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TMI Blog1974 (6) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... counts of the old firm were settled on October 30, 1965, and the resultant profit and loss up to that date was shared between the four partners and credited to their respective accounts. On October 31, 1965, the three sons of T. Veeraraghavulu Chetty were taken in as partners and the four partners of the old firm continued to remain as partners in the new firm. The assets and liabilities belonging to the old firm were taken over by the new firm. The terms and conditions on which the new firm agreed to run the business were reduced to writing in a partnership deed executed on December 4, 1965. The deed recited that the new firm was brought into existence with effect from October 31, 1965. For the assessment year 1966-67, the accounting year of which was from April 1, 1965, to March 31, 1966, the assessee-firm filed two returns declaring its incomes of Rs. 96,321 for the period April 1, 1965, to October 30, 1965, and Rs. 41,387 for the period October 30, 1965, to March 31, 1966. The assessee-firm claimed that there was a change in the constitution of the firm with effect from March 31, 1965, and that two separate assessments should be made for the two periods mentioned above. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covered by section 187 of the Act, a single assessment and no two separate assessments can be made. In support of this argument, the learned standing counsel for the revenue relied upon the decision in Excel Productions v. Commissioner of Income-tax. The learned counsel, Sri Anjaneyulu, appearing for the assessee on the other hand, contended that the expressions " firm ", " partner " and " partnership " have been assigned, under section 2(23) of the Act, the same meanings as are respectively assigned to them under the Indian Partnership Act. Under the Indian Partnership Act, a firm of four partners is not the same as a firm of seven partners. As seen from the facts of this case, the old firm of four partners was dissolved and it has been succeeded to by a different firm of seven partners and, therefore, two assessments have to be made on the predecessor and successor firms as provided in section 170 of the Act, because there is no provision in the Act to aggregate the incomes of two different firms for the computation of tax. In support of this argument, the learned counsel relied upon the decision of the Mysore High Court in Commissioner of Income-tax v. B. Shamiah Setty Broth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act, whatever be the position of law under the general law of partnership and that the case was squarely covered by the decision of the Kerala High Court in Excel Productions v. Commissioner of Income-tax . The Income-tax Appellate Tribunal held that since there was no contract to the contrary, the death of one of the partners brought about a total dissolution of the firm. On that date, what all happened was that the assessee's books of accounts were closed to profit and loss account and the profit computed was credited to the erstwhile partners' accounts. There was no dissolution account made, nor was any realisation account worked out. There was no stoppage of business and the business continued as such with all its assets and liabilities. There was continuation as far as the business was concerned, in which one set of partners was succeeded by another set of partners with as many as 18 partners being common between the two sets. The change squarely fell within the criteria laid down in section 187(2)(a). The Income-tax Appellate Tribunal, accordingly, refused to accept the assessee's contention that there was a dissolution of the partnership and a new firm came into exist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified in respect of the total income of the previous year of every person. As to what is the total income of any previous year is stated in section 5 of the Act. Section 170 provides that if a person carrying on business is succeeded by another person who continues to carry on that business, two assessments have to be made, one on the predecessor in respect of the income of the previous year in which the succession took place up to the date of succession, and another on the successor, in respect of the income of the previous year, after the date of succession. Chapter XVI of the Income-tax Act, 1961, contains the special provisions which are applicable to the assessments of firms. Section 182 of the Act provides that, in the case of a registered firm, the income-tax payable by the firm itself has to be determined and the share of each partner in the income of the firm shall be included in his total income and assessed to tax. Under section 183, an unregistered firm has to pay tax on the basis of its total income. Relevant portions of section 187 and section 188 read thus : " 187. (1) Where at the time of making an assessment under section 143 or section 144, it is found th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitution of the firm in the relevant accounting year. In such a case, under section 187(1) of the Act, assessment shall have to be made on the firm as constituted at the time of making the assessment. Whatever be the position under the general partnership law, since tax is levied under the provisions of the Income-tax Act, 1961, on the firm itself, and then an apportionment of the total income is made between the partners and their respective shares of income included in their individual incomes, it follows that a firm has been treated as a distinct and separate entity, different from the partners that constituted it. That it is so is now well-established by a long line of authorities. Suffice to cite the following decisions : In Commissioner of Income-tax v. A. W. Figgies Company, the Supreme Court observed, at page 408, thus : " The section does not regard a mere change in the personnel of the partners as amounting to succession and disregards such a change. It follows from the provisions of the section that a mere change in the constitution of the partnership does not necessarily bring into existence a new assessable unit or a distinct assessable entity and in such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business should be carried on by the person succeeding. A change of ownership may occur either by transfer inter vivos or by inheritance. Since a transfer is a contract, it must be supported by consideration. In the instant case, though accounts have been made up of the firm of four partners, and profit and loss determined up to October 29, 1965, the firm has not been dissolved and the business remained intact, and continued with the assets and liabilities of the firm of four partners, till the end of the accounting year. The only change that was effected was that three more partners were added. If there was a dissolution of one firm succeeded by another, the successor-firm would have paid some amount as the consideration for the transfer to the predecessor firm. No such amount has been shown to have been paid by the so-called successor-firm to the predecessor-firm. There is, therefore, no transfer of business in this case, and the change that has taken place is only a change in the constitution. In such a case, it is mandatory to assess the firm as constituted at the date of making the assessment. In Karupukula Suryanarayana Setty and Sons v. Commissioner of Income-tax, befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to make one assessment on the firm as constituted at the time of making the assessment. Since assessment has to be made in respect of the total income of the year, under section 4 of the Act, at the rate or rates specified in the Income-tax Act, it necessarily follows that the entire total income of the previous year of the firm should be assessed in the hands of the firm as constituted at the time of making the assessment. Section 188 of the Act does not apply to this case, because it is covered by section 187(2)(a). General law of partnership cannot be imported into the Income-tax Act, because the firm has been given a special treatment in the income-tax law. The reasons given by the Income-tax Appellate Tribunal in I.T.A. No. 404/1968-69 are inconsistent with each other. In one breath, the Income-tax Appellate Tribunal held that there was no dissolution and a new firm did not come into existence at least for income-tax purposes and that assessment has to be made under section 187(1) of the Act on the firm as constituted at the time of making the assessment. In another breath the Tribunal presupposes two different firms and possess a question before itself as to whether a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partnerships were different was binding on the High Court. The aggregation of the income of the two partnerships by the Income-tax Officer was not justified." The aforesaid decision of the Mysore High Court rests upon its view that the question whether the old partnership continued or whether a new partnership came into existence was a question of fact and the finding given on that question by the Income-tax Appellate Tribunal was binding upon the court. We are unable to agree with the Mysore High Court that the question whether the old partnership firm continued or whether a new one has come into existence is a question of fact. It is, in our opinion, a mixed question of fact and law. In the view that it had taken that the above finding of the Appellate Tribunal was binding on it, the Mysore High Court answered the question referred to it in favour of the assessee in that case. In the instant case before us, since the finding of the Income-tax Appellate Tribunal is that there was a change in the constitution and that no new firm came into existence, it necessarily follows that there should be only one assessment and not two separate assessments for the different periods of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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