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Issues:
1. Interpretation of section 187(2) of the Income-tax Act, 1961 regarding assessment of a reconstituted firm. 2. Determination of the previous year for assessment purposes following a change in firm constitution. 3. Application of legal fiction in assessing income for a period exceeding 12 months. 4. Consideration of the Indian Partnership Act, 1932 in determining the continuity of a firm. 5. Extending the previous year for assessment based on the choice of the assessee. Analysis: 1. The case involved a dispute regarding the assessment of a firm, Swamy & Pathy, following a change in its constitution. The Income Tax Officer (ITO) assessed the firm's income for a period of 17 months, starting from 1-11-1979 to 31-3-1981, despite the firm's claim of dissolution on 15-4-1980 and the formation of a new firm. The assessee objected to the ITO's decision, arguing that the income assessment should not exceed 12 months as per section 3 of the Act. 2. The Commissioner (Appeals) upheld the ITO's decision, relying on a previous judgment by the Punjab and Haryana High Court. However, the assessee appealed, contending that the previous year of the firm should not be extended beyond 12 months, and the order of the Commissioner (Appeals) should be reversed. The legal counsel for the assessee emphasized that section 187 contemplates only one assessment for the entire previous year of a reconstituted firm. 3. The Appellate Tribunal analyzed a similar case, Karnal Kaithal Co-operative Transport Society Ltd., where a change in the previous year was accepted based on voluntary submission of returns. However, in the present case, the Tribunal noted that the two firms, pre and post-reconstitution, were technically different entities under the Indian Partnership Act, but the legal fiction in section 187(2) considered them as the same for tax purposes. The Tribunal emphasized that the legal fiction did not authorize elongating the previous year beyond 12 months. 4. The Tribunal concluded that the previous year for assessment purposes should remain the same, i.e., year ending 31st October, and directed the ITO to assess the income of the firm for the period 1-11-1979 to 31-10-1980 for the assessment year 1981-82. However, the Tribunal allowed the assessee the option to change the previous year to 31st March, if desired, for assessing the income for the 17-month period. The decision aimed to align with the provisions of section 3 of the Act and provide the assessee with an opportunity to choose the previous year for taxation. 5. Consequently, both IT Appeal No. 230 and 231 of 1985 were treated as allowed, overturning the decisions of the authorities below and restoring the assessment to the ITO based on the choice of the previous year selected by the assessee for taxing the income.
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