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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 ..... e assessment year if one of the partners dies or retires. Civil Appeal No. 1792(NT) of 1974 is an appeal by the assessee from the judgment and order of the Allahabad High Court dated December 22, 1972, answering the following question referred to it under section 256(1) of the Income-tax Act, 1961, hereinafter referred to as " the Act ", for the assessment year 1965-66 in favour of the Revenue and in the negative : " Whether, on the facts and in the circumstances 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 dissolve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear. In view of section 187(2) of the Act, it was obligatory according to the Tribunal and the Income-tax Officer to make a single assessment only on the assessee and to apportion the total income 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. 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er's heir automatically, by virtue of the terms of the deed, becomes a partner without any fresh agreement." According to the High Court, the aforesaid observation of the learned judge had not been endorsed by the Allahabad High Court in Pannalal Babulal v. CIT [1969] 73 ITR 503. While agreeing to the observations in Makerwal Colliery's case [1942] 10 ITR 422 (Lah), Oak C.J. and T. P. Mukherjee J. found themselves unable to adopt the view taken in Giridharilal Seetaram 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Act. The High Court was, therefore, of the view that the Tribunal was not right in holding that during the period covered by the constitution of the original partnership deed, the income was assessable in the hands of the assessee as a registered firm. The High Court accordingly answered the question in the negative. In consequence, the Revenue succeeded. The validity of this answer to the question has been challenged in this appeal by the assessee. Indeed, on this question, 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 provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Income-tax Officer refused to accept the contentions of the assessee and his main ground was that there was a change in the constitution of the firm within the meaning of section 187(2). Therefore, the assessee should have applied for registration and should not have remained content with the filing of the declaration under section 184(7) of the Act. Against the said decision, the assessee appealed and the Appellate Assistant Commissioner agreed with the conclusion of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in his account even though he had expired on March 9, 1963. The High Court noted that the Tribunal was of the view that the conduct of the partners clearly indicated that the firm had agreed not to carry on business and whatever was done after the death of Sarabhai was merely by realisation of certain outstanding dues in the course of dissolution of the firm in discharging certain obligations by completing the contracts entered into prior to the death of Sarabhai. The High Court 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n March 9, 1963, and thereafter there was no new partner in his place. Of course, the estate of Sarabhai as represented by his wife, Kanchanben, who was also a partner, got the benefit of the profits which went to the share of Sarabhai but Kanchanben got that amount as representing the estate of Sarabhai and not in her capacity as a partner of the firm. Under these circumstances, the provisions of section 187(2) of the Act could not be said to apply to the facts of the present case. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or registration of firms under the said Act. It is not necessary for the present purpose to set out in extenso all the provisions of this section. It may, however, be borne in mind that an application for registration of firm must be made which is evidenced by an instrument and such application may be made during the existence of the firm or after its dissolution. Sub-section (3) of section 184 stipulates that the application shall be made to the Income-tax Officer having jurisdiction 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 requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm, the assessment shall be made on the firm as constituted at the time of making the assessment. The said sub-section further provides that the income of the previous year shall, for the purpose of inclusion in the total income of the partners, be apportioned between the partners who, in such previous year, were entitled to receive the same ; and when the tax assessed upon a partner cannot be recovered from him, it shall be recovered from the firm as constituted at the time of making 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at is to say, the previous year which expired on November 4, 1964, the assessee had filed a declaration in Form No. 12 for the relevant assessment year 1965-66 under section 184(7) of the Act. We are of the opinion that in this case, on the death of Qamaruddin and the inclusion of Fariduddin, there was a change in the constitution of the firm. It did not dissolve the firm but brought about a change in the constitution of the firm. Fresh deed had to be executed under sub-section (8) of 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nion that the Tribunal took the correct view in the first case. In the aforesaid view of the matter, it must be held that the Allahabad High Court was in error in the view it took. The Tribunal was right. The appeal must be allowed and the judgment and order of the High Court must be aside. A large number of authorities were cited before us but we shall note some of them. But we are of the opinion that for answering the particular question, in view of the clear consequences that flow 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... say, death, retirement, incapacity of partners, alteration in the shares of the partners in the firm, etc. It was so mentioned in " Maxwell on the Interpretation of Statutes ", 10th edition, and observations appearing at page 76 of the said book. The said decision of the single judge was confirmed by a Bench decision of that court and is reported in Sandersons and Morgans v. ITO [1977] 108 ITR 954 and it was reiterated that if one of the partners dies or retires, there is change in the constitution 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ership law principles even under the Income-tax Act. It was accordingly held by the High Court that where the partnership deed of a firm did not contain any provision that the death of a partner would not dissolve the firm, one of the partners of the firm died in the middle of the accounting period and thereafter a fresh deed was executed under which the surviving partners took a fresh partner in the place of the deceased and continued to carry on the business, the case was one of succession 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 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act, 1922, required the Income-tax Officer to certify and register the deed itself and the registration of the firm would follow. That is not so under the Income-tax Act, 1961. The High Court referred to the proviso to section 187(2) and observed that it could not be, interpreted to mean that in every case where one of the partners died, the firm was and must be held to be dissolved for the purpose of registration under the Income-tax Act. The language of the proviso was clear and it stated 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 No ..... X X X X Extracts X X X X X X X X Extracts X X X X
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