1987 (9) TMI 94 - AT - Income Tax

Summary

Issues Involved:
1. Whether one or two assessments should have been made in the matter.

Detailed Analysis:

Issue 1: Whether one or two assessments should have been made in the matter.

Background:
During the relevant accounting year, a partner of the assessee firm retired, and the firm was reconstituted. The assessee claimed that the former and the later firms were two different entities, thus necessitating two separate assessments. The Income Tax Officer (ITO) disagreed, stating that it was merely a change in the constitution of the firm under section 187(2) of the IT Act, and only one assessment should be made for the two periods.

First Appeal:
The Appellate Assistant Commissioner (AAC) sided with the assessee, directing the ITO to make two assessments. The AAC relied on the Rajasthan High Court's decision in CIT v. Hind Agencies, which held that the retirement of a partner amounted to a dissolution of the firm if the partnership deed did not provide for its continuance after such an event.

Second Appeal:
The revenue appealed to the Tribunal. The Tribunal noted the controversy among various High Courts regarding this issue. The Rajasthan High Court's view, which supported two assessments in cases of reconstitution due to a partner's retirement, was in line with the majority view. However, the Tribunal also noted that the legislature had clarified the law by amending section 187 through the Taxation Laws (Amendment) Act, 1984, stating that the firm is deemed dissolved only upon the death of a partner. This amendment impliedly endorsed the minority view that a change in the constitution does not constitute dissolution if one of the old partners continues in the new firm.

Judicial Member's Opinion:
The Judicial Member referenced the Supreme Court's decision in CIT v. Vegetable Products Ltd., which favored the assessee when two views were possible. However, he concluded that the legislative amendment clarified that only one assessment should be made, setting aside the AAC's order and restoring the ITO's decision.

Accountant Member's Dissent:
The Accountant Member disagreed, arguing that a change in the constitution occurs under specific conditions, such as the retirement of a partner without dissolution, admission of new partners, or the partners' intention for continuity. He emphasized that the amendment clarified dissolution due to a partner's death but did not affect other dissolution scenarios. He cited the Delhi High Court's decision in CIT v. Sant Lal Arvind Kumar and the Special Bench decision in Pelikan Paper & Stationery Mart v. ITO, which supported the view that dissolution followed by reconstitution constitutes succession, necessitating two assessments.

Third Member's Opinion:
The Third Member, President Ch. G. Krishnamurthy, sided with the Accountant Member. He noted that the Rajasthan High Court and other High Courts had consistently held that dissolution followed by reconstitution with some old partners constituted succession. He emphasized that the partnership's relationship ended with the dissolution deed, making the subsequent partnership a distinct entity. The Third Member referenced several High Court decisions, including CIT v. G. N. Textile, CIT v. Raj Bros., and R. Sithan Chetty Sons, which supported the view that dissolution followed by reconstitution requires two assessments. He concluded that the case involved succession, not a change in the constitution, and thus two assessments were necessary.

Final Order:
In accordance with the majority view, the appeal filed by the revenue was dismissed, affirming that two assessments should be made due to the succession of the firm following the retirement and dissolution.