9911796707
TMI Blog2003 (9) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... ious year ending March 31, 1991. The respondent-assessee is a partnership firm engaged in the business of fertilisers, pesticides, etc. The said firm was originally constituted by a partnership deed dated March 2, 1981 (annexure B). The firm consisted of three partners, Sri P. T. Cheriyan, Mrs. Santha Benjamin and Mrs. Annie Thomas. It was granted registration and the same was being continued. However, two of the said partners, i.e., Mrs. Santha Benjamin and Mrs. Annie Thomas, had expressed their desire to retire from the partnership and gave notice accordingly. On June 14, 1990, a new partnership deed (annexure C) was executed between Sri P. T. Cheriyan, who was the partner in the original partnership deed, Sri P. B. Titus and Mrs. Mary Thomas as partners. For the assessment year 1991-92 the firm filed two separate returns, one for the period from April 1, 1990, to June 13, 1990, and the other for the period from June 14, 1990, to March 31, 1991. This was on the ground that on the retirement of the two partners of the firm as originally constituted the said partnership ceased to exist by operation of law and subsequently another partnership deed was executed by the remaining par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the constitution of the firm attracting the provisions of section 187(2) of the Act. It is also his contention that in such a case section 188 of the Act which provides for two separate assessments specifically excludes matters covered by section 187(2) of the Act. Senior counsel took us to the partnership deed dated March 2,1981, and submitted that clause 14 thereof clearly provides that the firm shall not be dissolved by reason of retirement or death of any partner and on the happening of any such event, the remaining partners shall be entitled to continue the business of the firm as before, subject to determination of the share of the retiring or deceased partner. He also took us to the provisions of the partnership deed dated June 14,1990, and submitted that the partners of the original firm, i.e., Mrs. Santha Benjamin and Mrs. Annie Thomas, retired from the said firm only as per the partnership deed dated June 14,1990, that new partners were inducted by the remaining partner only on the basis of clause 14 of the original partnership deed and, therefore, it is a clear case of change in the constitution of the firm as contemplated under section 187(2) of the Act. Senior cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving three months' notice in writing to the other partners". Clause 16 provides that, "the terms and conditions of this partnership deed could be altered, modified, varied, added or cancelled by any agreement arrived at between and signed by all the partners hereof". Another partnership deed dated June 14, 1990, was executed between Sri P. T. Cherian, Sri P. B. Tifus and Mrs. Mary Thomas. In the said partnership deed, in the recital portion, it is stated that Mrs. Santha Benjamin and Mrs. Annie Thomas expressed their desire to retire from the partnership and gave notice accordingly. It is also stated in the recital that the first partner, P. T. Cherian, decided to relieve Mrs. Santha Benjamin and Mrs. Annie Thomas from the partnership and to continue the business in partnership admitting Sri P. B. Titus and Mrs. Mary Thomas as partners. Here it must be noted that the partnership deed dated June 14, 1990, is not one of dissolution-cum-reconstitution. The said deed is a partnership between the continuing partner Sri P. T. Cherian and two new partners. This partnership deed, it must be noted, is one executed by the said three persons only as is evidenced from the opening paragraph and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the provisions of section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners, and, in that context, the Supreme Court observed thus: ". . . The fundamental principle of partnership, therefore, is that the relation of partnership arises out of contract and not out of status. . section 42 can be interpreted without doing violence either to the language used or to the said basic principle. Section 42(c) of the Partnership Act can appropriately be applied to a partnership where there are more than two partners. If one of them dies, the firm is dissolved; but if there is a contract to the contrary, the surviving partners will continue the firm. On the other hand, if one of the two partners of a firm dies, the firm automatically comes to an end and, thereafter, there is no partnership for a third party to be introduced therein, and, therefore, there is no scope for applying clause (c) of section 42 to such a situation. It may be that pursuant to the wishes or the directions of the deceased partner the surviving partner may enter into a new partnership with the heir of the deceased partner, but that would constitute a new partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etired on June 30,1970, there remained only one partner and as such the firm had ceased to exist, as one individual cannot constitute a partnership firm and that when the remaining partner who took over the business of the firm under the terms of the release deed dated July 1, 1970, executed by the four retiring partners, took three other partners for the purpose of carrying on the business that will not lead to the inference that the old partnership and the new partnership are one and the same entity, and there cannot be any continuation of the old firm to enable the assessing authority to make a consolidated assessment on the new firm for both the periods. It was also contended that section 187(2) of the Act does not alter the legal position that a single individual cannot constitute a firm. The petitioner had also relied on, inter alia, the decisions of the Full Benches of the Allahabad and Andhra Pradesh High Courts which according to it, will support the case pleaded. The Division Bench after considering the principles laid down in the said decisions observed that, even if the extinction of the old firm and the constitution of the new firm took place simultaneously, in law it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) allowed the appeal filed by the assessee but the Tribunal in appeal by the Department held that since G was a partner of the firm as initially constituted and continued to be a partner in the firm with a new partner, section 187 of the Act was attracted and section 188 would not apply. The High Court considered the question as to whether the facts and circumstances of the case attract section 187 of the Act or section 188 of the Act. The Division Bench noted that various High Courts have taken different views on the question arising in cases where after the death of a partner or partners, the business of the firm had been continued taking in new partners and in some of the cases, the deed of partnership stipulated that notwithstanding the death of a