COMMISSIONER OF INCOME TAX Vs. RAJ BROTHERS

JUDGEMENT

(1.) This reference made at the instance of the Commissioner of Income-tax under section 256(1) of the Income-tax Act, 1961 (for short "the Act"), was disposed of by us, by our judgment dated 22/10/1984. Learned Standing Counsel for the Income-tax Department brought to our notice through a letter dated 30/01/1985, that the reference was answered on the basis that one of the partners died during the accounting year relevant to the assessment year 1977-78 while in fact there was only a retirement of the partner. Learned standing counsel submitted that the application of section 187 of the Act will have a different effect in the event of there being only a retirement of a partner instead of death. Learned counsel for the respondent, Sri A. Satyanarayana, agreed that we may recall the judgment already delivered, hear arguments afresh and answer the question referred to us in the light of correct facts. We recall our judgment dated 22/10/1984, accordingly. We have heard the submissions of learned standing counsel, Sri. M. Suryanarayana Murthy, and also learned counsel for the respondent, Sri A. Satyanarayana.

(2.) The following question of law is referred by the Income-tax Appellate Tribunal for our consideration : "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in concluding that two assessments should be made for the two periods, viz., from 1/04/1976, to 31/12/1976, and from 1/01/1977, to 31/03/1977 ?"

(3.) We may notice a few facts. A partnership consisting of four partners came into existence under a deed of partnership dated 20/10/1969. The terms of the partnership would indicate that the partnership was "at will", that is to say, the partnership will continue subject to the mutual consent of all the partners. The assessment year concerned is 1977-78 and the corresponding accounting period was 1/04/1976, to 31/03/1977. On 31/12/1976, one of the partners retired from the partnership. Pursuant to the retirement of one of the partners, the parties mutually agreed to dissolve the partnership and a deed of dissolution was executed on 4/01/1977, evidencing the dissolution with effect from 31/12/1976, of the partnership constituted under the deed dated 20/10/1969. It was agreed that the balance standing to the credit of the retiring partner at the time of retirement shall be paid to him. With effect from 1/01/1977, the remaining three partners constituted themselves into a partnership firm. A fresh deed of partnership was executed on 19/03/1977, setting out the terms and conditions governing the partnership. It was specifically provided that the partnership constituted by the deed dated 19/03/1977, came into existence with effect from 1/01/1977. The new partnership has taken over all the assets and liabilities of the partnership dissolved on 31/12/1976, and has been carrying on the same business. For the income-tax assessment year 1977-78, two returns were filed before the Income-tax Officer. The first return was filed by the partnership evidenced by the deed dated 20/10/1969. In that return, income for the period 1/04/1976, to 31/12/1976, was declared. The second return was filed by the partnership firm constituted under the deed dated 19/03/1977. In the return filed, the firm declared its income for the period 1/01/1977, to 31/03/1977. The Income-tax Officer was of the opinion that the retirement of the partner on 31/12/1976, did not bring about a dissolution of the partnership. According to the Income-tax Officer, it was only a change in the constitution of the firm within the meaning of section 187(1) of the Act and consequently one single assessment has to be made on the partnership as constituted at the time of making the assessment on the entire income for the period 1/04/1976, to 31/03/1977. In the opinion of the Income-tax Officer, the partnership firm evidenced by the deed dated 19/03/1977, could not be considered to have succeeded to the predecessor partnership firm within the meaning of section 188 of the Act and, consequently, the claim that two separate assessments have to be made was found to be unsupportable. In that view, the Income-tax Officer aggregated the income for the entire period 1/04/1976, to 31/03/1977, and assessed the same for the assessment year 1977-78 in the hands of the assessee-partnership as constituted at the time of making the assessment. The assessee questioned the correctness of the Income-tax Officers assessment of the entire income in one single assessment. The Commissioner of Income-tax (Appeals), the first appellate authority, affirmed the correctness of the assessment made by the Income-tax Officer. The assessee went in further appeal to the Tribunal. The Tribunal accepted the assessees contention and held that two assessments have to be made as claimed by the assessee. In other words, the Tribunal accepted the assessees contention that the partnership constituted under the deed dated 19/03/1977, is a successor to the earlier partnership firm constituted under the deed dated 20/10/1969 and, therefore, the provisions of section 188 of the Act were applicable and two separate assessments have to be made, one of the predecessor firm in respect of its income up to 31/12/1976, and another in respect of the successor-firm for the period 1/01/1977, to 31/03/1977. The Commissioner of Income-tax was aggrieved by the above decision f the Tribunal and, therefore, required the Tribunal to state a case to this court under section 256(1) of the Act. That is how the Tribunal referred the above question of law for the consideration of this court.