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TMI Blog1976 (1) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... same and which lie in a short compass and are not in dispute: M/s. Visakha Flour Mills, the assessee-firm, was constituted under an instrument of partnership dated January 10, 1964, with 19 partners. The assessee derives income mostly from milling charges and also from dealings in bran. During the assessment year 1966-67 whose relevant accounting year ended with March 31, 1966, one of the partners, Sri Ramanna, died on February 20, 1966. On the next day, i.e., February 21, 1966, a fresh deed of partnership including the deceased Ramanna's son, Subba Rao, as partner in the place of his father, was drawn up. In the accounting year ending with March 31, 1967, relevant to the assessment year 1967-68 another partner, Sri Manukonda Venkanna, died on October 4, 1966, and a fresh deed of partnership was drawn up on October 5, 1966, taking Ramamurthy, the son of the deceased Venkanna, in his place and the business continued till the end of the accounting year. In both the accounting years ending with March 31, 1966, and March 31, 1967, the business of the firm was continued in the same name and at the same place even after the death of Ramanna and Venkanna till the end of the respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Act. What is true for the assessment year 1966-67 is also true for the assessment year 1967-68. Aggrieved by the decision of the Appellate Assistant Commissioner, the assessee preferred appeals to the Appellate Tribunal. The Tribunal, on a consideration of the facts, found that the Appellate Assistant Commissioner is correct in holding that the provisions of section 187(2) apply to this case but declined to uphold the clubbing of the income of the two broken periods for each of the two assessment years. Following its order dated October 15, 1971, in ITA No. 404 (Hyderabad) 68-69, M/s. Sri Venugopal Rice, Turmeric and Polish Mills v. Income-tax Officer, Gudivada, in which the same issue was decided, the Tribunal directed that-- the assessments for the years 1966-67 and 1967-68 should be made on the firm as constituted at the time of the assessment, but tax should be computed separately on the incomes from April 1, 1965, to February 20, 1966, and from February 21, 1966, to March 31, 1966, for the assessment year 1966-67 and likewise tax should be computed separately on the income from April 1, 1966, to October 4, 1966, and from October 5, 1966, to March 31, 1967. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turns upon the provisions of sections 187 and 188 of the Income-tax Act, 1961 (hereinafter referred to as the Act ) and their application to the facts of the present case. Before adverting to the provisions of sections 187 and 188 of the Act, we may conveniently notice the material and relevant provisions of the Indian Partnership Act, 1932, applicable to the assessment of firms. Clause (23) of section 2 of the Act (Income-tax Act) defines firm , partner and partnership as having the meanings respectively assigned to them in the Indian Partnership Act, 1932, but the expression partner shall also include any person who, being a minor, has been admitted to the benefits of partnership Section 4 of the Partnership Act reads : Definition of Partnership--' 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. ' Partner ', ' firm ' and ' firm name '.--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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between all the partners of a firm is called under section 39 the dissolution of the firm. Dissolution of firm may be by several methods, viz., dissolution by agreement (section 40), compulsory dissolution (section 41), dissolution on the happening of certain contingencies (section 42), dissolution by notice of partnership at will (section 43) and dissolution by court (section 44). Compulsory dissolution as envisaged by section 41 may be due to the adjudication of all or some of the partners as insolvents or on the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership. Section 42 reads thus : Subject to contract between the partners a firm is dissolved-- (a) if constituted for a fixed term, by the expiry of that term ; (b) if constituted to carry out one or more adventures or undertakings, by the completion thereof ; (c) by the death of a partner; and (d) by the adjudication of a partner as an insolvent. Under section 42(c), a firm would get dissolved by the death of a partner unless there is an agreement between the partners to the contrary. In other words, a firm would au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses. The charging section, therefore, applies to the case of a firm. A firm, under the Act is, unlike under the Partnership Act, a separate and distinct entity chargeable to income-tax. It has a separate personality and existence independent of the partners. It is, therefore, a taxable unit. Section 182 provides for the assessment of registered firms whereas section 183 deals with assessment of unregistered firms. Under section 182 the assessing authority, after computing the total income of the firm, has to determine the income-tax payable by the firm itself and include the share income of each partner of the firm in his total income and assess him to tax accordingly. In the case of an unregistered firm, the assessing authority may determine the tax payable by the firm itself on the basis of the total income of the firm as a unit, or resort to the provisions of clause (b) of section 183, if, in its opinion, the aggregate amount of tax payable by the partners if the firm were treated as a registered firm would be greater than the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of assessment the actual changes in the constitution of the firm that took place prior to the making of the assessment. The proviso to sub-section (1) of section 187 requires the income of the previous year to be apportioned between the partners who, in such previous year, were entitled to receive the same. But, however, when the tax assessed upon a partner cannot be recovered from him, the same shall be recovered from the firm as constituted at the time of making the assessment. Sub-section (2) of section 187, unlike section 26(1) of the old Act, indicates what amounts to a change in the constitution of the firm for the purposes of that section. Parliament, in its wisdom, had thought fit and proper to specifically state in the very section as to what amounts to a change in the constitution of the firm. Section 187(2) reads thus: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partners