1977 (5) TMI 31 - AT - Income Tax

Summary

Issues:
1. Whether the formation of a new partnership after the death of a partner constitutes a change in the constitution of the firm or a dissolution of the old firm.
2. Whether the income of the financial year should be taxed as a single unit or separately for the two periods.

Detailed Analysis:

Issue 1:
The case involved an appeal by the assessee against the order of the AAC sustaining the ITO's decision to make a single assessment on the firm for the financial year ending on 31st March, 1973. The original firm consisted of three partners, one of whom died during the relevant financial year. A new partnership was formed among the surviving partners and the deceased partner's widow. The question was whether this constituted a change in the constitution of the firm or a dissolution of the old firm. The AAC held that there was an implied contract for the continuation of the firm with the legal heirs of a deceased partner, but the Tribunal disagreed. The Tribunal found that there was no provision in the deed of partnership for continuation in the event of death, and fresh accounts were started for the new partnership, indicating a dissolution of the old firm and the formation of a new one.

Issue 2:
The assessee contended that two separate assessments should be made for the income of the two periods, relying on legal precedents. The AAC had taxed the entire income of the financial year in the hands of the assessee, considering it as a single unit for assessment purposes. The Tribunal disagreed with the AAC's reasoning and held that there was a dissolution of the old partnership and the formation of a new partnership. Therefore, the Tribunal directed that two separate assessments should be made for the two periods, even though both assessments would be on the assessee as constituted at the time of assessment. The Tribunal allowed the assessee's appeal, concluding that the income should be taxed separately for the two periods.

In conclusion, the Tribunal held that the formation of a new partnership after the death of a partner constituted a dissolution of the old firm and the creation of a new partnership. Therefore, two separate assessments were to be made for the two periods, rather than taxing the income as a single unit. The decision was based on a detailed analysis of the deed of partnership and the circumstances surrounding the formation of the new partnership.