9911796707
TMI Blog1962 (7) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... os 1 2 3 Rs. per cent. 1. T. Stanes and Company Ltd. 26,000 26 2. Stanes (Motors) South India Ltd. 25,000 25 3. P.W. Davis 15,000 15 4. M.P. Davis 25,000 25 5. A.J. Davis 9,000 9 Total 1,00,000 100 3. The duration of the partnership was agreed to be ten years from November 5, 1948. The following are certain other important clauses in the aforesaid deed, annexure A , clause 17. Clause 17.--If any partner shall-- (a) commit any breach of clause 15 or 16, or (b) commit any act of insolvency, or (c) do or suffer any act which would be lawful ground for the dissolution of the partnership, then, in any of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the dissolution. Clause 19.--Upon dissolution of the partnership in any event not otherwise herein provided for a full and general account of the assets, liabilities and transactions of the partnership shall be taken and the assets and property thereof shall with all convenient speed be realised and sold and the debts due to the partnership got in and the proceeds shall be applied in the first place in discharge of the liabilities of the partnership and the expenses of liquidating the same and realising the assets thereof and in the next place in payment to each partner or his representatives of any unpaid interest or profits coming to him including his share of the sum for the time being standing to the credit of the reserve fund and of the amount due to him in respect of capital and the surplus (if any) of the moneys realised as aforesaid shall be divided between the partners or their representatives in the shares in which the partners shall be entitled to the net profits of the said business and the partners or their representatives shall execute such instruments for facilitating and effecting the realisation and division of the assets of the partnership and for their mutu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking of accounts, the books running continuously for the full year to June 30, 1951. The following are the agreed computations for the next five years: Previous year Assessment year greed results 1 2 3 Rs. 30-6-1951 1952-53 up to 21-9-1950 810 loss From 22-9-1950 to 30-6-1951 97 30-6-1952 1953-54 11,572 Profit 30-6-1953 1954-55 37,661 30-6-1954 1955-56 1,26,261 30-6-1955 1956-57 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on the part of the said continuing partners hereinbefore contained each of the retiring partners as beneficial owner hereby assigns and releases unto the said continuing partners all their respective shares and interests of and in the said business of the said partnership hereby dissolved and the property, assets, credits and effects and goodwill thereof to hold the same unto the said continuing partners absolutely. Clause 7.--The continuing partners shall be at liberty to collect all the assets of the late partnership and to demand, sue to recover, receive and give full and effectual receipts and discharges for all debts and effects of or due or owing to or belonging to the late partnership and to settle all accounts relating to the said business and to compound for or release any debts or claims belonging thereto and to institute any actions or other proceedings for compelling, paying or delivery thereof and for the purposes aforesaid or any of them to use the name of the retiring partner upon indemnifying him against all costs and liability incurred by such use. 5. In pursuance of the aforesaid deed, annexure B , the capitals of the three retiring partners were taken ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accounts of none of these years were the profits or losses divided and allocated to the shares of the partners in the ratio stipulated in the dissolution deed. I find from the audited accounts that in the balance- sheet as on June 30, 1951, the loss of ₹ 9,521 pertaining to that accounting year has been carried forward to the next year along with the aggregate of the losses brought forward. The accounts disclosed a loss of ₹ 4,659 relating to the accounting year ended June 30, 1952, which has also been added to the deficit in the profit and loss account brought forward without allocation among the partners. The accounts of the subsequent two years showed net profits of ₹ 17,516 and ₹ 1,07,267 which were similarly credited to the deficit account without being transferred to the accounts of the partners. It was only in the accounts of the year ended June 30, 1955, that the credit balance in the profit and loss account was closed on transfer to the accounts of the respective partners. Under the rules the appellant has to certify that the profit or loss of the relevant previous year was divided or credited in the respective accounts of the partners. Inasmuc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es for the acquiring of shares of the retiring partners and for the division of the profits or losses for the subsequent years among the two partners. As stated above the Income-tax Officer has held that on September 21, 1950, an entirely new firm came into existence and this firm should have executed a fresh instrument of partnership and should have based its claim for registration and renewal of registration on this deed. The authorised representative contended that the deed, dated September 21, 1950, could either be considered to be a modification of the original deed or that it may be considered to be an instrument of partnership in itself. As discussed above, the deed of dissolution is more or less in modification of the original deed and in this view of the matter, it is possible to hold that there is unbroken continuity of the old firm. Alternatively, it is possible to construe the deed, dated September 21, 1950, as an instrument of partnership itself. It is now more or less settled that an instrument of partnership need not be in any particular form. The essence of such an instrument is that it should specify the identity of the partners and also lay down the manner in w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise are set out as questions Nos. 1 and 2 at the end of the statement. 