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TMI Blog2005 (12) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... Kripal). It was claimed that the firm was dissolved by the deed dated July 31, 1982 and on August 1, 1982, a new partnership deed was drawn consisting of all the three partners of the earlier deed and one new partner Sri Sanjay Kumar who is also the son of Sri Raj Kripal. The profit sharing ratio of Sri Raj Kripal which was 45 per cent. under the old deed was reduced to 40 per cent. under the new deed while in the case of Smt. Brahma Devi it was 35 per cent. under the old deed but 5 per cent. under the new deed. The profit sharing ratio of Sri Sunil Kumar was 20 per cent. under the old deed but 30 per cent. under the new deed and that of the newly added partner Sri Sanjay Kumar was 25 per cent. The firm filed two returns of income-tax. The first was for the period October 8, 1981 to July 31, 1982 and the second was for the period August 1, 1982 to October 26, 1982. The Income-tax Officer came to the conclusion that there was merely a change in the constitution of the firm and, therefore, by virtue of the provisions of section 187 of the 1961 Act framed one assessment for the aforesaid two periods. This part of the order of the Income-tax Officer was sustained by the Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that the only truck held by the firm was allotted to one of the partners, namely, Sri Raj Kripal who carried on the truck business in partnership with another gentlemen and the Department had accepted that such business belonged only to that firm, namely, Saraswati Carriers which had been constituted by the deed dated August 1, 1982 between Raj Kripal and Smt. Anjali Garg, wife of Sri Sunil Kumar (grandson of Sri Raj Kripal). The answer to the reference would depend upon the interpretation of the provisions of sections 187, 188 and 189 of the 1961 Act and for the sake of convenience the said sections are reproduced below: "187. Change in constitution of a firm.- (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. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 159." Before proceeding to analyse the aforesaid sections of the 1961 Act, it may be useful to examine the relevant provisions of the Indian Partnership Act, 1932 (hereinafter referred to as "the Partnership Act"). Section 4 defines "partnership" as the relation between persons who have agreed to share the profit of the business carried by all or any of them acting for all. Persons who have entered into partnership with one another are called individually "partners" and collectively "a firm" and the name under which the business is carried on is called the "firm name". Chapter V of the Partnership Act, containing sections 31 to 38 deals with incoming and outgoing partners. Section 31 of the Partnership Act provides that subject to contract between the partners and to the provisions of section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners. It further provides that subject to the provisions of section 30, a person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he became a partner. Section 32 of the Partnership Act deals with retirement of a partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p...." However, inroads were made in this conception by certain statutes including the Income-tax Act by regarding firms as distinct entities. In this regard we may usefully refer to a passage from the aforesaid decision of the Supreme Court in the case of Rao Bahadur Ravulu Subba Rao v. CIT [1956] 30 ITR 163 which is as follows: "But, as pointed out by this court in Dulichand Laxminarayan v. CIT [1956] 29 ITR 535 inroads have been made by statutes into this conception, and firms have been regarded as distinct entities for the purpose of those statutes. One of those statutes is the Indian Income-tax Act, which treats the firm as a unit for purposes of taxation. Thus, under section 3 of the Act the charge is imposed on the total income of a firm, the partners as such being out of the picture, and accordingly under section 23 of the Act, the assessment will be on the firm on its total profits...." In CIT v. A.W. Figgies & Co. [1953] 24 ITR 405, the Supreme Court held as follows: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , every person who was, at the time of its discontinuance, a partner is liable in respect of income, profits and gains of the firm, to be assessed jointly and severally, (2) each partner is liable to pay the amount of tax payable by the firm, and (3) that the provisions of Chapter IV, so far as may be, apply to such assessment...." And while interpreting section 44 of the 1922 Act it was observed: "...In effect the Legislature has enacted by section 44 that the assessment proceedings may be commenced and continued against a firm of which business is discontinued as if discontinuance has not taken place. It is enacted manifestly with a view to ensure continuity in the application of the machinery provided for assessment and imposition of tax liability notwithstanding discontinuance of the business of firms. By a fiction, the firm is deemed to continue after discontinuance for the purpose of assessment under Chapter IV." Thus, the special provisions made in the 1922 Act governed the field even though they ran contrary to the provisions of Partnership Act. In the case of CIT v. S.V. Angidi Chettiar [1962] 44 ITR 739, the Supreme Court held that if a registered firm is exposed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h therein, and its provisions show an intention to depart from the common rule, qui facit per alium facit per se." It is, therefore, clear from the principle enunciated by the Supreme Court in the aforementioned cases, that when a special provision is made in the Income-tax Act which is contrary to the provisions of the Partnership Act then effect has to be given to the provisions of the Income-tax Act and resort cannot be taken to the provisions of the Partnership Act. We have, therefore, to examine the provisions of the 1961 Act. Section 2(31) of the 1961 Act defines a "person" to include an individual, a Hindu undivided family, a company, a firm, an association of persons or a body of individuals whether incorporated or not, a local authority, and every artificial juridical person, not falling within any of the aforesaid. Thus, the concept under the Partnership Act of a "partnership" being an association of individuals and a firm being a collective name of such individuals who constitute the firm has been modified and a firm has been equated with a person having a separate entity. It is, therefore, reasonable to infer that a firm, for the purposes of income-tax, has a separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o recover from the person succeeded the amount of any tax so paid. 44. Liability in case of a discontinued firm or partnership.