1985 (10) TMI 127 - AT - Income Tax

Summary

Issues Involved:
1. Whether there should be one or two assessments for the period from 1st April 1979 to 31st March 1980.
2. Whether the firm experienced a succession or a change in the constitution.

Issue-wise Detailed Analysis:

1. One or Two Assessments:

The primary issue was whether the firm should be assessed as one entity for the entire financial year or as two separate entities for the periods before and after 7th June 1979. The firm, originally constituted under a partnership deed dated 21st January 1979, dissolved on 7th June 1979, and a new partnership was formed immediately. The Income Tax Officer (ITO) clubbed the income of both periods, treating it as a single assessment, while the Appellate Assistant Commissioner (AAC) directed two separate assessments.

2. Succession vs. Change in Constitution:

The crux of the matter was to determine whether the dissolution and subsequent reconstitution of the firm constituted a succession or merely a change in the constitution of the firm. The Judicial Member opined that the provisions of Section 187(2) of the Income Tax Act were applicable, indicating a change in the constitution of the firm rather than a succession. He cited several cases, including CIT vs. Shiv Shankar Lal Ram Nath and CIT vs. Sant Lal Arvind Kumar, to support his view that the firm continued despite the retirement of one partner.

Conversely, the Accountant Member argued that the dissolution of the firm was genuine and that the subsequent formation of a new firm constituted a succession. He referenced decisions from the Allahabad High Court, particularly Badri Narain Kashi Prasad vs. Addl. CIT and Vishwanath Seth vs. CIT, to assert that the dissolution and reconstitution resulted in two distinct entities.

Majority Opinion:

Upon hearing both sides, it was concluded that the facts indicated a succession rather than a mere change in constitution. The dissolution deed executed on 7th June 1979 explicitly stated the termination of the old partnership, and the subsequent formation of a new partnership with a different profit-sharing ratio substantiated this claim. This view was consistent with the majority of High Court decisions, including those from the Delhi and Allahabad High Courts, which held that a firm ceases to exist upon dissolution, and a new firm formed thereafter is a separate entity.

Supporting Case Laws:

Several case laws were considered to support this conclusion:
- The Delhi High Court in CIT vs. Sant Lal Arvind Kumar emphasized that Section 187 applies only when a firm continues to exist in law.
- The Allahabad High Court in Vishwanath Seth vs. CIT and other cases reiterated that a firm ceases to exist upon dissolution, and any subsequent firm is a new entity.

Contrary Views:

The Madhya Pradesh High Court in CIT vs. Ram Kishan Bhojraj and the Punjab and Haryana High Court in Nandla Sohanla vs. CIT held a dissenting view, suggesting that such cases should be treated as a change in the constitution under Section 187.

Conclusion:

The judgment concluded that the view taken by the Accountant Member was correct and aligned with the majority legal opinion. The dissolution of the old firm and the formation of a new firm constituted a succession, necessitating two separate assessments for the periods before and after 7th June 1979. The matter was remanded to the original bench for decision according to the majority opinion.