9911796707
TMI Blog1962 (7) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. per cent. 1. T. Stanes and Company Ltd. 26,000 26 2. Stanes (Motors) South India Ltd. 25,000 25 3. P.W. Davis 15,000 15 4. M.P. Davis 25,000 25 5. A.J. Davis 9,000 9 Total 1,00,000 100 3. The duration of the partnership was agreed to be ten years from November 5, 1948. The following are certain other important clauses in the aforesaid deed, annexure "A", clause 17. Clause 17.--If any partner shall-- (a) commit any breach of clause 15 or 16, or (b) commit any act of insolvency, or (c) do or suffer any act which would be lawful ground for the dissolution of the partnership, then, in any of such events, the other partners may by one calendar month's notice in writing to the offending partners determine the partnership. Clause 18.--(i) If during the continuance of the partnership, any partner shall die or go into liquidation or determine the partnership by notice pursuant to the provisions hereinbefore contained, the surviving partners or partner shall in the proportions in which they are entitled to share in the net profits of the partnership have the option of purchasing as from the date of the dissolution and upon the terms hereinafter appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er or his representatives of any unpaid interest or profits coming to him including his share of the sum for the time being standing to the credit of the reserve fund and of the amount due to him in respect of capital and the surplus (if any) of the moneys realised as aforesaid shall be divided between the partners or their representatives in the shares in which the partners shall be entitled to the net profits of the said business and the partners or their representatives shall execute such instruments for facilitating and effecting the realisation and division of the assets of the partnership and for their mutual indemnity and release and otherwise as may be requisite or proper. Provided that if the moneys realised as aforesaid shall not be sufficient to pay in full the respective shares of the partners or their representatives in the said capital the same shall be paid rateably as far as such moneys will extend and no partner or his representatives shall have any claim against the others or other of them or their or his representatives in respect of such deficiency. 4. As some time later, disputes and dissensions arose among the partners, a deed styled as "dissolution deed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o in paragraph 2 supra only on June 30, 1955, in the proportions of 51 per cent. and 49 per cent. as aforesaid. 11. For the assessment year 1952-53 in respect of the previous year ended June 30, 1951, two applications for registration of the aforesaid firm were filed under section 26A. One was a renewal application in respect of the profits up to September 21, 1950, the date of the dissolution signed by the five partners aforesaid, and the other, an original application for the period thereafter, signed by only the two partners, items Nos. 1 and 2, referred in paragraph 2 supra, who also signed the renewal applications for the subsequent four years of assessments 1953-54 to 1956-57. 12. The Income-tax Officer refused to register the firm for all the aforesaid five years of assessment 1952-53 to 1956-57 for the following reasons: "(a) So far as the first period up to September 21, 1950, is concerned, it is admitted that accounts have not been made up to the date and profit and loss the amounts agreed upon between the retiring and the continuing partners as consideration for the purchase of the former's interests. The continuing partners further agree to pay the retiring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credit the following capital contribution: T. Stanes and Company Limited 51,000 Stanes Motors (South India) Limited 49,000 Total 1,00,000 account determined and adjusted to partners' accounts. Thus the assessee is not entitled to claim registration or renewal of registration for that matter, for the first period. (b) The original partnership deed, though for a period of ten years from November 5, 1948, stands automatically cancelled in the face of the dissolution deed executed on September 21, 1950, and which in no case can be taken to mean as an operative instrument indicating the formation or continuation of any partnership." A copy of the Income-tax Officer's order of assessment for the assessment year 1952-53 which also deals with the above matter is annexed hereunto as annexure "D" and forms part of the case. The assessee appealed to the Appellate Assistant Commissioner against the aforesaid refusal of registration for all the five years. The Appellate Assistant Commissioner upheld the refusal for the four years 1952-53 to 1955-56 in the following words reproduced from his consolidated order: "...It is, however, not necessary for me to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in for reduction in the number of partners and for the continuance of the business by the surviving partners. The dissolution of the partnership envisaged by the deed dated September 21, 1950, is in pursuance of the provisions of clause 18 of the original partnership deed and not of clause 19 which contemplated a total dissolution. Under clause 39 of the Indian Partnership Act, 1932, dissolution of the firm means dissolution of partnership between all the partners of a firm. This envisages that the firm comes to an end and is completely dissolved. Clause 19 envisages such a dissolution. In clause 18, the word dissolution has been used in rather a loose manner for what it really contemplates is the retirement of certain partners and the continuance of the business by the surviving partners. The deed, dated September 21, 1950, though described as a dissolution of partnership really incorporates the retirement of certain partners and continuance of the business by the other partners. It is very significant to note that the continuing partners constitute one set and the retiring partners constitute another set. Clause I of the deed specifically refers to the fact that the partnership i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Against the aforesaid decision of the Appellate Assistant Commissioner, both the parties appealed. The department challenged the decision for 1956-57 on the ground that there was no proper deed specifying the individual shares of the partners, whereas the assessee contended in the appeals for assessment years 1952-53 to 1955-56, that all the rules had been complied with. 16. In the assessee's appeal, the argument was that there was merely a change in the constitution brought about by the dissolution deed, annexure "B" aforesaid, that the assessee firm continued to carry on the same business with the same assets and liabilities as before and annexures "A", "B" and "C" among them set out clearly and unambiguously its constitution and profit-sharing proportions. 