partner, the partnership is to be continued taking the heir of the deceased partner as a new partner. It was observed that a Full Bench of three judges of the Andhra Pradesh High Court in Addl. CIT v. Visakha Flour Mills [1977] 108 ITR 466, the High Court of Kerala in CIT v. Kelukutty [1972] 85 ITR 102, the Madhya Pradesh High Court in Vimal and Amur Talkies v. CIT [1982] 138 ITR 660, a Full Bench of the Punjab and Haryana High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions 'firm', 'partner', 'partnership', have the same meaning as assigned to them in the Indian Partnership Act, 1932. According to the definition, partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually 'partners' and collectively 'a firm' and the name under which their business is carried on is called the 'firm name'. The firm is not a legal entity, except in a very minor and limited sense for the purpose of the Civil Procedure Code and the Income-tax Act, but is only a collective or compendious name for all the partners. One of the basic elements of partnership is the agreement entered into between the persons concerned. In order that there should be an agreement there must at least be two persons willing to join as partners. Whatever be the legal consequence of one among the three or more partners dying or retiring, there can be no controversy that when one among the only two partners dies or retires, the partnership de jure and de facto ceases to exist. It may be that ultimately the surviving partner takes ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be a case of succession governed by section 188 of the Act. The High Court observed that even if there had been a stipulation for non-dissolution in the event of death of a partner the firm could not have been saved from dissolution because after the death of Jethalal only one partner was left and one man cannot constitute a firm. The Allahabad High Court in CIT v. Ram Bilas Purshottam Dass [1993] 200 ITR 461 was also concerned with a case of a firm of two partners, one of whom died and the partnership deed did not contain a contract to the contrary. The surviving partner took a new partner after a few days. The court observed that a contract to the contrary may prevent dissolution of a partnership notwithstanding the death of a partner and assure continuity of the firm, but the position is different when the firm consists of only two partners because the moment one of the two partners dies, the firm automatically comes to an end. In such circumstances it was held that the proviso to clause (a) of sub-section (2) of section 187 did not apply. The Delhi High Court in Sant Lal Arvind Kumar's case [1982] 136 ITR 379 where a partnership firm consisted of four partners of which one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Where there is, however, no agreement to treat the firm as continuing notwithstanding the death of a partner, the partners have no option to treat the firm as continuing. Under the Indian Partnership Act, 1932, the firm gets dissolved and the Income-tax Officer is not entitled to ignore this consequence. There is nothing in the language of section 187, 188 or 189, according to the High Court, which precludes the application of the partnership 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer, the partnership deed dated April 16, 1975, constituting the firm had effected only a change in the constitution of the old firm, and, as such, there is no scope to make the assessment under section 188. He accordingly made a single assessment for the whole year. Appeals filed by the assessee before the Commissioner of Income-tax (Appeals) and before the Tribunal ended in dismissal confirming the order of the assessing authority. The Division Bench considered the question whether the assessment made in terms of section 187 is sustainable or not. It was observed that the answer depends upon the construction of sections 187 and 188 read with section 170 of the Act. After adverting to the said provision it was observed that the provisions of sections 187 and 188 are concerned only with the person upon whom the liability for the tax can be imposed. Adverting to the provisions of section 187 of the Act it was observed that if a change in the constitution of the firm occurs in the course of the assessment, i.e., before the assessment is made, the firm which will be made liable to tax is the firm as constituted at the time of assessment. To say that there is a change in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is established that, during the relevant year of assessment, there existed two distinct and different firms, and the firm carrying on the business or profession was succeeded by the other firm. These principles shall be borne in mind while deciding the issue, namely, whether the assessment requires to be made under section 187 or under section 188." The Supreme Court in Empire Estate's case [1996] 218 ITR 355 mentioned above considered a case of a partnership consisting of three partners of which one died, there being no provision in the deed of partnership contemplating the continuance of the partnership in the event of the death of a partner, the partnership stood dissolved. No deed of dissolution was executed but the surviving partners executed a fresh deed of partnership for carrying on the business on and from January 13, 1974, and it mentioned that the earlier partnership had stood dissolved on January 12, 1974. The assessee filed two returns of income for the period June 1, 1973, to January 12, 1974, and the other for the period January 13, 1974, to June 30, 1974. The assessee contended that the earlier partnership had stood dissolved on the death of a partner on Janua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s attracted for there is a succession of one by another partnership. The Supreme Court also observed that the question is covered by the decision of the Supreme Court in Wazid Ali Abid Ali's case [1988] 169 ITR 761 mentioned above. Referring to a clause contained in the partnership deed which provided for continuation of a partnership business even after the death of a partner and the decisions rendered considering such a clause, the Supreme Court held that the death of a partner did not dissolve the partnerships and the businesses were continued by reconstituted partnerships. Here, it must be noted that this decision of the Supreme Court is one rendered in the context of the death of a partner and the partnership continued with the remaining partners but in the absence of a clause in the partnership deed providing for continuation of the partnership business even after the death of the partner, the Supreme Court has taken the view that there is an automatic dissolution of the partnership deed by operation of law and the continuation of the business by the surviving partners amounts to a different partnership business. The Supreme Court in such a situation has held that section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
