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TMI Blog1987 (11) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case, the Tribunal was justified in holding that for the period covered by the old constitution, the income was assessable in the hands of the assessee as a registered firm ? " For the assessment year 1965-66, the relevant previous year commenced on November 17, 1963, and ended on November 4, 1964. The assessee was a partnership firm styled as Messrs Wazid Ali Abid Ali of Phulpur in the district of Azamgarh. It was constituted under a deed of partnership dated March 17, 1959, with 17 members. The said deed provided, inter alia as follows: " That where the deed is silent, it shall be governed by the Indian Partnership Act save and except that on the death or demise of any partner, the firm shall not be dissolved but shall be carried on with the remaining partners and that heir and representative of the deceased partner who resides in India on such terms and conditions to which they mutually agree." On June 4, 1964, one of the partners, Qamaruddin, died and his son, Fariduddin, joined the firm as a partner. New deed of partnership evidencing the change in the constitution of the firm was not executed before November 4, 1964. The assessee filed a declaration in Form No. 12 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emaining part of the previous year. Thereupon, the aforesaid question was referred to the High Court. The High Court was of the view that on the death of Qamaruddin on June 4, 1964, and on the entry of Fariduddin, there was a change in the constitution of the firm. According to the High Court, by virtue of section 42(c) of the Indian Partnership Act, 1932, a firm was dissolved by the death of a partner but as the section provided, that was subject to the contract between the partners. The High Court was of the view that clause 7 of the partnership deed dated March 17, 1959, specifically stipulated that the firm would not be dissolved on the death of a partner but it would be carried on with the remaining partners and such heir of the deceased partner who resides in India on the terms and conditions to which they mutually agree. The High Court was of the view that if there was any heir of the deceased partner who resides in India and agrees with the surviving partners on the terms and conditions on which he could be admitted to the partnership, the firm would not be dissolved. The High Court was further of the view that the condition that there should be mutual agreement between th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bros.' case [1949] 17 ITR 282 (Orissa) that on the death of a partner, his successor would become partner of the firm automatically. It was open to the heir, according to their decision, to join or not to join the partnership. He was not bound to do so. In that view, application for renewal of registration signed by the surviving partners and the son of the deceased partner could be rejected because the constitution of the firm was no longer reflected in the instrument of partnership. The High Court in the instant case was of the view that the Tribunal was right in holding that the inclusion of Fariduddin as a partner upon the death of Qamaruddin resulted in a change in the constitution of the firm and it could no longer be given the continued benefit of registration on the basis of the original partnership deed. The High Court was of the view that the next question was whether the. Tribunal was also right in holding that the assessee was entitled to the continued benefit of registration in respect of the profits up to June 4, 1964, that is to say, the period during which Qamaruddin remained alive. According to the High Court, it was clear that the continued benefit of registration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion, divergent views have been taken by different High Courts as we shall presently notice. Civil Appeal No. 609 (NT) of 1975 is an appeal by certificate granted by the High Court of Gujarat and admitted by this court. This is an appeal from the High Court of Gujarat at the instance of the Revenue for the assessment year 1964-65. The following two questions were referred to the High Court of Gujarat : " (1) Whether, on the facts and circumstances of the case; there was any dissolution of the partnership on the date of death of Shri Sarabhai Chimanlal and that, therefore, there should be separate assessment till the date of his death ? (2) Whether, on the facts and circumstances of the case, the provisions of section 187(2) apply to the facts of the case ? " The facts involved in the said appeal were that the assessee was partnership firm. The firm was granted registration in the preceding year 1963-64 under the Act. Originally, the firm consisted of five partners and one of the partners was Sarabhai Chimanlal. Sarabhai died on March 9, 1963. The business of the firm was in executing contracts entered into with the Railways for handling of goods at various stations and also s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Officer and dismissed the appeal. The assessee appealed to the Appellate Tribunal. The Tribunal came to the conclusion that there was a dissolution of the partnership on March 9, 1963, and that conclusion was drawn from the various circumstances which the Tribunal took into consideration. Then, at the instance of the Revenue, reference was made to the High Court on the aforesaid two questions mentioned hereinbefore. The Tribunal had negatived the contention that section 187(2) of the Act applied to the facts and circumstances of the case. The High Court took into account two clauses in the background of the partnership deed. According to the