TMI Blog1984 (9) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act, 1961 ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the firm had not been dissolved on the death of Shri Chandram on May 6, 1966, and that it was a case of change in the constitution of the firm in terms of the provisions of s. 187 of the Income-tax Act, 1961, and that, therefore, only one assessment should have been made on the assessee-firm in respect of the assessment year 1967-68 ?" The petitioner-assessee is a firm which carries on business of crushing oil and running trucks. The ITO, Bhilwara, completed the assessment relating to the assessment year 1967-68 by order (annexure "A ") dated November 6, 1967. Against that order, the assessee went in appeal to the AAC, who by his order (annexure " B ") dated November 11, 1968, set aside the assessment with the direction that the ITO should make reassessment after giving proper opportunity of hearing to the assessee. In pursuance of the directions given by the Appellate Assistant Commissioner (AAC), the ITO by his order (annexure " C ") dated November 27, 1971, passed fresh assessment order. While doing so, the ITO made the following additions in the oil accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner, Chandram, accounts of the firm were not closed. The same books of account continued and the transactions of the firm after his death were recorded in the same books which were ultimately closed on Diwali 1966. A combined trading and profit and loss account for the entire period from Diwali 1965 to Diwali 1966 was drawn up. The balance-sheet was also prepared on that basis. On the death of Chandram, another partnership deed was executed on July 16, 1966. A contention was raised on behalf of the assessee that the firm stood dissolved on the death of the partner Chandram and, therefore, two separate assessments should be made on the firm as below : (i) in the respect of the period beginning with the first day of the accounting period and ending on May 6, 1966 ; and (ii) on the firm which was constituted afresh after the death of the partner, Chandram, from May 7, 1966 to Diwali 1966. The ITO did not accept the above contention of the assessee and instead clubbed the income of both the periods and made a single assessment thereon. The assessee appealed against the aforesaid order of the ITO to the AAC, who after considering the submissions of the assessee in detail, de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fresh assessment order was made by the ITO, vide annexure " C ", dated November 27, 1971. On appeal against that order, the AAC was of the view that the ITO could not go beyond the directions as given in the original assessment order and enquire into other matters adversely against the assessee and after so deciding, he deleted the additions of Rs. 8,710 and of Rs. 1,730 in tilli account and alsi account, respectively. The Tribunal on appeal by the Department opined that the AAC had definitely erred in law in presuming that the ITO could not make any additions on account of tilli account and alsi account, simply because he had made no such additions at the time of framing the original assessment order. The ITO in this case had power during the course of reassessment to pass a fresh order when the original assessment order was set aside by the AAC. Section 251 of the Act deals with the powers of the AAC. The material portion s. 251 of the Act is as follows: " Section 251. (1) In disposing of an appeal, the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) shall have the following powers (a) in an appeal against an order of assessment, he may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against his order, of the AAC were tied. " In Surendra Overseas Ltd. v. CIT [1979] 120 ITR 872 (Cal), it was held that the ITO can make a fresh assessment if the AAC sets aside an order of assessment under s. 31 of the Indian I.T. Act, 1922, or s. 251 of the Act and directs the ITO to make a fresh assessment. It was further observed as under (headnote) : "The power and jurisdiction of the ITO to make a further enquiry while making a fresh assessment will be governed by and should strictly conform with the order of the AAC. The AAC may direct the ITO to make further enquiry as the ITO may think fit or he may indicate the points or specify the matters on which further enquiry is to be made by the ITO. Where the order of the AAC is specific, it is not open to the ITO to conduct a fresh enquiry beyond the said directions and to make a fresh assessment without reference to the earlier assessment. " The authorities relied on by the learned counsel for the petitioner are clearly distinguishable and cannot be availed of in the case on hand. On the other hand, Mr. J. P. Joshi, learned counsel for the Revenue, has cited J. K. Cotton Spinning Weaving Mills Co. Ltd. v. CIT [1963] 47 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Underlining is ours) J.K. Spinning Weaving Mills Co. Ltd.'s case [1963] 47 ITR 906 (All) was relied on in Abhai Ram Gopi Nath's case [1971] 79 ITR 339 (All). In Abhai Ram Gopi Nath's case, it was held that where, in an appeal from an assessment, the AAC sets aside the assessment and directs the ITO to make a fresh assessment, the ITO is bound by the directions of the AAC in making the fresh assessment. But, subject to those directions, he has the same powers in a fresh assessment as he had originally in making an assessment under s. 23 of the Act. There are no restrictions at all on the powers of the ITO when he proceeds to make a fresh assessment, for the fresh assessment is nothing but a second assessment in substitution of the one set aside. In Seth Manicklal Forma's case [1975] 99 ITR 470 (Mad), the question referred to the High Court was whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the AAC was justified in directing that the sum of Rs. 87,595 should be excluded from the assessment made by the order dated March 7, 1967. After applying J. K. Cotton Spinning Weaving