1986 (3) TMI 100 - AT - Income Tax

Summary

Issues:
1. Whether the assessment should be made separately for the dissolved firm and the successor firm or as a single assessment covering both periods under section 187(2) of the Income-tax Act, 1961.

Analysis:
The case involved an appeal by the revenue for the assessment year 1980-81 against the order of the AAC directing the ITO to frame two assessments separately for the dissolved firm till the date of dissolution and the successor firm. The ITO had made a single assessment covering an 18-month accounting period, relying on section 187(2) of the Act. The facts revealed a firm with seven partners undergoing a change due to the retirement of one partner and the formation of a new firm with a different accounting year. The ITO's decision to club the income of both periods for a single assessment was contested by the assessee, arguing that a change in the accounting year did not necessitate prior permission from the ITO. The AAC ruled in favor of the assessee, emphasizing the need for two separate assessments as per section 188, considering the dissolution of the old firm and the formation of the new one.

The Tribunal analyzed the confusion surrounding the issue, emphasizing the importance of framing assessments under section 187(1) based on the entity existing at the time of assessment. The assessment aims to tax the income of the business carried on by the predecessor firm, irrespective of changes in ownership. The Tribunal highlighted the distinction between a change in constitution and the completion of assessment under section 187(1). Referring to relevant case law and the Punjab and Haryana High Court ruling, the Tribunal clarified that a change in constitution was evident, but the key question was whether a single assessment could be made under section 187(1). The Tribunal concluded that as the successor firm changed the accounting period, the conditions of section 187(1) were not met, necessitating separate assessments under section 188 for the successor firm. The Tribunal upheld the AAC's decision for two assessments, citing the definition of the previous year in section 3 and the need to comply with accounting year norms.

In conclusion, the Tribunal dismissed the revenue's appeal, affirming the need for separate assessments for the dissolved firm and the successor firm under section 188, due to the change in accounting year and the distinct entities of the predecessor and successor firms.