1979 (6) TMI 88 - AT - Income Tax

Summary

Issues:
- Dissolution of a firm upon the death of a partner
- Continuation of business under a new partnership after dissolution
- Assessment of income for different periods based on firm dissolution

Analysis:
1. The appeal concerned the dissolution of a firm upon the death of a partner and the subsequent formation of a new partnership for the assessment year 1977-78. The AAC accepted the assessee's claim for separate assessments due to the dissolution of the earlier firm.

2. The deed of partnership from May 11, 1970, did not provide for the continuation of the firm after a partner's death. Section 42(c) of the Indian Partnership Act states that a firm dissolves upon the death of a partner unless otherwise agreed. The AAC found that a new firm was formed on June 14, 1976, following the dissolution due to the death of a partner.

3. The Revenue contended that despite no express provision for continuation, the surviving partners impliedly decided to continue the firm. However, the Tribunal disagreed, citing the lack of clauses like those in previous cases where implied contracts against dissolution were found.

4. The Tribunal noted that the absence of a clause in the new partnership deed specifying the continuation of the old firm indicated a new partnership. The books of the old firm were closed upon the partner's death, profits were divided, and a trial balance was prepared, supporting the dissolution and formation of a new firm.

5. Referring to a previous case, the Tribunal emphasized that the dissolution of the old firm and the formation of the new firm must be distinct. The principle applied in a case where partners retired and a new firm was formed the same day, indicating that the dissolution of the old firm must precede the formation of the new one.

6. Consequently, the Tribunal upheld the AAC's decision that the firm was dissolved upon the partner's death, leading to the formation of a new partnership. The appeal by the Revenue was dismissed, affirming the separate assessments for the two periods based on the firm's dissolution and reconstitution.