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TMI Blog1979 (8) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... il, 1965. On the 7th May, 1965, another deed of partnership was executed by the surviving partners, namely, Ghanshyamdas Binani and the said Padma Binani, recording, inter alia, as follows : (a) The partnership carried on under the earlier deed dated the 17th December, 1963, was a partnership at will and on the death of Govardhandas Binani the partnership stood dissolved. (b) The surviving partners had agreed to become partners and continue the business of the old firm to be commenced immediately after the dissolution of the same. (c) The name of the new partnership would be Mathurdas Govardhandas. (d) The new firm would take over all assets and liabilities of the old firm. (e) The shares of the said Ghanshyamdas Binani and Padma Binani in the assets and profits of the new firm would be 4/5ths and 1/5th, respectively. For the assessment year 1966-67, the assessee filed two returns of income, one being for the period between the 1st November, 1964, and the 19th April, 1965, i.e., up to the death of the said Govardhandas Binani and the other being for the period from the 28th April, 1965, up to the end of the accounting period, i.e., the 24th October, 1965, and claimed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the provisions of section 187(2)(a) would be applicable and as such only one assessment for the whole year was rightly made? " At the hearing, learned counsel for the assessee contended before us that inasmuch as the deed dated the 17th December, 1963, constituting the first partnership did not provide for continuation of the firm on the of a partner, under s. 42(c) of the Indian Partnership Act, the first partnership stood dissolved on the death of the said partner on the 19th April, 1965. The new partnership no doubt came into existence immediately thereafter but it succeeded to the business of the first partnership and, two assessments ought to have been made on the two firms under s. 188 of the Act. It was further submitted that where there was dissolution of a firm on the death of a partner and a new firm came into existence with some of the partners of the original firm it would not be a mere change in the constitution of a firm and s. 187 of the Act would not apply. Learned counsel for the revenue contended on the other hand that Govardhandas Binani cease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business of the firm till 31st December, 1963, without any fresh agreement. On 31st December, 1963, another partner of the see retired and by a deed dated 14th May, 1964, a new partnership was constituted for four years. declaration was filed on the 29th June, 1964, for continuation of the earlier registration stating that there had been no change in the constitution of the firm up to the 31st December, 1964. For the assessment year 1964-6.5, the accounting period being the calendar year 1963, the ITO refused registration to the assessee and pawed an order under s. 184(4) treating the assessee as an unregistered firm on the ground that one of the partners had died during the accounting year and that the assessee has not submitted the original deed of partnership. The assessee's application for rectification of the said order and also an appeal therefrom were unsuccessful. In an application of the assessee under art. 226 of the Constitution, it was held by a single Bench of this court that the expression " change in the constitution of the firm " not having been defined either in the I.T. Act or in the Partnership Act, must be construed in its ordinary meaning and normally and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. This order was challenged in an application under art. 226 of the Constitution which ultimately came up before a Full Bench of the Allahabad High Court. By a majority judgment of the Full Bench, it was, inter alia, held as follows : (i) Section 187 of the I.T. Act, 1961, does not define " change in the constitution of the firm " but clearly contemplates the reconstitution of a firm under ss. 31 and 32 of the Indian Partnership Act and provides by way of abundant caution that even if only one of the partners of the original firm is retained in the reconstituted firm or where the same partners continued with only a change in their respective shares it will still be a reconstitution. (ii) But where a firm is dissolved either by agreement or by operation of law, the question of reconstitution does not arise and if another firm takes over the business it will be a case of, succession governed by s. 188 of the I.T. Act, 1961, even though some of the partners in the two firms are common. In the facts, it was held that the firm being initially constituted with two partners, after the death of one of them, the new firm could only succeed to the business of the old firm and the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artner would not bring about a dissolution of the partnership and, therefore, there were only successive changes in the constitution of the firm and s. 187(2) of the I.T. Act, 1961, was applicable. (f) Addl. CIT v. Visakha Flour Mills [1977] 108 ITR 466 (AP) [FB]. In this case, during two successive assessment years two of partners of a firm, the assessee, died. In each case, the surviving partners continued the business of the, firm with the sons of the deceased partners by drawing up fresh deeds of partnership in the same name and in the same place. In each of the said two assessment years, the assessee filed two returns and contended that on the death of the partner in each year the firm stood dissolved as there was no specific provision in the deeds providing for the continuation of the firm on such a contingency and assessment should be made under s. 188 of the I.T. Act. The ITO brought to tax the entire income of the firm in each of the assessment years under s. 187 of the Act. The AAC and the Tribunal upheld the decision of the ITO. reference from the order of the Tribunal was disposed of by a Full Bench of the Andhra Pradesh High Court. Construing the scheme in the I.T. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the Partnership Act came to an end. If a new firm was constituted thereafter, a new relationship came into existence and if the new firm continued the old business, it would be a case of succession under s. 188 of the Act. The High Court, however, held that where the deed did not expressly provide that the partnership would continue in the event of the death of some of its partners or even expressly provided for dissolution it could still be possible to infer from the facts and circumstances and the conduct of the parties that there was an agreement express or implied between the partners overriding the deed that in the event of the death of one of them the firm would not be dissolved. In the facts of that case, the revenue contended that there was such an agreement and the same could be inferred from, inter alia, the following facts (i) No dissolution deed was drawn up on the death of the partner. (ii) The assessee did not notify the bank or the Registrar of Firms of the dissolution of the firm. (iii) The rights and liabilities of the parties immediately on the death of the said partners were not determined and the same books and the same trading account were continued. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [FB]. It was held that s. 187 of the I.T.Act, 1961, would apply. (j) Addl. CIT v. Vinayaka Cinema [1977] 110 ITR 468 (AP) [FB]. In this case, during the relevant assessment year, one of the partners of the assessee, a partnership firm, died. Another partner retired on the same day and transferred his interest in the firm to a third party. The deed did not provide for the continuance of the firm in the event of the death of any of the partners. By another deed executed immediately thereafter a new partnership was constituted where seven partners of the old firm joined and two new partners were taken in. The new firm was registered and it continued the business of the old firm. In the relevant assessment year two separate returns of income were filed. The ITO held that there was only a change in the constitution of the firm under s. 187(2) of the I.T. Act, 1961. He clubbed the entire income and made one assessment. On an appeal, the AAC held that on the death of the partner the firm stood dissolved and accordingly two separate assessments had to be made on the two firms. This was confirmed by the Appellate Tribunal. On a reference, the majority of a Full Bench of the Andhra Pradesh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stitution of such a firm just because after the dissolution of the firm, by virtue of a new agreement between some of the partners of the dissolved firm, the business of the firm is continued and the new firm takes over the business of the old firm. It is possible to urge that, in the event of a firm being dissolved under the provisions of the Partnership Act, if some of the partners of the dissolved firm agree to restart the business by virtue of a new agreement, there is a newly constituted firm; but the words 'a newly constituted firm' which were present in section 26(1) of the 1922 Act are absent from section 187(1) of the 1961 Act. Under these circumstances, by a mere process of interpretation, it obviously follows that the basic concept underlying section 187 is a continuity of a firm as an entity. Once dissolution comes about, the provisions of section 187 can never apply." (k) Mavukarai (N) Estate Tea Factory v. Addl. CIT [1978] 112 ITR 715 (Mad). In this case, during the relevant assessment year four partners retired from a partnership firm executing a deed of release under which one remaining partner took over the rights and liabilities of the firm. On the same day, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o continues to carry on that business or profession, (a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession ; (b) the successor shall be assessed in respect of the income of the previous year after the date of succession ...... " 187. (1) Where at the time of making an assessment under section 143 or section 144 it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment: Provided that (i) the income of the previous year shall, for the purposes of inclusion in the total incomes of the partners, be apportioned 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights." From the aforementioned sections of the Indian Partnership Act, clear indications are found as to the circumstances under which a firm is reconstituted and also when a firm stands dissolved. If there be a contract to the contrary, whatever be the contingency, a firm will not stand dissolved under s. 42 of the Indian Partnership Act. The remaining partners or some of them may carry on the business of the firm by themselves or along with other persons inducted as new partners. This will be a reconstitution of the firm. But if the firm is dissolved then there is no question of its reconstitution. What comes into existence in its place is a new firm which may take over the business of the old firm. The scheme for assessment of firms in the I.T. Act as appears from the sections quoted as aforesaid shows that different procedures are laid down covering three different contingencies: (a) a change in the constitution of the firm, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nayaka Cinema [1977] 110 ITR 468, which have laid down that if by operation of law a partnership is dissolved and thereby ceases to exist there can be no question of a change in its constitution and s. 187 of the Act would apply only where the firm continues after a change in its constitution. With respect we are unable to accept the contrary view taken by the Punjab and Haryana High Court in Daram Pal Sal Dev [1974] 97 ITR 302, the earlier Full Bench decision of the Andhra Pradesh High Court in Visakha Flour Mills [1977] 108 ITR 466 and the majority decision of the Full Bench of the Punjab and Haryana High Court in Nandlal Sohanlal [1977] 110 ITR 170. The decision of this court in Sandersons Morgans [1973] 87 ITR 270, in our view, is not a decision on the question involved in the present reference. In that case, the deed provided that the death or retirement of any of the partners would not dissolve the partnership. During the relevant accounting period one of the partners had died and thereafter without a fresh deed being executed it was contended by the firm that there had been no change in the constitution of the firm and that the earlier registration of the firm continue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the surplus valued, determined and paid has no relevance to and cannot affect the dissolution of the firm, if, in law, the firm is already dissolved. It has been found as a fact that separate accounts for profits and losses for the relevant accounting periods were made. The fact that the new firm applied for continuation of the registration on the basis of a change in constitution cannot also alter the legal position. That the partners of the new firm carried on the same business in the same name with the same set of books must be held to be a decision of the surviving partners. From such conduct and from the aforesaid facts, it does not follow that there was an implied agreement between all the partners of the old firm during their lifetime to continue the firm in the event of the death of any of them. We respectfully agree with the decision of the Gujarat High Court in Harjivandas Hathibhai [1977] 108 ITR 517 on this point. From the facts relied on by the revenue, it cannot be inferred that there must have been an agreement between all the partners of the old firm during their lifetime that the said firm will not be dissolved on the death of any of them. For the reasons afor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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