TMI Blog1975 (9) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... n the three surviving partners and the widow of the deceased. This new partnership deed was executed on June 15, 1967, and the new partnership was to come into existence from. May 26, 1967. Under the new deed of partnership the widow of the deceased was given 10 per cent. share in the profits and the three surviving partners of the old firm were given 30 per cent. share each in the profits of the firm. The assessee contended that two separate assessments should be made on the firm because, on the death of Harjivandas Hathibhai, one of the partners, the firm was automatically dissolved since in the deed of partnership of April 29, 1960, there was no provision in the terms of the partnership deed that, on the death of one of the parties, the firm was to continue. It was contended that, on the death of Harjivandas Hathibhai on May 25, 1967, the old firm was dissolved and, thereafter, a new firm came into existence with effect from May 26, 1967. The profits of the business were divided on time-basis between the two firms for the period November 13, 1966, to May 25, 1967, for the undissolved (sic) firm and for the period May 26, 1967, to November 2, 1967, for the new firm. It was conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in these terms : " 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 deals with succession of one firm by another firm. It provides-- " Where a firm carrying on a business or profession is succeeded by another firm, and the case is not one covered by section 187, separate assessments shall be made on the predecessor firm and the successor firm in accordance with the provisions of section 170." Section 189 deals with the situation where the firm is dissolved or business discontinued. Under sub-section (1) of section 189 : " Where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the Income-tax Officer shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here the firm is dissolved, but the business is not discontinued, there being change in the constitution of the firm, assessment has to be made under section 26(1), and if there is succession to the business, assessment has to be made under section 26(2). It may be pointed out that provisions of section 26, sub-section (1), of the Indian Income-tax Act, 1922, with which the Allahabad High Court was concerned, were similar to the provisions of section 187, sub-section (1), of the Income-tax Act, 1961, with which we are concerned. Besides their decision on certain observations of the Supreme Court in Shivyam Poddar v. Income-tax Officer [1964] 51 ITR 823 (SC), the learned judges of the Allahabad High Court who decided the case in R. B. Jessa Ram Fateh Chand v. Commissioner of Income-tax [1971] 81 ITR 409 (All) held on the above lines. The conclusion of the Allahabad High Court was that, on the facts and in the circumstances of the case, change occurred in the constitution of the firm within the meaning of section 26(1) of the Indian Income-tax Act, 1922, and assessment should have been made on the firm as constituted at the time of making the assessment. This decision of the Allaha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. At page 308 of the report, Dhillon J., who delivered the judgment of the Division Bench, has referred to the decision of the Allahabad High Court in R. B. Jessa Ram Fateh Chand v. Commissioner of Income-tax [1971] 81 ITR 409 (All). Now, it may be pointed out that recently a Full Bench of the Allahabad High Court in Dahi Laxmi Dal Factory v. Income-tax Officer [1976] 103 ITR 517 (All) [FB] has in terms overruled the earlier decision of the Division Bench in R. B. Jessa Ram Fateh Chand v. Commissioner of Income-tax [1971] 81 ITR 409 (All). The majority of the learned judges constituting the Full Bench, namely, Gulati and C. S. P. Singh JJ., held that the decision in R. B. Jessa Ram Fateh Chand's case [1971] 81 ITR 409 (All) was not correctly decided. The third learned judge, H. N. Seth J., dissented from this view but ultimately the matter was decided in accordance with the majority view. Gulati J., delivering the majority judgment of the Full Bench, observed at page 529: " The case of R. B. Jessa Ram Fateh Chand v. Commissioner of Income-tax [1971] 81 ITR 409 (All) has been decided on the basis of the observations quoted above in the case of Shivram Poddar's case [196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and when it talks of admission of a new partner it refers to section 31 of the Indian Partnership Act. Gulati J. emphasised the fact by restating that by incoming and outgoing of a partner the firm is not dissolved. But once a firm is dissolved either by agreement or by operation of law, the question of reconstitution does not arise even when the new firm has common partners and takes over the same business. A firm in order to be reconstituted must remain in existence. The following passage from the decision of the Supreme Court in Commissioner of Income-tax v. A. W. Figgies Co. [1953] 24 ITR 405, 408 (SC) was cited by Gulati J. : " It is true that under the law of partnership a firm has no legal existence apart from its partners and it is merely a compendious name to describe its partners but it is also equally true that under that law there is no dissolution of the firm by the mere incoming