1991 (7) TMI 170 - AT - Income Tax

Summary

Issues Involved:
1. Whether the CIT(A) erred in directing two separate assessments instead of one.
2. Whether the order of the ITO should be restored and the CIT(A)'s order canceled.

Detailed Analysis:

1. Whether the CIT(A) erred in directing two separate assessments instead of one:

The primary issue revolves around whether the firm should be assessed as having undergone a change in constitution or a dissolution followed by the formation of a new firm. Initially, the firm had three partners with specific profit-sharing ratios. Upon the death of Mannalal and the subsequent retirement of Dattulal, a new partnership deed was executed, retaining the same business premises and name but changing the partners and their profit-sharing ratios.

The ITO treated this as a change in the constitution of the firm and made a single assessment, combining the incomes of the two periods. However, the CIT(A) directed that two separate assessments be made, citing the absence of a clause in the original partnership deed that the firm would continue despite the death of a partner.

2. Whether the order of the ITO should be restored and the CIT(A)'s order canceled:

The Revenue argued that the firm was a family concern and that the new partnership deed was executed immediately after the death of Mannalal, indicating continuity. They also pointed out that the same business premises and licenses were used, and no intimation of dissolution was provided to the ITO, suggesting that the firm was not automatically dissolved upon Mannalal's death. They relied on the proviso under section 187(2) and various case laws to support their stance.

The assessee countered by highlighting the absence of a clause in the original partnership deed ensuring the firm's continuation upon a partner's death. They argued that the firm dissolved momentarily when Dattulal retired, and a new firm was formed with a new bank account and a different partner, indicating a genuine dissolution. They cited several case laws, including the Madhya Pradesh High Court's decision in CIT vs. Jasumal Devandas, to support their claim that the firm should be considered dissolved and succeeded by a new firm, necessitating two separate assessments.

Statutory Position and Case Law:

The Tribunal examined the statutory position and relevant case laws, including decisions from various High Courts and the Supreme Court. It noted that under the Partnership Act, a firm is dissolved upon a partner's death unless there is a contract to the contrary. The Tribunal considered the totality of facts, including the retrospective effect of the new partnership deed, the continuity of business, and the absence of account-taking upon Mannalal's death.

Conclusion:

The Tribunal concluded that the firm was reconstituted rather than dissolved. However, it acknowledged that even in cases of reconstitution, the income of the two periods should not be clubbed together, as this would lead to inequities in taxation. The Tribunal cited the Supreme Court's decision in Wazid Ali Abid Ali vs. CIT, which clarified that while the assessment order may be one, the income of the two periods should be assessed separately.

Final Decision:

The appeal was partly allowed. The Tribunal upheld the CIT(A)'s direction for two separate assessments but clarified that the income of the two periods should not be clubbed together, even if the assessment order is singular. This approach ensures fairness in taxation and aligns with the statutory provisions and judicial precedents.