1979 (2) TMI 130 - AT - Income Tax

Summary

Issues Involved:
1. Whether the retirement of a partner and the reconstitution of the partnership firm constitute a dissolution of the old firm and the creation of a new firm.
2. Applicability of Section 187(2) versus Section 188 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Whether the retirement of a partner and the reconstitution of the partnership firm constitute a dissolution of the old firm and the creation of a new firm:

The firm Pelikan Paper & Stationery Mart was initially constituted by three partners with specified shares. On 1-11-1973, one partner retired, and a new partnership deed was executed between the remaining partners and a new partner. The assessee submitted two returns for the periods before and after the retirement. The Income Tax Officer (ITO) rejected the assessee's contention that the old firm was dissolved and made a single assessment for the entire year. The Appellate Assistant Commissioner (AAC) affirmed this order.

2. Applicability of Section 187(2) versus Section 188 of the Income-tax Act, 1961:

The assessee argued that the old firm dissolved upon the retirement of the partner, invoking Section 188 (succession of one firm by another) rather than Section 187(2) (change in the constitution of a firm). The Tribunal considered several precedents to determine the applicability of these sections.

Analysis of Precedents:

- Dahi Laxmi Dal Factory Case: The Allahabad High Court held that Section 187 applies only when a firm is reconstituted, not dissolved. If a firm is dissolved and another firm takes over, Section 188 applies.

- Shiv Shanker Lal Ram Nath Case: The court held that when a firm is reconstituted, the old firm ceases to exist, and Section 187 does not imply that the income of the old firm becomes the income of the reconstituted firm.

- Kunj Behari Shyam Lal Case: The court ruled that the firm stood dissolved on the death of a partner, and the new firm that took over was a successor under Section 188.

- United Commercial Co. Case: The court found that the firm dissolved upon the death of a partner, and the new firm could not be considered a continuation of the old firm under Section 187.

- Harjivandas Hathibhai Case: The Gujarat High Court emphasized that a dissolved firm cannot be considered the same entity as a reconstituted firm, and Section 188 applies in such cases.

- Vinayaka Cinema Case: The Andhra Pradesh High Court ruled that if a firm is dissolved, it cannot be said to continue with a mere change in constitution, and Section 188 applies.

- Contrary View by Punjab and Haryana High Court: In Dharam Pal Sat Dev and Nandlal Sohanlal cases, the court held that Section 187 applies when there is a change in the constitution of the firm, even if one partner retires and another joins.

Conclusion:

The Tribunal concluded that Section 187(2) does not apply where the old partnership is dissolved by the act of partners, and Section 188 governs such situations. The Tribunal directed the ITO to make two separate assessments for the periods before and after the dissolution of the old firm.

Final Judgment:

The appeal was allowed, and the single assessment made by the ITO was set aside. The ITO was directed to make two separate assessments for the periods from 1-4-1973 to 31-10-1973 and from 1-11-1973 to 31-3-1974.