1973 (1) TMI 15 - HC - Income Tax

Change in Constitution of Firm - Of the three partners, one died, remaining two and the son of deceased entered into partnership, whether it amounts to succession by new firm and whether it is merely a change in Constitution - No doubt it is true that on the facts of that case there was a provision in the partnership deed that on the death of a partner the firm shall not dissolve, but I fail to understand as to how this will affect the merits of their case, keeping in mind the view we have taken regarding the, interpretation of section 187 of the Income-tax Act, 1961. Therefore, this authority is also of no assistance to the learned counsel for the assessee

Issues Involved:
1. Applicability of Section 187(2) of the Income-tax Act, 1961.
2. Applicability of Section 188 of the Income-tax Act, 1961.
3. Interpretation of the dissolution of the firm under Section 42(c) of the Indian Partnership Act.
4. Assessment of income for the periods before and after the death of a partner.
5. Legal entity status of the firm post the death of a partner.

Detailed Analysis:

1. Applicability of Section 187(2) of the Income-tax Act, 1961:
The court focused on whether the provisions of Section 187(2) of the Income-tax Act, 1961, were applicable. The section defines a change in the constitution of a firm, stating that if one or more partners cease to be partners or new partners are admitted, and one or more of the original partners continue, it constitutes a change in the firm's constitution. The court concluded that the facts of the case, where one partner ceased to be a member due to death and his son was admitted as a new partner, fit the description of a change in the constitution under Section 187(2).

2. Applicability of Section 188 of the Income-tax Act, 1961:
The assessee argued that the case should be governed by Section 188, which deals with the succession of one firm by another. However, the court clarified that Section 188 applies only when there is a complete change in the firm's partners, meaning none of the original partners continue in the new firm. Since the two original partners continued in the new partnership, Section 188 was deemed inapplicable.

3. Interpretation of the dissolution of the firm under Section 42(c) of the Indian Partnership Act:
The assessee contended that the firm dissolved upon the death of one partner as per Section 42(c) of the Indian Partnership Act, which states that a firm dissolves on the death of a partner unless otherwise agreed. The court acknowledged this but emphasized that for income tax purposes, the provisions of the Income-tax Act take precedence. Thus, even if the firm dissolved under the Partnership Act, it would still be considered a change in the constitution under Section 187 of the Income-tax Act.

4. Assessment of income for the periods before and after the death of a partner:
The court addressed the issue of whether separate assessments should be made for the periods before and after the death of the partner. The Income-tax Officer had clubbed the income of the two periods and passed a single assessment order. The court upheld this approach, stating that since it was a change in the constitution of the firm under Section 187, a single assessment was justified.

5. Legal entity status of the firm post the death of a partner:
The court examined whether the firm continued as the same legal entity after the death of a partner. Citing previous judgments, it was held that a firm is treated as an independent unit for income tax purposes, and its identity survives reconstitution. Therefore, the firm remained the same legal entity despite the change in partners.

Conclusion:
The court concluded that the provisions of Section 187 of the Income-tax Act, 1961, were applicable to the case, and the assessment for both periods was justified. The question referred to the court was answered in the affirmative, in favor of the revenue, with costs. The court emphasized that the identity of the firm survives its reconstitution for income tax purposes, and the change in partners did not constitute the creation of a new legal entity under Section 188.

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