ADDITIONAL COMMISSIONER OF INCOME TAX Vs. HARJIVANDAS HATHIBHAI

JUDGEMENT

(1.) THE assessment year under consideration is 1968 69. The assessee is a registered firm and for the year of account which was the relevant previous year, being Samvat year 2023, the assessee had filed two returns of income for asst. year 1968 69. The first return was for the period November 13, 1966, to May 25, 1967 and the second return was for the period May 26, 1967, to November 2, 1967, Samvat year 2023 was from November 13, 1966, to November 2, 1967. The original partnership deed was dated April 29, 1960, and under that deed of partnership, the firm consisted of four partners, each partner having 25 per cent. share in the profits of the firm. The firm was carrying on business in iron and steel, hardware and mill stores. One of the four partners, namely, Patel Harjivandas Hathibhai, died on May 25, 1967. Thereafter, a new partnership was entered into between the three surviving partners and the widow of the deceased. This new partnership deed was executed on June 15, 1967, and the new partnership was to come into existence from. May 26, 1967. Under the new deed of partnership the widow of the deceased was given 10 per cent. share in the profits and the three surviving partners of the old firm were given 30 per cent. share each in the profits of the firm. The assessee contended that two separate assessments should be made on the firm because, on the death of Harjivandas Hathibhai, one of the partners, the firm was automatically dissolved since in the deed of partnership of April 29, 1960, there was no provision in the terms of the partnership deed that, on the death of one of the parties, the firm was to continue. It was contended that, on the death of Harjivandas Hathibhai on May 25, 1967, the old firm was dissolved and, thereafter, a new firm came into existence w.e.f. May 26, 1967. The profits of the business were divided on time basis between the two firms for the period November 13, 1966, to May 25, 1967, for the undissolved (sic) firm and for the period May 26, 1967, to November 2, 1967, for the new firm. It was contended that the income for the two periods mentioned above should not be clubbed together. The ITO took various factors into consideration and came to the conclusion that there was a mere change in the constitution of the firm and nothing more and, therefore, the provisions of S. 187 of the IT Act, 1961, were attracted and the income of the two periods should be clubbed together. Against the decision of the ITO, the assessee took the matter in appeal and the AAC confirmed the order of the ITO and dismissed the appeal. The matter was, thereafter, taken in further appeal by the assessee to the Tribunal and the Tribunal held that where there was a dissolution in law, S. 187 was not applicable and the Tribunal held that the old firm was dissolved on the death of the partner and, therefore, directed that there should be two separate assessments for the two periods. Thereafter, at the instance of the Revenue the following three questions have been referred to us for our opinion :

(2.) BEFORE discussing the several authorities which have been cited before us, it would be better to refer to the provisions of ss. 187, 188 and 189 of the IT Act, 1961. Sec. 187 provides for change in the constitution of a firm and under Sub S. (1)

(3.) IN R. B. Jessa Ram Fateh Chand vs. CIT (1971) 81 ITR 409 (All), T, a partner of the assessee firm, died on August 1, 1958, during the accounting year, October 24, 1957, to November 11, 1958. After the death of T, the business was continued by the remaining eleven partners, a fresh deed of partnership having been executed on August 20, 1958. The assessee firm filed two returns for the relevant assessment year, one for the period from October 24, 1957, to August 1, 1958, and the other from August 2, 1958, to November 11, 1958, claiming losses in both the periods. The ITO did not accept the claim of loss for the first period and made an addition of a sum of Rs. 9,305. Both the AAC and the Tribunal rejected the assessee's plea that the ITO was in error In making two separate assessments for the two periods. On a reference being made to the High Court, the Allahabad High Court held that a change occurred in the constitution of the firm within the meaning of S. 26(1) of the Indian IT Act, 1922, and the assessment should have been made on the firm as constituted at the time of making the assessment. The IT Act recognises a firm for purposes of assessment as a unit independent of the partners constituting it ; it invests the firm with a personality which survives reconstitution. 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 S. 26(1), and if there is succession to the business, assessment has to be made under S. 26 (2). It may be pointed out that provisions of S. 26, Sub S. (1), of the Indian IT Act, 1922, with which the Allahabad High Court was concerned, were similar to the provisions of S. 187, Sub S. (1), of the IT Act, 1961, with which we are concerned. Besides their decision on certain observations of the Supreme Court in Shivyam Poddar vs. ITO (1964) 51 ITR 823 (SC), the learned judges of the Allahabad High Court who decided the case in R. B. Jessa Ram Fateh Chand vs. CIT (supra) held on the above lines. The conclusion of the Allahabad High Court was that, on the facts and in the circumstances of the case, change occurred in the constitution of the firm within the meaning of s. 26(1) of the Indian IT Act, 1922, and assessment should have been made on the firm as constituted at the time of making the assessment.