1970 (11) TMI 4 - HC - Income Tax

Firm - change in the Constitution - whether separate assessment for the broken periods is necessary - if the case falls under section 187 separate assessments under section 188 is not required

Summary

Issues:
Assessment of a partnership firm after a change in its constitution for the assessment year 1963-64.

Analysis:
The case involved a registered partnership firm that underwent a change in its constitution in 1962, adding four minor partners while the original five partners continued. The firm's shares were restructured accordingly. The Income-tax Officer initially assessed the firm separately for the two periods before being directed by the Commissioner of Income-tax to redo the assessment for the whole year in one assessment. This decision was upheld by the Appellate Tribunal, leading to the reference question on whether a single assessment could be made for the entire period. The court examined the provisions of section 187 and section 188 of the Income-tax Act of 1961 to determine the appropriate assessment procedure.

The court noted that section 187 deals with a change in the constitution of a firm, specifying that assessment should be made on the firm as constituted at the time of assessment. In contrast, section 188 pertains to the succession of a firm by another firm, requiring separate assessments for the predecessor and successor firms. The counsel for the assessee argued that the observation by Hegde J. implied that every change in the constitution of a firm creates a new firm for assessment purposes. However, the court clarified that the key consideration is whether the case falls under section 187 or not, as even in cases of succession, separate assessment under section 188 is only applicable if section 187 does not cover the situation.

The court determined that the addition of minor partners and the alteration of shares in the firm constituted a change in the constitution falling under section 187(a). As a result, the assessment should be conducted under section 187, assessing the firm as reconstituted. While separate consideration of the two periods may be necessary for determining individual partners' shares of profit or loss, the overall assessment should be based on the reconstituted firm. Consequently, the court answered the reference question in the affirmative, supporting the assessment approach directed by the Commissioner of Income-tax and upheld by the Appellate Tribunal.

In conclusion, the court's decision clarified the distinction between sections 187 and 188 regarding the assessment of partnership firms following changes in their constitution. The judgment emphasized the importance of determining the applicability of section 187 in cases of constitutional changes to ensure the appropriate assessment methodology and allocation of profits or losses among partners.