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TMI Blog1979 (8) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... 256(2) of the Act. The brief and undisputed facts of the case relevant for answering the reference are these : M/s. Sangam Silks, Bangalore, the assessee, is a partnership firm. The assessment year concerned is 1971-72. During the relevant accounting year ending March 31, 1971, there was a reconstitution of the firm on June 12, 1970. Prior to June 12, 1970, the firm consisted of three partners, namely, V. Pandurangaiah, G. Srinivasulu Shetty and P. R. Sathyanarayana Shetty. On June 12, 1970, P. R. Sathyanarayana Shetty went out of the firm by executing a release deed. On the same date two other partners entered into the partnership firm. They are P. S. Ramachandra Shetty and K. N. Srinivasa Shetty. Thus, the new firm consisted of four partners out of whom two were partners prior to June 12, 1970. The firm continued its business during the accounting year. For the assessment year 1971-72 the firm filed two separate returns, one for the period commencing from April 1, 1970 ; to June 12, 1970, and another for the period commencing from June 13, 1970, to March 31, 1971. The ITO made a single assessment on the reconstituted firm clubbing the income for both the periods. Aggrieved by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required and accordingly we reframe the question as follows : " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the action of the Income-tax Officer in making one assessment for the period from April 1, 1970, to March 31, 1971. on the assessee or whether the Tribunal should have held that the Income- tax Officer should have made two separate assessments, one for the period from April 1, 1970, up to June 12, 1970, the date of reconstitution of the firm, and another assessment for the period from June 13, 1970, up to March 31, 1971?" In order to appreciate the two contentions raised for the assessee, it is necessary to set out the provisions of ss. 187 and 188 of the Act. They read thus ; " 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th their respective shares or in the shares of some of them, it shall be construed as having brought about a change in the constitution of the firm. Section 188 of the Act provides that in cases where a firm carrying on a business or profession is succeeded by another firm and the case is not one covered by s. 187 of the Act, separate assessment shall be made on the predecessor firm and the successor firm in accordance with the provisions of s. 170 of the Act. In the present case, as can be seen from the facts of the case, only one of the three partners of the firm went out on June 12, 1970. On the same date two other partners got into the partnership. The resultant position was two partners of the firm before the change continued to be partners of the firm along with two other new partners. Therefore, this is a case of change in the constitution of the firm and it squarely falls under the provisions of s. 187(2) of the Act. Learned counsel for the assessee, however, contended that it is only in cases where one or more partners cease to be partners or one or more partners are admitted, the case comes under the description of " change in constitution " given in sub-s. (2) of s. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the sole object of sub-s. (1) of s. 187 was to make the reconstituted firm liable for payment of tax by the firm before its reconstitution and not to include the income of the firm before its reconstitution in the income of the firm after its reconstitution. In support of hit submission he relied on the decision of a Division Bench of the Allahabad High Court in CIT v. Shiv Shanker Lal Ram Nath [1977] 106 ITR 342, wherein the facts were very similar to the facts of this case. There, it was held that s. 187 of the Act, even by implication, did not create a fiction that the income derived by the old firm becomes the income of the reconstituted firm, but the section made the new firm liable to be assessed in respect of the income derived by the old firm. Their Lordships noticed the difference between s. 188, which provides for making separate assessment in the case of succession of one firm by another not covered by, s. 187 and also s. 187(1) of the Act which requires the making of an assessment on the reconstituted firm, and held that merely because there is no provision in s. 187 for assessing two different persons as in s. 188, it does not follow that s. 187 contemplates on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the assessment of the income of the firm. Where the firm is dissolved, but the business is not discontinued there being change in the constitution of the firm, assessment has to made under section 26(1), and if there be succession to the business, assessment has to be made under section 26(2). The provisions relating to assessment on reconstituted or newly constituted firms, and on succession to the business are obligatory." The above observations equally apply to the provisions of Chapter XVI of the Act and particularly to ss. 187 and 188 of the Act, which correspond to sub-ss. (1) and (2) of s. 26 of the Indian I.T. Act, 1922. Therefore, the object of s. 187 is to treat the reconstituted firm same as the firm before its reconstitution notwithstanding the change of one or more partners. Obviously, this section is aimed at prevention of evasion of the liability of partnership firms to pay tax on the basis of the total income of a given year by merely substituting one or more partners in the middle of the year and creating two or more taxable entities and filing separate returns in the names of such firms. Section 187, therefore, provides that the reconstituted firm existing at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that any of the changes in the constitution of a firm of the nature mentioned therein brings into existence a new firm. Further, in the case of Karupukula Suryanarayana Shetty [1973] 92 ITR 141 also, reliance was placed for the therein on the said observation and the Division Bench held that that decision did not lay down that whenever there is a change in the constitution of a firm two separate assessments are to be made. There is no substance in the submission made for the assessee that s. 187(1) only makes the reconstituted firm liable to pay tax of the firm before its reconstitution, but does not authorise the making of one assessment for the whole year on the reconstituted firm. In this behalf it is sufficient to point out that s. 187(1) only speaks of making the assessment on the firm as reconstituted at the time of making the assessment and says nothing about the recovery of the tax due from the firm before its reconstitution. If the intention was that two assessments should be made, the Legislature would have also provided for collecting the tax due from the firm before its constitution from the firm as reconstituted. In this behalf it is significant to note that under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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