ADDITIONAL COMMISSIONER OF INCOME TAX Vs. VINAYAKA CINEMA

JUDGEMENT

(1.) THESE two matters have been placed before a Full Bench of five Judges in view of the order of reference made by a Division Bench of which one of us (Divan C. J.) was a member on December 1, 1976. Those two matters were referred to a larger Bench in view of the conflicting decisions of the different High Courts on the point which is involved in both these matters.

(2.) THE question that has to be decided is whether the provisions of S. 187 of the Income-tax Act , 1961 (hereinafter referred to as 'the Act') can be invoked by the Income-tax authorities, when a partnership firm is dissolved; and after the dissolution of the partnership firm, the business of the firm is continued by another partnership firm in which one or more of the partners of the dissolved firm have also joined and there are thus common partners between the dissolved firm and the new firm which continues the business of the old firm.

(3.) IN R. C. No. 67 of 1975, the facts are as follows : The assessment year under consideration is 1971-72. The accounting year is the financial year from April 1, 1970 to March 31, 1971. There were originally two partners in the firm, M/s Prasad Motors and Electricals. They were Ch. Suryanarayana and K. Sanyasiraju. Each of these two partners represented his Hindu undivided family in the business of the partnership firm. During the course of the financial year 1970-71 which is the accounting year for this firm, a partition took lace in the family of Ch. Suryanarayana and after the partition, he retired from the partnership with effect from October 1, 1970. As a result of the retirement of Suryanarayana, it is obvious that the firm stood dissolved because the only partner left thereafter was K. Sanyasi Raju. A new partnership deed was executed on October 26, 1970, and under this deed, a new partnership firm was brought into existence with effect from October 1, 1970. Under this new partnership deed, five minors some of whom belonged to the family of Suryanarayana, were admitted to the benefits of the partnership and two strangers were taken as partners. On these facts, two returns were filed, one for the period 1-4-1970 to 30-9-1970 and the other for the period 1-10-1970 to 31-3- 1971. The INcome-tax Officer held that there was only a change in the constitution of the firm with effect from October 1, 1970 and he accordingly clubbed the incomes of the two periods and made a single assessment on the income of the entire period from April 1, 1970 to March 31, 1971 under S. 187 (2) of the Act. The assessee took the matter in appeal and the Appellate Assistant Commissioner confirmed the order of the INcome-tax Officer. The assessee carried the matter in further appeal to the Tribunal and the Tribunal held that, on the retirement of Suryanarayana, the firm which existed till then between Suryanarayana and Sanyasi Raju was dissolved and what was brought into existence on October 1, 1970 was entirely a new firm and hence the provisions of S. 187 (2) were not applicable. The Tribunal directed that there should be two separate assessments on the two firms, one on the old firm from April 1, 1970 to September 30, 1970 and the other on the new firm, which came into existence under the partnership deed of October 26, 1970, for the period October 1, 1970 to March 31, 1971. Thereafter, at the instance of the Revenue, the following question has been referred to this Court for its opinion: