1986 (1) TMI 31 - HC - Income Tax

Summary

Issues:
- Dissolution of a partnership firm on the death of a partner
- Assessment of income for different periods after the dissolution

Analysis:
The case involved a partnership firm comprising five partners, one of whom, Smt. Hari Bai, passed away on September 22, 1977. Following her death, the remaining partners admitted two new partners and executed a new partnership deed on October 5, 1977, which came into effect from September 23, 1977. The Income-tax Officer initially clubbed the income of the two periods in a single assessment, contending that there was a change in the firm's constitution but no dissolution on September 22, 1977. However, the Appellate Assistant Commissioner disagreed, stating that the firm stood dissolved on Smt. Hari Bai's death, and two separate assessments should have been conducted.

The Tribunal, citing the Andhra Pradesh High Court's decision in Vinayaka Cinema, held that under section 42 of the Income-tax Act, a firm is automatically dissolved on the death of a partner unless there is a contrary agreement in the partnership deed. As there was no such agreement in the original deed, the firm was deemed dissolved upon Smt. Hari Bai's demise. Consequently, the Tribunal affirmed the Appellate Assistant Commissioner's view that two assessments should have been made for the different periods. The Tribunal dismissed the Income-tax Officer's appeal, emphasizing the necessity for separate assessments post the dissolution of the firm.

In a related case involving the same assessee, it was previously established that the Tribunal erred in not recognizing the dissolution of the firm upon the death of another partner. The court referred to various precedents, including Addl. CIT v. M K M Moosa Bhoy Amin and Surana and Co. v. CIT, to support the stance that the firm's dissolution on the death of a partner necessitates separate assessments for distinct periods. The court concurred with the Tribunal's decision that on Smt. Hari Bai's demise, the firm ceased to exist, warranting separate assessments for the relevant periods.

In conclusion, the court upheld the Tribunal's decision, affirming that the partnership firm dissolved upon the death of Smt. Hari Bai, and the Income-tax Officer should have conducted separate assessments for the periods ending on September 22, 1977, and from September 23, 1977, to March 31, 1978, for the assessment year 1978-79. The judgment favored the assessee over the Revenue, and no costs were awarded. The court directed the answer to be returned to the Tribunal in compliance with the Income-tax Act.