Mills Co. Ltd.'s case [1963] 47 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who are said to look after the interests of the assessee in the Bhilwara firm. Section 37 of the Act, inter alia, lays down that any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head " Profits and gains of business or profession ". The two most important ingredients in allowing the expenditure laid out or expended in computing the income chargeable under the head " Profits and gains of business or profession " are that the expenditure should be in respect of the business which was carried on by the assessee and that it should have been laid out or expended wholly and exclusively for the purposes of such business or profession. The Tribunal has found that the assessee had no business connection with the Bhilwara firm and, therefore, it could not claim any expenditure on account of the employment of the persons who are said to look after the interests of the assessee in the Bhilwara firm. In these circumstances, the payment of salary to Ramgopal and Omprakash was rightly disallowed by the Tribunal, for, that deduction was not allowable under s. 37 of the Act. Que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as follows: s. 187. (1) Where at the time of making an assessment under section 143 or section 144 it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment: Provided that ...... (2) For the purposes of this section, there is a change in the constitution of the firm (a) if one or more of the partners cease to be partners or one or more new partners are admitted, in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change; or (b) where all the partners continue with a change in their respective shares or in the shares of some of them." Section 188 of the Act deals with succession of one firm by another firm and s. 189 deals with firms dissolved or business discontinued. The contention of the learned counsel for the petitioner-assessee is that the Tribunal has erred in holding that after the death of Chandram, there was merely a change in the constitution of the firm. According to him, the firm stood dissolved after the death of Chandram and the business of the firm was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 966, to Diwali, 1966. In other words, the precise question that arose was whether merely a change in the constitution of the firm has occurred and liability for the tax is to be assessed in accordance with s. 187 of the Act. Section 187 of the Act deals with a case where at the time of making the assessment, it is found that a change has occurred in the constitution of the firm. Section 188 of the Act deals with succession of one firm by another firm. In this connection, it will be relevant to refer to the various decisions cited by the learned counsel appearing for the parties. First we propose to refer to the cases cited by the learned counsel for the petitioner-assessee. In Dahi Laxmi Dal Factory v. ITO [1976] 103 ITR 517 (All) [FB], there were two partners of a firm to the benefits of which three minors were admitted. One of the partners died and after his death, his son and two others took over the business of that firm and a fresh partnership deed was executed. To the benefits of this partnership also, the three minors were admitted. During the course of the assessment, the firm claimed that on the death of one of the partners, the old firm stood dissolved and on the fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayaka Cinema [1977] 110 ITR 468 (AP) [FB]; AIR 1978 AP 51, there was a partnership firm and death and retirement of partners had taken place during the accounting year. There was no provision in the partnership deed that the firm was not to be dissolved in such events. Hence, as a result of the death of a partner, the old partnership firm stood dissolved under the Partnership Act and a new partnership was constituted with the remaining partners of the old firm together with two new partners. In those facts, it was observed as under (AIR headnote): " that, on the facts and circumstances of the case, and in view of s. 187(2)(e), a single assessment could not be made on the aggregate of the incomes for the two periods (viz., one for the period April 1, 1968, to August 17, 1968, and the other, for August 18, 1968, to March 31, 1969), but there should be two separate assessments. In the absence of any provision in the partnership deed to continue the firm even after the death of a partner, the firm stood dissolved on August 17, 1968, when one of the partners died and the firm which came into existence on August 18, 1968, was a new firm. There was succession to the old firm by a new fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the firm. It was held that a change in the constitution of the firm normally and ordinarily would mean every alteration in the set up of the firm, viz., death, retirement, incapacity of partners, alteration in the shares of the partners in the firm, etc. There was a change in the constitution of the petitioner-firm consequent on the death of the partner. In Sri Rama Talkies' case [1973] 87 ITR 615 (AP), it was held that firm is constituted, by its partners and even if in accordance with the terms of the deed of partnership a partner is replaced by another, without the firm being dissolved, there is a change in the constitution of the firm for the purpose of s. 184(7) of the I.T. Act, 1961. In Kaithari Lungi Stores v. CIT [1976] 104 ITR 160 (Mad), it was held by a Division Bench of the Madras High Court as under (headnote) : " A change in the constitution of a firm may arise by admission, retirement, explusion, insolvency, or death of one or more partners subject to the conditions referred to in sections 31 to 35 of the Partnership Act. In the case of death of a partner, there should be a contract express or implied between the partners that the firm shall not be dissolve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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