Tribunal, that the balances were completely struck and carried to a new set of books was an important circumstance and evidence to find out whether the parties did want to bring about a dissolution. The Tribunal was of the view that by virtue of clause 8 of the partnership deed the death of a partner would not bring about a dissolution automatically, yet, by mutual consent of the parties, which could be inferred from the facts, the firm has been dissolved. The High Court, however, noted that the primary circumstance was that the boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt noted that there were two other circumstances which were pointed out. One was that no new deed of partnership was executed after Sarabhai's death nor was any application made for registration by the surviving partners. The application contemplated by section 184(7) of the Act was filed in connection with the period up to March 9, 1963, and it was also pointed out before the High Court that the major source of profit was from the business mentioned in set No. 1, that is, Sabarmati Railway contract, and actually in other accounts, losses were being incurred or not much profit was being earned in the business set out in set No. II and set No. III. After noting these facts, the High Court was of the view that the important thing was the intention of the partners and, referring to the different clauses, the High Court was of the view that the conclusion of the Tribunal that the partners had by mutual agreement decided to dissolve the firm with effect from March 9, 1963, was a correct and justified one and, therefore, the Tribunal was also justified in holding that the rest of the activities between March 9, 1963, and the end of the accounting period, that is, till the end of Samvat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. In the premises, the High Court answered both parts of the first question in the affirmative and in favour of the assessee. As to the second, the High Court answered it in the negative and in favour of the assessee. The High Court granted the certificate as mentioned hereinbefore to appeal to this court. The real question with which we are concerned in both these appeals is, therefore, when there is death of a partner within a previous year in the case of a registered firm, what happens ? In order to appreciate the controversy in this case, it is necessary to have a perspective of the scheme of the Act in the assessment of firms. Under the scheme of the Act, assessment of firms has been provided for in Chapter XVI and it can be found in sections 182 to 189 of the Act. Section 170 of the Act which is relevant in this connection provides succession to business or profession and stipulates that where a person carrying on any business or profession or, such person hereinafter in that section being referred to as the predecessor, has been succeeded therein by any other person who continues to carry on that business or profession, the predecessor shall be assessed in respect of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to assess the firm, and shall be signed by all the partners and in the case of dissolution by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased. It further stipulates that the application shall be made before the end of the previous year for the assessment year in respect of which registration is sought. The proviso to sub-section (4) also provides that the Income-tax Officer may entertain an application made after the end of the previous year, if he is satisfied that the firm was prevented by sufficient cause from making the application before the end of the previous year. The other requirements of the application and the mode and manner of making it as set out in other sub-sections are not relevant for the present purpose except sub-section (7) of section 184 which provides that where registration is granted to any firm for any assessment year, it shall have effect for every subsequent assessment year : provided there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king the assessment. Sub-section (2) of section 187 provides that for the purposes of this section, that is to say, section 187, there is a change in the constitution of the firm, if one or more of the partners cease to be partners or one or more new partners are admitted, in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change; or where all the partners continue with a change in their respective shares or in the shares of some of them. Section 188 deals with succession of one firm by another firm. It provides that where a firm carrying on a business or profession is succeeded by another firm, and the case is not one covered by section 187, separate assessments shall be made on the predecessor firm and the successor firm in accordance with the provisions of section 170. It may be mentioned that a proviso to sub-section (2) of section 187 had been inserted by the Taxation Laws (Amendment) Act, 1984, with retrospective effect from 1st of April, 1975. It provides that nothing contained in clause (a), that is to say, indicating where the change in the constitution of the firm is supposed to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 184. This follows from an analysis of the different sections of the Act. The application was not filed for the whole of the assessment year and so, for part of the assessment year, the firm was registered and for the rest, the firm was not registered. The Tribunal held that the assessee would be entitled to the benefit of registration up to June 4, 1964, that is to say, a part of the previous year. The Tribunal further held that the total income be apportioned between the partners who were entitled to receive the