and the subsequent conduct of the partners is immaterial unless it contradicts the deed.

The Tribunal considered the retrospective amendment to s. 187(2) and the intention to reduce litigation. The Tribunal noted that the proviso to s. 187(2) overrides any partnership deed clause, thus supporting the dissolution of the firm on the death of a partner.

Separate Judgments Delivered:

Judgment by Judicial Member:

The Judicial Member disagreed with the CIT(A), holding that the firm was not dissolved due to the partnership deed's clause and the absence of material evidence showing the partners' conduct contrary to the deed. The Judicial Member argued that the proviso to s. 187(2) does not grant the surviving partners the authority to dissolve the firm against the partnership deed's terms.

Judgment by Accountant Member:

The Accountant Member upheld the CIT(A)'s decision, emphasizing the retrospective amendment to s. 187(2) and the intention to reduce litigation. The Accountant Member argued that the firm should be considered dissolved on the death of a partner, irrespective of the partnership deed's clause, and thus, two separate assessments were warranted.

Judgment by Third Member:

The Third Member agreed with the Accountant Member, supporting the view that the firm was dissolved on the death of a partner based on the retrospective amendment to s. 187(2). The Third Member emphasized that the amendment overrides any contrary clause in the partnership deed, thus validating the assessee's claim for two separate assessments.

Conclusion:

The Tribunal, by majority view, concluded that the firm was dissolved on the death of a partner, and two separate assessments should be made for the two periods involved. The CIT(A)'s order was upheld, and the Revenue's appeal was dismissed.

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