in section 187(2) must be construed to be of wide import so as to take in all cases of cessation of partner. It is not possible to limit the cessation of partner to only agreement,voluntary retirement, expulsion and adjudication as an insolvent. A change in the constitution of a firm within the meaning of section 187 would occur where, -- (i) one of the partners voluntarily retires or is expelled leaving the remaining partners to continue the business, or (ii) a new partner is introduced with the consent of the existing partners, or (iii) all the partners continue as before but with readjustment or reallocation of shares of one or more or all of them, or (iv) one of the partners is adjudicated as an insolvent and others continue the business, or (v) one of the partners dies. Under section 42(c) of the Partnership Act, the firm gets dissolved if any one of the partners dies unless there is a specific agreement in the deed of partnership to the effect that notwithstanding the death of any one of the partners, the firm continues to do its business with the remaining partners. In the present case, there is no specific term of agreement in the partnership de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase is not one covered by section 187 has been used by Parliament in section 188 without any object or purpose. The court or the income-tax authorities must first apply the provisions of section 187 to a given case and if the conditions specified therein are satisfied, the procedure contemplated therein for the completion of the assessment of the firm for any previous year must invariably be followed notwithstanding the fact that that case may also fall under section 188. A close and combined reading of sections 187 and 188 does not warrant or justify the assumption that section 187 is not applicable to a case of dissolution of a firm. Where, therefore, a firm is dissolved on account of the death of a partner by virtue of the provisions of section 42(c) of the Partnership Act and the business is continued by the remaining partners or by the remaining partners and another in the place of the deceased partner, there being only a change in the constitution of the firm within the meaning of section 187(2)(a), the assessment of the firm for the previous year or years must invariably be made under section 187 and if there be succession to the business by another separate entity owned b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... personality which survives reconstitution. A firm discontinuing its business may be assessed in the manner provided by section 25(1) in the year of account in which it discontinues its business; it may also be assessed in the year of assessment. In either case it 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 be 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. Therefore, even when there is change in the ownership of the business carried on by a firm on reconstitution or because of a new constitution, assessment must still be made upon the firm. When there is succession, the successor and the person succeeded have to be assessed each in respect of his actual share. Reiterating the aforesaid view, the Supreme Court in Commissioner of Income-tax v. Kirkend Coal Co. [1969] 74 ITR 67, 71 (SC) observed thus: Section 44, therefore, only applied to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the constitution of a firm brings into existence a new firm, does not represent the correct position of law. The aforesaid view of ours gains support from the later decision of the Mysore High Court in K. Suryanarayana Shelly Sons v. Commissioner of Income-tax [1973] 92 ITR 141 (Mys), wherein the contention of the assessee's counsel that every change in the constitution of a firm brings into existence a new firm and there shall be two separate assessments for the two different periods though the assessment has to be made by virtue of section 187 of the Act on the firm as constituted at the time of the making of the assessment, has been repelled. After quoting the observation of Hegde J. in Bharat Engineering Construction Co.'s case [1968] 67 ITR 273 (Mys) referred to above, it was observed thus : That case did not lay down that whenever there is a change in the constitution of a firm, two separate assessment orders shall be made. Therefore, the decision relied on is not an authority for the proposition now contended for by the learned counsel for the assessee. Again, at page 144, it was observed: By virtue of section 187(1), the assessment shall be made on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case. In R. B. Jessa Ram Fateh Chand v. Commissioner of Income-tax [1971] 81 ITR 409 (All) one of the partners of the assessee-firm died on or about August 1, 1958. The assessment of the firm for the assessment year 1959-60, corresponding to the accounting period commencing from October 24, 1957, to November 11, 1958, had to be made by the assessing authority. The assessee filed two separate returns--one for the period from October 24, 1957, to August 1, 1958, and the other for the period from August 2, 1958, to November 11, 1958. The Income-tax Officer made two separate assessments for the two periods. The appeals of the assessee before the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal were not successful. The High Court agreed with the assessee that the case was governed by section 26(1) of the old Act as only a change in the constitution of the firm occurred within the meaning of that provision and consequently a single assessment for the entire accounting period ought to have been made on the firm as constituted at the time of making the assessment, rejecting the plea of the department that that was a case of succession governed by section 26(2) and two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered to be a change in the constitution of the firm for the purposes of sub-section (1) ............... In the present case, only one partner, namely, Ram Rattan, ceased to be a member of the firm on account of his death and his son, Sham Lal, was entered as a new partner in his place. The other two partners, namely, Sat Dev and Dharam Pal, remained the same. Therefore, the two partners remaining the same and there being only a change in one partner, as one partner ceasing to be a partner on account of his death and another partner entering into partnership, this answers the description of sub-section (2) of section 187 of the Act and it has been rightly held by the authorities below that this constituted a change in the constitution of the firm. The contention that the previous firm as a legal entity