KUKREJA AGENCIES Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) BY this reference under S. 256(1) of the IT Act, 1961 ( for short, "the Act"), the Tribunal, Nagpur Bench, Nagpur, has referred the following question of law to this Court for opinion :

(2.) THE facts of the case are brief. The assessee is a partnership firm. The assessment year is 1976 77. By a deed of partnership dt. 5th July, 1974, a partnership firm was constituted under the name and style of "M/s Kukreja Agencies, Nagpur" with five partners, namely, Shri Kanhaiyalal Hassanand, Shri Arjundas Hassanand, Smt. Vinjhabai Hassanand, Smt. Sarlabai Cheturam and Shri Ghanashyamdas Hassanand. The firm came into existence w.e.f. the same date. The object of the firm was to carry on business in medicines and drugs. The firm was reconstituted by another partnership deed dt. 1st Aug., 1975. As a result of the reconstitution, one of the partners of the old firm, namely, Shri Arjundas Hassanand, retired and in his place, his wife, Smt. Hirabai, was taken in as a partner. The terms and conditions of the reconstituted firm were set out in the new partnership deed. The name of the firm and the nature of the business, however, continued to be the same as before. The reconstituted firm commenced its business from 1st Aug., 1975. The accounting period of the original as well as reconstituted firm was the Diwali year. The accounting period for the asst. year 1976 77 was Diwali 1974 75. The assessee filed two returns of income for the asst. year 1976 77, (1) for the period from 14th Nov., 1974, to 31st July, 1975, during which the original firm was in existence ; and (2) from 1st Aug., 1975, to 3rd Nov., 1975, i.e., the period during which the reconstituted firm carried on the business. The assessee contended that two separate assessments should be made on the two firms as there was a dissolution of the original firm on 31st July, 1975, and reconstitution of a new firm thereafter.

(3.) THE assessee preferred an appeal before the AAC. The AAC allowed the appeal following the decision of the Allahabad High Court in CIT vs. Shiv Shanker Lal Ram Nath 1975 CTR (All) 22 : (1977) 106 ITR 342 and held that though under S. 187 of the IT Act, 1961, the income of the firm for the whole of the accounting year had to be assessed in the hands of the reconstituted firm as it stood at the time of the assessment, the income derived by the original firm had to be assessed in the hands of the reconstituted firm separately and without clubbing it with the income of the reconstituted firm itself derived during a part of the relevant accounting period after reconstitution. The AAC, therefore, directed that the income of the original and the reconstituted firm should be assessed separately in the hands of the reconstituted firm and the tax liability determined accordingly.