COMMISSIONER OF INCOME TAX Vs. NALLI SILK EMPORIUM

JUDGEMENT

(1.) AT the instance of the Revenue, under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), the following questions of law, common to both the cases, have been referred to this court for its opinion :

(2.) IN T.C. No. 116 of 1980, the assessee is a firm, viz. Nalli Silk Emporium. The firm consisted of five partners. During the course of the accounting year ending with March 31, 1974, relevant for the assessment year 1974-75, one of the partners died and the remaining four partners continued the partnership up to August 31, 1973, when the accounts were closed for the period April 1, 1973, to August 31, 1973, and the profits were apportioned to the five partners including the deceased partner, though the share of profits of the deceased partner was credited to the account of his legal heir. For this period, a return disclosing an income of Rs. 98,800 was filed. On September 1, 1973, a new partnership deed was drawn up among the four partners, admitting a minor, viz., the widow and legal heir of the deceased partner, to the benefits of the partnership with effect from September 1, 1973. For the period September 1, 1973, to March 31, 1974, another return declaring an income of Rs. 1,29,960 was filed. Subsequently, on March 29, 1974, on the attainment of majority by the minor admitted to the benefits of the partnership, a fresh partnership deed also came to be executed. IN the course of the assessment proceedings, it was claimed by the assessee that the first partnership stood dissolved and a new partnership came into being and that necessitated the passing of two separate assessments. Later, in the course of the assessment proceedings, by a letter dated March 5, 1976, the assessee maintained that there was only a change in the constitution and not a dissolution as claimed by it earlier on the ground that, by a codicil, the surviving partners were enabled to continue the business as before for the period August 5, 1973, to August 31, 1973, and that an opportunity should also be given to the firm to file an application for the period from August 5, 1973, to August 31, 1973. The INcome-tax Officer rejected the stand of the assessee and found that, as per the materials available on record, no accounts were taken and no rights and liabilities of the partners were determined and no dissolution took place, but the business had been carried on up to August 31, 1973, and that established that there was no dissolution on the death of one of the partners. The conduct of the surviving partners in continuing the partnership business subsequently, according to the INcome-tax Officer, also made out that there was no dissolution of the partnership. The codicil had been signed only by three of the signatories to the original instrument of partnership and that was found by the INcome-tax Officer to be of no avail to the assessee. Referring to the declaration filed under section 184(7) of the Act that there was no change in the constitution during the period April 1, 1973, to August 31, 1973, signed by the four surviving partners and the heir of the deceased partner, the INcome-tax Officer was of the view that the declaration was a false one and had no force. IN respect of the period August 5, 1973, to August 31, 1973, the assessee did not file any partnership deed; nor did it file any application for registration. The INcome-tax Officer also found that the subsequent deed of partnership entered into on September 1, 1973, did not mention anything about the dissolution of the firm or the codicil or the admission of the legal heir of the deceased partner with effect from August 5, 1973, and that the partnership deed was afresh one unconnected with the earlier ones. Ultimately, the INcome-tax Officer, in view of the absence of the deeds of the partnership operative for the entire period and the false declaration, treated the assessee as an unregistered firm and proceeded to assess the income between the period April 1, 1973, to August 31, 1973, and September 1, 1973, to March 31, 1974, as such. On appeal by the assessee to the Appellate Assistant Commissioner, placing reliance upon Kaithari Lungi Stores v. CIT , it was held that the original firm stood dissolved on August 4, 1973, when one of the partners died, and a fresh firm came into existence on August 5, 1973, which carried on business till August 31, 1973, when the accounts were closed and that, on September 1, 1973, another partnership came into being with the remaining four partners along with the minor admitted to the benefits of the partnership. According to the Appellate Assistant, Commissioner, the entire period between April 1, 1973, and March 31, 1974, fell into three different periods, viz., April 1, 1973, to August 4, 1973, August 5, 1973, to August 31, 1973, and September 1, 1973, to March 31, 1974. Regarding the first period, referring to the application under section 184(7) of the Act, wherein it was stated that there was no change in the constitution, the Appellate Assistant Commissioner agreed with the INcome-tax Officer that the declaration was a false one and cannot be acted upon. It was also futher pointed out that the assessee chose to close the accounts only on August 31, 1973, and that there was no division of the profits as envisaged in the deed of partnership and that, therefore, the firm was not entitled to registration for the period April 1, 1973 to August 4, 1973. Adverting to the second period August 5, 1973 to August 31, 1973, the Appellate Assistant Commissioner noticed that the assessee had not filed any partnership deed nor any application for registration and, therefore, the question of granting registration for that period did not arise and agreed with the INcome-tax Officer that no case for grant of registration was made out, but, however, directed the INcome-tax Officer to verify whether the provisions of section 183(b) of the Act would apply and determine the question of grant of registration for the period. IN so far as the third period September 1, 1973, to March 31, 1974, was concerned, the Appellate Assistant Commissioner took the view that a new firm had come into being and the question of its registration has to be considered afresh and the INcome-tax Officer was directed to consider the question afresh for the period September 1, 1973, to March 31, 1974, in accordance with the relevant provisions of the Act. Finally, a direction was given to the INcome-tax Officer to tax the income in respect of the assessment under consideration for the period April 1, 1973, to September 4, 1973, and the refusal of registration for that period was affirmed and the assessment for the period August 5, 1973, to August 31, 1973, and August 1, 1973, to March 31, 1974, was directed to be done separately. IN view of the conclusions so arrived at, the Appellate Assistant Commissioner allowed the appeal in part. On further appeal by the Revenue before the Tribunal, contending that there was no dissolution of the firm and the business was continued and the assessee had admitted that there was only a change in the constitution of the firm and not a dissolution, the Tribunal, on a consideration of the terms of the partnership deed and the provisions of the Act, found that the firm stood dissolved on the death of one of the partners and the question of change in the constitution could at all arise only if the firm continued to exist and that the firm which came into existence after the death of one of the partners was a new firm and, upholding the direction given by the Appellate Assistant Commissioner, dismissed the appeal. That is how the three questions of law earlier set out have arisen.

(3.) IN view of the above observations of the Supreme Court, no exception can be taken by the Revenue to the directions given by the Appellate Assistant Commissioner and affirmed by the Tribunal in these cases. The principle that where the deed of partnership does not provide that the death of a partner would not dissolve the firm, the firm would stand dissolved on the death of a partner has also been reiterated in S. K. Sundararamier and Sons v. Second ITO (T.C. No. 177 of 1977, dated March 5, 1985). It has also been further laid down therein that the dissolution of a partnership and continuance of a partnership are contradictory and a partnership which stands dissolved either as a result of operation of law or by act of parties cannot be said to be a continuing partnership in spite of its dissolution and, where there is a dissolution of a partnership firm on accoount of the death of a partner and the remaining partners reconstitute themselves into a new firm with or without a new partner, it is not a case of a mere change in the constitution of a firm. On the death of one of the partners of the firms in these cases, the firms stood dissolved and, thereafter, there was no question of the firms having continued, in which there was a change in the constitution by the happening of one or more of the events leading to a change in the constitution. We, therefore, answer the second question referred to us in the affirmative and against the Revenue.