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TMI Blog1994 (10) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the deed of partner ship contained the following three clauses : " 17. That if any party desires to retire from the partnership business, he shall have to give at least three months' notice to the remain ing partners and can retire while settling his accounts at the close of the accounting year and in so doing the outgoing party shall not be entitled to the rights or value of the goodwill of the partnership business. 18. That the partnership being at will, it may be dissolved by the mutual consent of all the partners hereto. 19. That in the event of death of any party, the partnership shall not be dissolved, but the heir or heirs of the deceased partner shall be entitled to step into his place in the partnership business. " It appears from the preamble of the deed of dissolution dated May 2, 1969, that on account of some differences between the partners, they decided to dissolve the firm. Accordingly, on May 2, 1969, the partners of the firm drew two deeds--one of them was the deed of dissolution of the firm with effect from April 30, 1969. By this dissolution deed, all the assets and liabilities of the firm were to be taken over by the two partners and the other partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms of the contract concerning the partnership, the language of section 187(2) could not be considered to be wide enough to authorise a single assessment on the successor-firm under section 187(1) of the Act. On account of this difference of opinion, the matter was referred to the Third Member, who agreed with the view taken by the Accountant Member. Thus, by a majority view, the Tribunal held that the income of the old and the newly formed firm should be assessed separately for the aforesaid two periods and the tax liability determined accordingly. Hence, the present reference. On the above facts, the point referred for our opinion is whether the income earned by the old dissolved firm is to be clubbed with the income of the newly constituted firm and assessed as such in the hands of the reconstituted firm. To us, the matter appears to be simple in that it is not a case of continuation of the old firm, to which only section 187 of the Act would be attracted but of dissolution of the old firm on execution of the dissolution deed and the emergence of a new distinct firm under a new partnership deed executed on May 2, 1969. As such the answer to the question has to be in the aff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontention that it was a case of mere retirement. The prime question is not whether some of the old partners also happen to be partners in the newly constituted firm but whether the old firm continued to exist or is finished and instead a new firm came into existence. Merely because some partners of the old dissolved firm also became partners in the new firm, it cannot be said that it is a continuation of the old firm. The old firm stood dissolved on execution of the dissolution deed. A partnership is a relation between the persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. The relationship between them is essentially contractual. On dissolution of the firm on May 2, 1969, this relationship terminated. It could not continue. Of course, it was open to some of them, as in the instant case, along with others to enter into a new relationship constituting a new firm. Such a firm cannot be said to be a continuation of the old dissolved firm or to have been reconstituted under section 187(2) of the Act but the formation of a new firm succeeding the old firm, falling within the ambit of section 188 of the Act. The second content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this decision and the said two Full Bench decisions of the same High Court as under (at page 777) : " CIT v. Shiv Shanker Lal Ram Nath [1977] 106 ITR 342 is a Bench decision of the Allahabad High Court which held that in a case where a 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 a 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. The same High Court in a Full Bench decision of five judges held that it was well-settled that on the death of a partner, the constitution of the firm changes. It observed that if a partner dies and is replaced by a legal representative, there is a change in the constitution of the firm and the new firm will be liable in respect of the income derived from the old firm. The Full Bench suggested that after the reconstitution, the firm becomes a distinct assessable entity, different from the firm before its reconstitution. It observed that two different assessment orders had to be passed, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reconstitution and that the income derived by the old firm ought to be assessed in the hands of the new firm separately and without clubbing it with the income derived by it after reconstitution. The said decision having been dealt with specifically and then approved by the Supreme Court, we are of the opinion, that it must be accepted as laying down the correct law and is on all fours to the facts of the present case. Even otherwise, the ratio of the judgment of the Supreme Court in Wazid Ali's case [1988] 169 ITR 761 supports the majority view taken by the Tribunal. Before parting with the case, we may also deal with the last contention urged by Mr. Gupta, that the ratio of the decision in Sant Lal Arvind Kumar's case [1982] 136 ITR 379 (Delhi) is not applicable on the facts instant case. The pronouncement of the Supreme Court in Wazid Ali's case [1988] 169 ITR 761, wherein the decision of this court in Sant Lal Arvind Kumar's case [1982] 136 ITR 379 (Delhi) has also been considered and approved, is very clear and leaves no scope for any doubt that the point in issue, viz., whether in a situation, as prevailing in the instant case, it would be a case of succession governed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of assessment to income-tax, it was held as follows (at page 389) : " The Legislature could have easily said, but did not say, that the firm in the circumstances set out in section 187(2) shall be deemed to continue to exist with only a change in the constitution notwithstanding that under any other law in force it may be considered to have got dissolved on the death of a partner, etc. Not only is there no deeming provision contained in section 187, the language of that section, particularly, sub-section (2), clearly envisages the continued existence of a ' firm '. It talks of ' a ' firm and ' the ' firm and it also postulates that there are common partners before or after the change that is referred to there. This language clearly envisages that the provision comes into operation and applies only where there is in the eye of law a firm with continued existence and not to a case where under the law one firm has ceased to exist and another has come into existence. It appears to us that to import any such concept in section 187 would be to travel beyond the ordinary and natural meaning of the words used in the context of the partnership law that is clearly applicable and that h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ype that section 188 appears to have used the words above referred to. The intention of these words is that merely because there is a change in the constitution of the firm, it should not be argued that there is a succession of one set of persons by another because such a case would be really covered by section 187. We, therefore, think that the language of section 188, though creating a mild ambiguity, is not merely not inconsistent or contradictory but is only intended to clarify the meaning of section 187 and to exclude the possibility of the applicability of the common law doctrine regarding the personality of a firm even in cases of mere change in the constitution. " While considering this decision in Wazid Ali's case [1988] 169 ITR 761, the Supreme Court observed thus (at page 779) : " 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. " From the above observations of the Supreme Court, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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