came to an end on the death of Ram Rattan and a new firm came into existence by the joining of Shyam Lal loses sight of the fact that, for the purposes of the Income-tax Act, this will be considered to be a change in the constitution of the firm as when dealing with the matters under the Income-tax Act, as to whether a particular case is a change in the constitution of the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable even if there was no such provision in the partnership deed as the court, in such circumstances, has to look for guidance to the provisions of section 187(2) of the Act but not section 42(c) of the Partnership Act. We may in this context usefully notice the decision of Sabyasachi Mukharji J. in Sandersons Morgans v. Income-tax Officer [1973] 87 ITR 270, 282, 283 (Cal). That was a case of a registered firm evidenced by a deed of partnership which provided that the death or retirement of any partner shall not dissolve the partnership. The registration was refused by the assessing authority on the ground that there was a change in the constitution of the firm due to the death of the partner and the assessee did not submit the original instrument of partnership. One of the questions that arose for decision therein was whether there was a change in the constitution of the firm consequent on the death of a partner. The learned judge, while construing the scope of the expression change in the constitution of the firm , observed thus: ' Change in the constitution of the firm' normally and ordinarily would mean every alteration in the set-up of the firm, viz., dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on June 21, 1969, and the next day the new firm took over the business and, therefore, two assessments must be made--one against the old firm and the other aginst the new firm--for the respective periods. As the Income-tax Officer refused to accept the claim of the assessee, the assessee sought for the same relief in an application under article 226 of the Constitution of India before the High Court of Allahabad. It was held per majority consisting of R.L. Gulati and C.S.P. Singh JJ. that section 187 applies only where a firm is reconstituted in accordance with sections 32 and 33 of the Partnership Act and that section has no application if a partner dies in the course of the accounting year. It was opined that the firm gets dissolved the moment one of the partners dies if there is no specific stipulation in the partnership deed that the partnership would continue despite the death of a partner. The firm also gets dissolved by agreement of the partners. In that view, it was held that it was a case of succession which falls squarely under section 188 of the Act and, therefore, there must be two separate assessments for the two broken periods and there could be no single assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de import so as to take in all types of cessation. Where there are no specific provisions in the Act to cover a particular aspect, the provisions of the Partnership Act may be applicable but where there is a conflict between the provisions of the Act and those of the Partnership Act with regard to a particular aspect, we are of the firm view that the provisions of the Act would govern the situation as they prevail over the similar provisions under the Partnership Act or any other Act. We are not also concerned with the general law and the impact of the provisions of other statutes while construing the provisions of section 187 as the very section defines what amounts to a change in the constitution of the firm. The sovereign Parliament have designedly used the expression di ceased . With great respect to the learned judges, we are unable to agree with their view that the provisions of sub-section (2) of section 187 do not change the concept of reconstitution of a firm as understood in the Indian Partnership Act nor do they obliterate the distinction between reconstitution and dissolution and that once a firm is dissolved either by agreement or by operation of law, the question of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the share of profits that arose to the minors for that period was held to be liable to be included in their father's total income as the relationship between them and their father was not snapped by Ranchhoddas's death. This decision is distinguishable on facts. That decision is not an authority for the proposition pertaining to the scope and interpretation of the provisions of sections 187 and 188. The application of the provisions of section 187 of the Act did not arise there. Hence, that decision which arose under section 64 of the Act would not render any assistance to the assessee herein. The decision of this court in Koteswara Rao v. Commissioner of Income-tax [1962] 46 ITR 882 (AP) relates to succession under section 25(4) of the Indian Income-tax Act, 1922. Therein it was held that the death of one of the partners resulted in the dissolution of the partnership unless there is a contract to the contrary and such contract need not be expressed but may be inferred from the conduct of the parties although the contract must invariably be between the original partners at the time of formation of the contract. On the facts of that case, it was held that there was no su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 187 of the Act cannot be said to contemplate only one assessment being made on the new firm after clubbing the income derived by it and the old firm during the entire accounting year and the new firm cannot be compelled to elect the previous year which had been elected by the old firm and the mere absence in section 187 as in section 188 of a specific provision for assessing two different persons would not alter the legal position. With great respect to the learned judges, we are unable to agree with this view. When once the provisions of section 187(2) are found to be applicable, the inevitable result is that there should be only one assessment on the firm which is in existence at the time of the making of the assessment for the entire accounting year. Such single assessment on the firm in existence at the time of the assessment would be possible only if the incomes for the two broken periods of the old and reconstituted firms are clubbed together as if they belong to one entity for the purpose of assessment. If Parliament intended to have two separate assessments for the two broken periods without clubbing the incomes of the old and the reconstituted firms, the language of se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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