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Issues: Appeal against order under section 263 of the IT Act setting aside the assessment for the assessment year 1978-79 and directing a fresh assessment in the status of an unregistered firm. Interpretation of changes in the constitution of a partnership firm due to death of a partner and its impact on assessment.
Analysis: The case involved an appeal by the assessee against an order passed by the CIT under section 263 of the IT Act, setting aside the assessment made for the assessment year 1978-79 and directing a fresh assessment as an unregistered firm. The firm, a partnership, experienced changes in its constitution due to the death of one partner and retirement of another. A fresh partnership deed was executed after these changes. The issue arose regarding the treatment of the firm for the two different periods within the same assessment year. The CIT held that as there was a change in the constitution of the firm, the firm should have been treated as unregistered for the entire accounting year, leading to the order under appeal. The assessee contended that the CIT's order became erroneous after an amendment to section 187 of the IT Act by the Taxation Laws (Amendment) Act, 1984. The amendment added a proviso stating that the dissolution of a firm due to the death of a partner would not be considered a mere change in the constitution of the firm. This meant that two separate assessments were required to be made in such cases. The Departmental Representative, however, relied on a ruling by the High Court stating that the dissolution of a firm due to the death of a partner was a mere change in the constitution of the firm if some old partners continued in the reconstituted firm. The amendment aimed to resolve the divergence of opinions among various High Courts on this issue. Upon examination of the partnership deed and the legal provisions, it was concluded that the firm automatically dissolved upon the death of a partner as per the Partnership Act. Therefore, two separate assessments were necessary, and the ITO had correctly assessed the income for both periods separately. The amendment to section 187 made the CIT's order erroneous, and the appeal was allowed, setting aside the order under appeal and restoring the assessment made by the ITO. In conclusion, the judgment addressed the interpretation of changes in the constitution of a partnership firm due to the death of a partner and the impact on assessment, highlighting the significance of the amendment to section 187 of the IT Act in resolving the controversy surrounding this issue.
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