KUNDANLAL PYARELAL AND CO Vs. INCOME TAX OFFICER

JUDGEMENT

(1.) THIS reference application under Section 256(2) of the Income -tax Act, 1961, has been filed at the instance of the assessee seeking reference on the following questions of law for the opinion of this court :

(2.) BRIEFLY stated, the facts of the case are that a firm was constituted of four partners, namely, Shri Pyarelal, Shri Nathmal, Smt. Rani Devi and Shri Tarsemlal, with effect from March 27, 1969, on the terms and conditions of the partnership deed executed on June 15, 1969. One of the partners, namely, Pyarelal, died on August 22, 1986. On August 25, 1986, Smt. Rajrani Devi, a widow of the deceased Pyarelal, joined hands with the other three surviving partners on the terms and conditions of the partnership deed executed on September 5, 1986. The assessee filed two returns of income, one for the period from April 18, 1986, to August 21, 1986, another for the period August 25, 1986, to the end of March, 1987. A specific note was made to the effect that the firm is to be dissolved on August 21, 1986, on account of the death of Shri Pyarelal, one of the partners of the firm. The returns were accepted under Section 143(1) of the Income -tax Act. Subsequently, it transpired that the assessee had overvalued the closing stock in the first return so as to take benefit of the same in the second return. In the first return, the assessee had declared an income of Rs. 8,350 after inflating the value of stocks, by a sum of Rs. 9,05,184, but for this overvaluation of closing stock, there would have been a loss of Rs. 8,96,834. Thus, according to the Revenue, by overvaluation of the closing stock for the first period, the assessee suppressed the profits of the firm in the second period so as to get a dual benefit. Accordingly, the proceedings were reopened by issuing a notice under Section 148 of the Income -tax Act to the assessee for the period August 25, 1986, to March 31, 1987. On August 16, 1988, the Assessing Officer issued a letter to the assessee to explain the basis for adopting the value of closing stock for the first period, which has been shown as opening stock in the second period. After receipt of the said letter, the assessee filed a consolidated return which was termed as a revised return. The assessee claimed that only one assessment should be made in respect of the entire period as there has been no dissolution of the partnership firm on the death of one of the partners but only a change in the constitution of the firm. By letter dated June 28, 1990, the assessee claimed that after the execution of the first partnership deed, a supplementary partnership deed had been executed by the firm on July 24, 1969, which contained clause 10 to the effect that the firm would not be dissolved on the death of any partner. Clause 10 reads as under :

(3.) IT is contended by Mr. Kothari, learned counsel for the assessee, that upon the death of the partner, there was only change in the constitution of the partnership firm and not dissolution. He has pointed out certain circumstances to show that a supplementary deed was executed which provides that on the death of the partner, the firm shall not be dissolved. It is pointed out that Smt. Rajrani, the widow of the late Shri Pyarelal, was substituted as a partner and the partnership firm continued to exist thereafter. It is submitted that two returns were filed under a bona fide mistake. However, when the partners came to know about the correct interpretation of the provisions of law, they immediately filed a revised return before the assessing authority and submitted that it was only a case of change in the constitution of the firm. It is, thus, submitted that the question relates to the interpretation of law contained in Section 42 of the Indian Partnership Act, 1932, read with Section 187(2) of the Income -tax Act. Learned counsel has also relied upon the decision of this court in CIT v. B.D. Dal and Oil Industries wherein it is held that Section 42(c) of the Indian Partnership Act envisages that a partnership would not stand dissolved on the Jeath of a partner but shall continue with the remaining partners together with the heir of the deceased partner, there results only a change in the constitution of the firm and a single assessment is to be made on the firm for the periods before and after the death of a partner.