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TMI Blog1978 (12) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... a Mudaliar being admitted to the benefits of the partnership to the extent of 15% share. Admittedly, the partnership deed dated February 11, 1966, did not contain any provision that, in the event of any of the partners ceasing to be a partner, the partnership shall not stand dissolved, but shall continue. T. C. No. 497 of 1978 is concerned with a firm by name M/s. V. Muniswamy Mudaliar Company, which came into existence under deed of partnership dated September 4, 1965, consisting of V. Muniswamy Mudaliar with 40% share, D. Thiagasundara Mudaliar with 21% share, M. Govindaraja Mudaliar with 21% share and V. Munirathnam with 18% share. This partnership deed also did not contain a clause that the firm shall continue undissolved notwithstanding the death or retirement of any of the partners. On the death of Govindaraja Mudaliar on October 17, 1968, a new deed of partnership was drawn up on December 15, 1968, with effect from October 18, 1968, consisting of the following persons V. Muniswamy Mudaliar with 40% share, D. Thiagasundara Mudaliar with 20% share, V. Munirathnam with 20% share and M. G. Raman, the major son of the deceased, Govindaraja Mudaliar with 10% share, and M. G. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the partners who, in such previous year, were entitled to receive the same and (ii) 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. (2) For the purposes of this section, there is a change in the constitution of the firm (a) 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 (b) where all the partners continue with a change in their respective shares or in the shares of some of them. Section 188 of the Act reads : " 188. 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. " The question is, whether s. 187 of the Act applies at all. Subsection (2) of that section has more or less defined the expression " change in the constitution of the firm " for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Section 5 of the said Act says that the relation of partnership arises from contract-and not from status. The fundamental principle of partnership, therefore, is that the relation of partnership arises out of contract and not out of status. To accept the argument of the learned counsel is to negative the basic principle of the law of partnership. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contrary or by reason of any law, did not bring about the dissolution of the partnership. But we are not prepared to accept the further argument of the learned counsel for the revenue that for the purpose of section 187 even in cases where there is no contract to the contrary against the dissolution of the firm by death of a partner it will amount to a change in the constitution of the firm within the meaning of section 187(2)." The same question of all the partners excepting one retiring from the partnership and the reconstitution of the partnership with the surviving partner came to be considered by this court again in Mavukkarai (N.) Estate Tea Factory v. Addl. CIT [1978] 112 ITR 715. In that case, four out of five partners retired from the partnership on June 30, 1970, after executing a release deed under which the remaining partner, viz., T. K. Joghee Gowder, took over the rights and liabilities of the firm. On the same day, T. K. Joghee Gowder formed a new partnership with the same name as the old firm by taking in three new partners. The new firm filed two separate returns of income, one for the period September 1, 1969, to June 30, 1970, in respect of the old firm and fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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