Inapplicabilioty of Sec.197(2) in case of firm having two partners where one dies. - Income Tax - 1430/CBDT

INSTRUCTION NO. 1430/CBDT Dated: November 20, 1981 The Board recently came across a case of firm, where the question arose as to one composite assessment to be made in the case of a firm having two partners of which one died in the course of the accounting year and the firm got reconstituted thereafter with other persons as partners. 2. The brief facts were:- The firm had two partners A B. A died during the account year and B joined hands with two more partners C D and continued to run the business in the same name and style. The ITO relied on the provisions of sec.187(2)(a) and held that there was only a change in the constitution of the firm. He accordingly framed only one assessment under as provided u/s.187(1) for the whole of the year. The matter went up to the High Court. The High Court relied on an earlier decision of the Supreme Court in CIT VS Govind Ram Sugar Mills (57 ITR 510) and decided the case against the Department. As per the ratio the Supreme Court's decision, u/s.42(c) of the Indian Partnership Act in the case of partnership consisting of only two partners no partnership remains if one of the partners dies and such a firm automatically stands dissolved on the date of death. 3. As there were conflicting views by different High Courts, the matter was examined in the Board's office in consultation with the Ministry of Law who have advised that wherever in the case of a firm consisting of only two partners one of the partner dies, the firm should ipso facto be treated as dissolved on the date of death of the partner and if the surviving partner continues the same business in partnership with some other persons the provisions of sec.197(2) will not apply. In other words two separate assessment orders have to be passed for the two periods in such cases. 4. This advice of the Law Ministry dealing with the approach to be followed in respect of assessments on firms, having 2 partners only, may please be brought to the notice of all officers working under your charge for their information and guidance.