17. In the above appeals, the Tribunal found that the deed dated September 21, 1950, annexure "B" aforesaid, had brought about a dissolution of the old firm, the firm of two partners was a new firm that had come into existence on that day, there was no proper instrument in writing constituting such a firm. The Tribunal accordingly held that the new firm was not entitle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot;previous year" for assessment year 1955-56, a profit of ₹ 1,26,352 was computed by the Income-tax Officer before whom no claim was made for any set-off against it of the aforesaid losses of 1950-51 and 1951-52. Though the assessee appealed to the Appellate Assistant Commissioner against the aforesaid computation, it did not raise in it any ground in respect of the carry forward. 24. The assessee appealed to the Appellate Tribunal against the orders of the Appellate Assistant Commissioner for the assessment years 1952-53 and 1955-56 referred to in paragraphs 20 and 22 supra, seeking to get set-off of the aforesaid carry forward losses of 1950-51 and 1951-52 under the authority of proviso (e) to section 24(2). The Tribunal dealt with the contention for assessment year 1955-56 notwithstanding the assessee's failure to raise it before the Appellate Assistant Commissioner and observed that on this short ground alone this appeal became liable to be rejected. It also dismissed both the appeals as a consequence of its finding aforesaid that the old firm was at an end on September 21, 1950, and that there was not a mere change in the constitution that took place on that d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5, 1955-56, and 1956-57. The Income-tax Officer refused registration and on appeal by the assessee to the Appellate Assistant Commissioner registration was refused for the first four years, but was granted for the fifth year 1956-57. Both the assessee and the department preferred appeals to the Income-tax Appellate Tribunal which restored the decision of the Income-tax Officer. The Tribunal however has referred the following questions of law to this court under section 66(1) of the Act at the instance of the assessee: "1. Whether the firm as constituted up to September 21, 1950, is the same as the one that carried on the business thereafter with only a change in its constitution? 2. Whether the firm is entitled to registration for the assessment years 1952-53 to 1956-57 under section 26A? 3. If the answer to question No. 2 is in the negative, whether the losses of assessment years 1950-51 and 1951-52 require to be set off in the assessments of 1952-53 and 1955-56?" Tyresoles (India), Calcutta, referred to in this judgment as the assessee, was originally a partnership firm consisting of five partners. The articles of partnership were embodied in a written instrument date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecute all such assurances as may be necessary for vesting in the partners exercising the option the assets including the goodwill and property of the partnership at the date of the dissolution." Clause 18 extracted above prevents the dissolution of the firm which would normally occur in the event of the death of a partner or in the event of the liquidation of one of the partners which is a limited company registered under the Indian Companies Act. The right of the other partners of the firm who remained, after the death of any one of the partners or after the winding up of any one of the partners of the firm, which is a limited company, to purchase the shares of the deceased partner or the extinct partner when availed of would result in a reconstitution of the firm. Clause 19 may also be set out. It is as follows: "Upon dissolution of the partnership in any event not otherwise herein provided for a full and general accounting of the assets, liabilities and transactions of the partnership shall be taken and the assets and property thereof shall with all convenient speed be realised and sold and the debts due to the partnership got in and the proceeds shall be applied in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ument refers to the Davis Group as the retiring partners and to the limited companies as the continuing partners. Clause 1 of this deed of dissolution is as follows: "The said partnership between the parties hereto in the business of manufacturing and selling tyresoles, etc., carried on by them under the said deed of partnership is hereby declared to be dissolved by mutual consent so far as the retiring partners are concerned on this the 21st day of September, 1950, and the said business shall from that date be carried on by the continuing partners as their business and notice of such dissolution should be forthwith advertised in the Fort. St. George Gazette, Madras, and notified to the customers of the said partnership." Clause 3 runs thus: "The continuing partners shall on the execution of this deed at once pay the retiring partners, Mr. A.J. Davis, a sum of ₹ 9,739-11-6, Mr. P.W. Davis, a sum of ₹ 16,367-10-9 and M.P. Davis, a sum of ₹ 27,277-13-0, being the amounts agreed upon between the retiring and the continuing partners as consideration for the purchase of the former's interest. The continuing partners further agree to pay the retiring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining the true scope and character of the instrument. Before discussing the crucial question arising in the case, namely, whether there was in fact a dissolution of the firm constituted under the instrument dated November 5, 1948, or whether that firm was merely reconstituted after the retirement of the Davis Group of partners, we shall refer to some other facts. The book results of profits and losses for the five years in question are as follows: Previous year Assessment year Agreed results Rs. 30-6-1951 1952-53 up to 21-9-1950 810 loss from 22-9-1950 to 30-6-1951 97 loss 30-6-1952 1953-54 11,572 profit 30-6-1953 1954-55 37,661 profit 30-6-1954 1955-56 1,26,261 ,, 30-6-1955 1956-57 1,28,993 ,, There was no division and allocation of the loss incurred for the five years from July 1, 1950, to June 30, 1955. The losses commencing from 1950-51 were carried forward from year to year and it was only after the closing of the books for the year ended June 30, 1955, there was a division of profits between the two limited companies in the proportion of 51 per cent. and 49 per cent. For the assessment year 1952-53, two applications for registration of the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the terms of the deed dated September 21, 1950, and as admittedly in respect of this year there has been a division of profits between the partners in the ratio of 51% and 49%, the shares to which they are entitled. The Income-tax Appellate Tribunal differred from the view of the Appellate Assistant Commissioner and held that there was in fact a dissolution, that the terms of the document dated September 21, 1950, could not be construed as bringing about an arrangement by way of reconstitution of the firm, that that instrument cannot be treated or construed as an instrument of partnership between the two limited companies and that registration should be refused on the short ground that the partnership sought to be registered is not evidenced by an instrument in writing. It is this view which has been challenged before us. The registration for the period prior to September 21, 1950, was refused on the ground that there was no distribution of losses between the partners. The dissolution and reconstitution of a partnership are two different legal concepts. The dissolution puts an end to the partnership, but reconstitution keeps it subsisting, though in another form. A dissolution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... number of the remaining partners should be two or more). The remaining partners would then continue to carry on the business of the firm, and such continuance does not involve the concept of the dissolution of the firm as originally constituted and the formation of a new firm by the other partners. Section 17(a) of the Partnership Act prescribes that the mutual rights and duties of the partners in the reconstituted firm remain (subject to the contract between the parties) the same as they were immediately before the change, as far as may be." We have now to address ourselves to the question of the proper interpretation of the so-called deed of dissolution dated September 21, 1950. Mr. S. Ranganathan, learned counsel for the department, laid considerable stress on the words "dissolution" and "dissolved" and "late" occurring in various parts of the instrument. Mr. Ramamani, learned counsel for the assessee, was not less insistent in harping upon the expressions "continuing partner" and "retiring partners" used throughout the instrument in support of his contention that the real intention of the parties was a retirement of three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f dissolution that the quondam partnership business should be carried on by the other members for his benefit also. Such a stipulation is wholly repugnant to dissolution. Now there cannot be both a dissolution and a continuance. But in the case of a retirement of a partner it is open to the outgoing partner to bargain for a share in the future profits of the firm after his retirement as consideration for his retirement. A clause of this description (clause 3 in the deed dated September 21, 1950) is so much against the grain of dissolution and is so harmonious with retirement of partners resulting in reconstitution that it should be taken as a circumstance indicating reconstitution. The absence of any fresh deed of partnership between the two surviving partners also indicates not a dissolution but a continuance of the old firm. We are unable to construe the provisions of this document as having effectuated a dissolution and in our opinion that document merely embodies the arrangement by which three of the partners retired from the firm. Learned counsel for the department does not dispute that if there was no dissolution in fact the articles of partnership dated November 5, 1948, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the constitution of the firm and it follows that in regard to the two years the assessee would be entitled to relief by way of carrying forward the losses attributable to the shares of the continuing partners. In respect of the loss of the assessment year 1951-52 sought to be set off in the assessment year 1955-56 we do not think that the assessee will be entitled to any relief in view of what has been pointed out by the Appellate Tribunal in its order. The Tribunal observes: "The claim relates to the 1955-56 assessment. But in the intervening two years, 1953-54 and 1954-55, there were profits against which a portion of these losses now sought to be set off could have been set off. This the assessee failed to claim at the relevant time. This contention was not taken before the Appellate Assistant Commissioner and does not arise out of his order. The appeal is liable to be rejected on this ground." In our opinion, the assessee is clearly disentitled to have the losses of 1950-51 and 1951-52 set off against the income of the assessment year 1955-56 for the above reason set out by the Tribunal. Question No. 3 is therefore answered in favour of the assessee only in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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