Change in Constitution of a Partnership Firm - Assessment under section 187(1) - Retirement of a Partner and Introduction of another Partner can not be held as dissolution and reconstitution of a firm

Section 187(1) of Income Tax Act, 1961

Facts of the Case:

Two out of 13 partners retired and the firm continued with two new partners taken in the firm immediately on the next date and the business and liability having been taken over.

Returns by the Firm

For the assessment under consideration, the firm filed two returns for the two periods, i.e., one for the period April 1, 1977, to June 30, 1977, and the other for the period July 1, 1977, to March 31, 1978, claiming that two separate assessments be made for the two periods.

Action of the AO

The Assessing Officer observed that there was no change in the name, business, assets or liabilities of the firm and even the two newly admitted partners belonged to the same group to which the two retiring partners belonged. Even their share of profits were the same as those of the retiring partners. He, therefore, held that it was merely a change in the constitution of the firm and that merely by mentioning it to be a dissolution in the deed, did not conclusively prove it to be a case of dissolution of the firm. Accordingly, a single assessment for the whole year was made.

Decision of the CIT(A)

The action of the Assessing Officer was upheld by the Commissioner of Income-tax (Appeals).

Decision of the ITAT

However, the Tribunal by the impugned order dated August 30, 2004, while partly allowing the appeal, has held that when there is a specific agreement that the old firm stood dissolved, the Department is not justified in uniting them, irrespective of the fact that the same name, business, assets and liabilities are continued with.

Accordingly, it directed that two assessments for the two periods be made as claimed by the assessee.

Observation and Decision of the High Court

Except in a case where the firm is dissolved on the death of any of its partners if the conditions mentioned either in clause (a) or (b) are fulfilled or exist in the given case it will be treated as a change in the constitution of the firm only, the dissolution of the firm in the case of death of any of its partners has been taken out from a change in the constitution of the firm.

The case in hand is covered under section 187(1) of the Act and the Tribunal was not justified in deleting the addition of Rs. 2,00,155 on the ground that there was no question of any addition to be made in the hands of new firm and has ignored the provisions of section 187(1) of the Act, as two assessments could not be made separately for the two periods.

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COMMISSIONER OF INCOME-TAX AND ANOTHER Versus BHARAT STEEL ROLLING MILLS [2009 -TMI - 34054 - ALLAHABAD HIGH COURT]