19. For the full year ended June 30, 1951, as the previous year for assessment year 1952-53, the assessee made its return declaring a loss of ₹ 3,606. In addition, it also claimed that the share of the two continuing partners out of the losses determined for the earlier two assessment years 1950-51 and 1951-52 as set out in paragraph 8 supra, must also be carried forward to that year under proviso (e) to section 24(2). 20. The Income-tax Officer rejected the above basis of assessment returned by the assessee. In accordance with his decision that it was a new firm that had come into existence on September 22, 1950, he computed the profits at ₹ 2,463 of only the period September 22, 1950, to June 30, 1951, and refused to set off against it any part of the losses of 1950-51 and 1951-52 as claimed, since the old firm did not exist, and the firm now in question was a separate entity, the losses of the defunct firm could not be set off. The full details of the assessment are to be found in the latter part, annexure D aforesaid. 21. The assessee appealed to the Appellate Assistant Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 2. In our opinion, this contention is not well-founded. Section 24(2), proviso (e), would be attracted only where a change has occurred in the constitution of a firm. It is clear from the said proviso itself, that, where any person carrying on any business has been succeeded in such capacity by another person, the provisions of section 24 cannot be applied and the loss cannot be carried forward. In our consolidated order, dated November 21, 1958, in I.T.A. Nos. 7583 to 7586 and 7598 of 1957-58, we have held that the deed, dated September 21, 1950, operated as a dissolution of the firm and that there was not a mere change in the constitution thereof. We had, in our said order, made it clear that the old firm constituted by the earlier deed, dated 5th November, 1948, was at an end on the date of dissolution, viz., 21st September, 1950. 3. In view of this decision of ours, it cannot be said that there is a mere change in the constitution of the firm. The real position is that the new firm has succeeded to the business carried on by the erstwhile firm. In this view of the matter, we hold that the assessee is not entitled to the benefit of proviso (e) of section 24(2) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ective share capital and their profit-sharing ratio are set out herein below: Partners Share capital Profit-sharing ratio Rs. 1. T. Stanes Co. Ltd. 26,000 26% 2. Stanes Motors (South India) Ltd. 25,000 25% 3. Mr. P.W. Davis 15,000 15% 4. Mr. M.P. Davis 25,000 25% 5. A.J. Davis 9,000 9% Total 1,00,000 This partnership was for a fixed term of 10 years commencing from September 5, 1948. Clause 5 of the partnership instrument provides that the net profits of the partnership shall belong to and be divisible amongst the partners in the shares belonging to them in the ratio of the share capital contributed by the resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would result in a reconstitution of the firm. Clause 19 may also be set out. It is as follows: Upon dissolution of the partnership in any event not otherwise herein provided for a full and general accounting of the assets, liabilities and transactions of the partnership shall be taken and the assets and property thereof shall with all convenient speed be realised and sold and the debts due to the partnership got in and the proceeds shall be applied in the first place in discharge of the liabilities of the partnership and expenses of liquidating the same and realising the assets thereof and in the next place in payment to each partner or his representatives of any unpaid interest or profits coming to him including his share of the sum for the time being standing to the credit of the reserve fund and of the amount due to him in respect of capital and the surplus (if any) of the moneys realised as aforesaid shall be divided between the partners or their representatives in the shares in which the partners shall be entitled to the net profits of the said business and the partners or their representatives shall execute such instruments for facilitating and effecting the realisation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e continuing partners shall on the execution of this deed at once pay the retiring partners, Mr. A.J. Davis, a sum of ₹ 9,739-11-6, Mr. P.W. Davis, a sum of ₹ 16,367-10-9 and M.P. Davis, a sum of ₹ 27,277-13-0, being the amounts agreed upon between the retiring and the continuing partners as consideration for the purchase of the former's interest. The continuing partners further agree to pay the retiring partners up to November 4, 1958, from the time when the losses sustained by the partnership have been made good out of the profits of the carrying on of the business by the continuing partners in the future or if the said T. Stanes Co. Ltd. draw any commission from the business during the said period before previous losses have been made good, 2?