profits accordingly as they were entitled to share the profits, the firm being assessed as a registered firm in respect of the profits ending on June 4, 1964, and as an unregistered firm in respect of the profits for the remaining part of the previous year. In our opinion, this conclusion is correct. The High Court has held that there is no warrant for this view. We are unable to agree. As a matter of fact, an analysis of the different sections of the Act leads to that conclusion and there is no contrary provision in the Act. Such a conclusion is logical and equitable and would do justice to both the Revenue as well as to the assessee. Our attention was not drawn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow from the analysis of the sections, it is not necessary to be bogged down by decisions. We may, however, refer to Stroud's judicial Dictionary, fourth edition, pages 412-414, where the meaning of the expression "cease " has been analysed from different angles. When and how does a partner cease to be a partner has, however, to be determined in the context of a particular set of facts. It is not necessary to refer to the decision in Rex v. General Commissioners of Income-tax for the City of London [1942] 24 TC 221 (HL), where the shares in an erstwhile partnership business were apportioned in a particular manner. These, though throwing light, however, are non sequitur for the issue before us. CIT v. Shiv Shanker Lal Ram Nath [1977] 106 ITR 342 is a Bench decision of the Allahabad High Court which held that in case where firm is reconstituted, the old firm ceases to exist. It was observed by the court that section 187 of the Act even by implication does not create fiction that the income derived by the old firm becomes the income of the reconstituted firm. The High Court held that the Tribunal was right in holding that after reconstitution, it becomes a separate assessable unit. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitution of the firm even if there is no dissolution. This decision was also noted in a Bench decision of the Calcutta High Court in Joshi and Co. v. CIT [1986] 162 ITR 268 at page 280. The Full Bench of the Madhya Pradesh High Court in Girdharilal Nannelal v. CIT [1984] 147 ITR 529, held that any matter for which provision was made in the Income-tax Act, 1961, was to be governed by it, notwithstanding anything different or to the contrary contained in the general law relating to that matter. It was further held that in the case of a change in the constitution of a firm during the accounting year, the income earned by the firm before such change was to be clubbed with the income earned after such change and a single assessment had to be made on the firm for the entire accounting period. On an analysis of the different sections of the Act, we are unable to agree with this conclusion. The Delhi High Court, however, held in the case of CIT v. Sant Lal Arvind Kumar [1982] 136 ITR 379, that section 187 of the Income-tax Act came into operation and applied only when there was in the eye of law a firm with continued existence and not to a case where under the law, one firm had ceased ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and not one of change in the constitution and separate assessments had to be made in regard to the incomes. With respect, we agree that where in a case, there is a change in the constitution of the firm by taking of a new partner and the old firm is succeeded by a new firm then, in such a case, there might be succession and there could be two assessments as contemplated under section 188 of the Act. We accept the reasoning of that decision. A large number of decisions were referred to us as indicating divergent views. The view which found favour with the Tribunal in the instant case was accepted more or less by the Madhya Pradesh High Court in Dungarsidas Kaluram v. Addl. CIT [1981] 132 ITR 526, Ganesh Dal Mills v. CIT [1982] 136 ITR 762, by the Full Bench of the Allahabad High Court in Dahi Laxmi Dal Factory v. ITO [1976] 103 ITR 517, by the Gujarat High Court in Addl. CIT v. Harjivandas Hathibhai [1977] 108 ITR 517, by the Orissa High Court in 1. Ramakrishnaiah & Sons v. CIT [1978] 111 ITR 296, by the Madras High Court in Tyre soles (India), Calcutta v. CIT [1963] 49 ITR 515 and Mavukkarai (N.) Estate Tea Factory v. Addl. CIT [1978] 112 ITR 715. Our attention was, however, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that nothing in clause (a) of section 187(2) of the Act should apply to a case where a firm was dissolved on the death of any of its partners. In the facts of this case, before the High Court, it was held by the High Court that the assessee-firm was not dissolved on the death of B, one of its partners. Under the terms of the deed, one of the heirs of the deceased partner was inducted as a partner in the firm in respect, and to the extent, of the share and interest of the deceased partner. Hence, there had been a change in the constitution of the firm. It was held that the assessee was entitled to registration for the assessment year 1976-77 on the strength of its application made in Forms Nos. 11 and 11A and on the strength of the new deed of partnership executed after the end of the accounting year. We are in agreement with the views expressed in the said decision. It may, however, be mentioned that so far as the High Court had held that the assessee-firm was not dissolved on the death of one of the partners in view of the terms of the partnership deed, but there is a change in the constitution of the firm, the High Court was right. Whether the assessee was entitled to registr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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