or outgoing of partners. A partner can retire with the consent of the other partners and a person can be introduced in the partnership by the consent of the other partners. The reconstituted firm can carry on its business in the same firm's name till dissolution. The law with respect to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even though some of the partners of the two firms are common." We respectfully agree with the reasoning of the majority of the learned judges of the Allahabad High Court in Dahi Laxmi Dal Factory's case [1976] 103 ITR 517 (All) [FB] and with respect to the learned judges of the Punjab and Haryana High Court who decided the case in Dharam Pal Sal Dev v. Commissioner of Income-tax [1974] 97 ITR 302 (Punj) and the learned judges of the Allahabad High Court who decided the earlier case of R. B. Jessa Ram Fateh Chand v. Commissioner of Income-tax [1971] 81 ITR 409 (All), we are unable to agree with their conclusions. . Even apart from the decision of the learned judges of the Allahabad High Court in the Full Bench decision referred to above, it is obvious on general principles that unless the words of the Income-tax Act compel us to do so, it would not be correct to depart from the well-known principles of partnership law. The partnership law contemplates retirement of a partner and even though a partner retires, the firm continues as before. What is meant by a change in the constitution of the firm is coming in of a new partner with the consent of all the existing partners or by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and circumstance of the particular case, sufficient material to justify an inference that originally there was an agreement between the partners of the firm as originally constituted, that on the death of one of the partners, the firm should not stand dissolved. Mr. Kaji is right when he says that the provisions of section 42(c) of the Indian Partnership Act do not require that there must be an agreement in writing between the partners that, on the death of one of the partners, the firm will not stand dissolved. Even if there is no such express term in the partnership agreement and even if in some cases the partnership deed comes to provide that by the death of one of the partners the firm should stand dissolved, from the circumstances of the case it may be possible to infer that before the death of the partner who died there was an agreement between the surviving partners and the partner who died that in the event of death of one of the partners the firm should not stand dissolved. It is an inference to be drawn from the conduct of the parties but it must be borne in mind that the conduct which is material is of the surviving partners and the agreement that is to be inferred is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether there being no specific agreement to the contrary as required by section 42(c) of the Indian Partnership Act, from the facts and circumstances of the case an inference can be drawn that there must have been an agreement between the surviving partners and the deceased partner that ill the event of the death of one of the partners the firm should not stand dissolved. No effort was made by the Tribunal to find out whether there was such an agreement or not or whether such an agreement could or could not be inferred. Mr. Kaji has taken us through several decisions of the different High Courts for the purpose of pointing out that there can be such an agreement which has to be inferred from the facts and circumstances of the case but since we agree with him on this proposition, we have not discussed in detail these different authorities cited by him at the bar for this purpose. There are decided cases of this High Court, for example, in Vinodkumar Ratilal v. Commissioner of Income-tax [1975] 100 ITR 564 (Guj) and the decision in Income-tax Reference No. 7 of 1972 decided on November 26, 1973 [Addl. Commissioner of Income-tax v. United Commercial Co. [1977] 106 ITR 264 (Guj)], w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nything as and by way of a share in the goodwill of the firm. Thus, by mutual agreement between the partners, by clause 8 it was agreed that the partner leaving the firm either by retirement or by death would not be entitled to any share in the goodwill. Once there was no goodwill allottable to the share of the deceased as a result of the death of Harjivandas Hathibhai, it is obvious that there was no question of taking the account in the middle of the year, namely, as on May 25, 1967, and distribution of the profits between the two parties on the basis of actual taking of accounts instead of on mere time-basis. It may be pointed out that in Vinodkumar Ratilal's case [1975] 100 ITR 564 (Guj) the distribution of the profits was on time-basis and on that basis the whole matter was argued out before this court. Therefore, the distribution of profits on time-basis is also a well-known method of distributing profits, between the two firms when the same business has been continued and afterwards when the periods have been separated. Under these circumstances the fact that the profits were divided on time-basis cannot work against the assessee, and cannot lead to an inference by itself th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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