% of the annual net profits, if any, of the business as certified by the auditors, Messrs. Fraser and Ross, annually to be shared between them in the proportion in which they were entitled to share profits under the said partnership deed, dated the 5th November, 1948. Clause 6 reads thus: In consideration of the said sums paid to the retiring partners by the continuing partners on the execution of this deed and of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from 22-9-1950 to 30-6-1951 97 loss 30-6-1952 1953-54 11,572 profit 30-6-1953 1954-55 37,661 profit 30-6-1954 1955-56 1,26,261 ,, 30-6-1955 1956-57 1,28,993 ,, There was no division and allocation of the loss incurred for the five years from July 1, 1950, to June 30, 1955. The losses commencing from 1950-51 were carried forward from year to year and it was only after the closing of the books for the year ended June 30, 1955, there was a division of profits between the two limited companies in the proportion of 51 per cent. and 49 per cent. For the assessment year 1952-53, two applications for registration of the firm were filed under section 26A. One was a renewal application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in respect of this year there has been a division of profits between the partners in the ratio of 51% and 49%, the shares to which they are entitled. The Income-tax Appellate Tribunal differred from the view of the Appellate Assistant Commissioner and held that there was in fact a dissolution, that the terms of the document dated September 21, 1950, could not be construed as bringing about an arrangement by way of reconstitution of the firm, that that instrument cannot be treated or construed as an instrument of partnership between the two limited companies and that registration should be refused on the short ground that the partnership sought to be registered is not evidenced by an instrument in writing. It is this view which has been challenged before us. The registration for the period prior to September 21, 1950, was refused on the ground that there was no distribution of losses between the partners. The dissolution and reconstitution of a partnership are two different legal concepts. The dissolution puts an end to the partnership, but reconstitution keeps it subsisting, though in another form. A dissolution followed by some of the erstwhile partners taking over the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d then continue to carry on the business of the firm, and such continuance does not involve the concept of the dissolution of the firm as originally constituted and the formation of a new firm by the other partners. Section 17(a) of the Partnership Act prescribes that the mutual rights and duties of the partners in the reconstituted firm remain (subject to the contract between the parties) the same as they were immediately before the change, as far as may be. We have now to address ourselves to the question of the proper interpretation of the so-called deed of dissolution dated September 21, 1950. Mr. S. Ranganathan, learned counsel for the department, laid considerable stress on the words dissolution and dissolved and late occurring in various parts of the instrument. Mr. Ramamani, learned counsel for the assessee, was not less insistent in harping upon the expressions continuing partner and retiring partners used throughout the instrument in support of his contention that the real intention of the parties was a retirement of three partners and a reconstitution of the firm and not a dissolution and a formation of a fresh partnership. In our opinion, the test of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wholly repugnant to dissolution. Now there cannot be both a dissolution and a continuance. But in the case of a retirement of a partner it is open to the outgoing partner to bargain for a share in the future profits of the firm after his retirement as consideration for his retirement. A clause of this description (clause 3 in the deed dated September 21, 1950) is so much against the grain of dissolution and is so harmonious with retirement of partners resulting in reconstitution that it should be taken as a circumstance indicating reconstitution. The absence of any fresh deed of partnership between the two surviving partners also indicates not a dissolution but a continuance of the old firm. We are unable to construe the provisions of this document as having effectuated a dissolution and in our opinion that document merely embodies the arrangement by which three of the partners retired from the firm. Learned counsel for the department does not dispute that if there was no dissolution in fact the articles of partnership dated November 5, 1948, read with the modification introduced under the document dated September 21, 1950, would sufficiently satisfy the requirement of law regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the losses attributable to the shares of the continuing partners. In respect of the loss of the assessment year 1951-52 sought to be set off in the assessment year 1955-56 we do not think that the assessee will be entitled to any relief in view of what has been pointed out by the Appellate Tribunal in its order. The Tribunal observes: The claim relates to the 1955-56 assessment. But in the intervening two years, 1953-54 and 1954-55, there were profits against which a portion of these losses now sought to be set off could have been set off. This the assessee failed to claim at the relevant time. This contention was not taken before the Appellate Assistant Commissioner and does not arise out of his order. The appeal is liable to be rejected on this ground. In our opinion, the assessee is clearly disentitled to have the losses of 1950-51 and 1951-52 set off against the income of the assessment year 1955-56 for the above reason set out by the Tribunal. Question No. 3 is therefore answered in favour of the assessee only in respect of the assessment year 1952-53 and against the assessee in respect of the other year 1955-56. As both the department and the assessee have partly succeeded ..... X X X X Extracts X X X X X X X X Extracts X X X X
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