- Where any business, profession or vocation carried on by a firm or association of persons has been discontinued or where an association of persons is dissolved, every person who was at the time of such discontinuance or dissolution a partner of such firm or a member of such association shall, in respect of the income, profits and gains of the firm or association, be jointly and severally liable to assessment under Chapter IV and for the amount of tax payable and all the provisions of Chapter IV shall, so far as may be, apply to any such assessment." In the case of Shivram Poddar v. ITO [1964] 51 ITR 823, the Supreme Court observed as follows: "Under the ordinary law governing partnerships, modification in the constitution of the firm in the absence of a special agreement to the contrary amounts to dissolution of the firm and reconstitution thereof, a firm at common law being a group of individuals who have agreed to share the profits of a business carried on by all or any of them acting for all, and supersession of the agreement brings about an end of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 187(2) provides that 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." However, the proviso to section 187(2) stipulates that nothing contained in clause (a) shall apply to a case where the firm is dissolved on the death of any of its partners. There is nothing in section 187(2) which limits the change to a case where the firm is not dissolved. The changes of the nature contemplated under section 187(2) can arise without the firm being dissolved or upon dissolution of the firm. Under the Partnership Act, the phrase "change in the constitution of the firm" has a different meaning than the one given to "dissolution", but for the purpose of section 187 of the 1961 Act the Legislature has given a different meaning and made a departure. Section 187(2) creates a legal fiction and suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2983; 5 RC 204, 226, the Supreme Court held as follows: "The language of the definition of the phrase in Explanation 4 to section 4A is sufficiently clear and unambiguous. This coupled with the use of the word 'means' in the Explanation shows that the definition is exhaustive. As has been observed in Feroze N. Dotivala v. P.M. Wadhwani [2003] 1 SCC 433, 442: 'Generally, when the definition of a word begins with "means" it is indicative of the fact that the meaning of the word has been restricted; that is to say, it would not mean anything else but what has been indicated in the definition itself.... Therefore, unless there is any vagueness or ambiguity, no occasion will arise to interpret the term in a manner which may add something to the meaning of the word which ordinarily does not so mean by the definition itself, more particularly, where it is a restrictive definition.'" The Constitution Bench of the Supreme Court in PLDR Corpn. Ltd. v. Presiding Officer, Labour Court [1990] 3 SCC 682, 717 held that when the statute says that a word or phrase shall mean certain things it is a "hard-and-fast definition, and no other meaning can be assigned to the expression than is put do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new firm, it would be a case of change in the constitution of the firm as defined under section 187(2)(a) and if it is so construed then the question whether the firm has been dissolved or not has no relevance. The view which we are taking finds support from the proviso to section 187(2) introduced by the Taxation Laws (Amendment) Act, 1984, with retrospective effect from April 1, 1975. The proviso stipulates that nothing contained in section 187(2)(a) shall apply to a case where a firm is dissolved on the death of any of its partners. A firm can be dissolved on account of many factors including the death of any of the partners. The proviso to section 187(2) clearly stipulates that in case of dissolution on death of any of the partners, there shall not be a change in the constitution of the firm. If the main provision, i.e., section 187(1) did not apply to dissolution of firms then there was no necessity for the Legislature to carve out an exception by taking away such cases of dissolution of firm which arise because of the death of any of the partners. The normal function of a proviso is to except something out of the enactment or to qualify something enacted therein which, but f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covered by the terms of sub-clause (ii) will be exempted provided a declaration in the form prescribed is furnished. To put it in other words, a dealer cannot get the exemption unless he furnishes the declaration in the prescribed form. It is well-settled that 'the effect of an excepting or qualifying proviso, according to the ordinary rules of construction, is to except out of the preceding portion of the enactment, or to qualify something enacted therein, which but for the proviso would be within it': see 'Craies on Statute Law', 6th edn. page 217. If the intention of the Legislature was to give exemption if the terms of the substantive part of sub-clause (ii) alone are complied with, the proviso becomes redundant and otiose. To accept the argument of the Learned counsel for the appellant is to ignore the proviso altogether, for if his contention be correct it will lead to the position that if the declaration form is furnished, well and good; but, if not furnished, other evidence can be produced. That is to rewrite the clause and to omit the proviso. That will defeat the express intention of the Legislature...." In Ishverlal Thakorelal Almaula v. Motibhai Nagjibhai, AIR 1966 SC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Union v. Metropolitan Life Assurance Co. [1897] AC 647. Normally, a proviso does not travel beyond the provision to which it is a proviso. It carves out an exception to the main provision to which it has been enacted as a proviso and to no others..." This view was reiterated by the Supreme Court in the case of Union of India v. Sanjay Kumar Jain [2004] 6 SCC 708. The aforesaid decisions clearly lay down that a proviso is added to an enactment to create an exception to what is contained in the main section and so unless the main section included dissolution of the firm, the proviso would not have been introduced. Thus, even though the main enactment is absolutely clear in itself, yet the proviso to section 187(2) of the 1961 Act reinforces the conclusion reached by us. In view of the aforesaid discussion, the inescapable conclusion is that section 187(2) of the 1961 Act clearly defines as a "change in the constitution of the firm" and there is nothing in the section 187 of the 1961 Act to exclude the cases where the firm is dissolved. The view which we have taken finds support from the recent decisions, of this court in the case of Hindustan Motors Finance Co. [2005] 276 ITR 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p would stand dissolved on the death or retirement of a partner. Hence, the assessee filed two returns, one for the period April 1, 1978, to July 29, 1978, and the other for the period September 21, 1978 to March 31, 1979, alleging that there was dissolution of the firm and hence there should be two assessments in that assessment year. However, the Income-tax Officer, made one assessment, but the Commissioner of Income-tax (Appeals) accepted the plea of the assessee. The Department went in further appeal to the Tribunal. But the Tribunal rejected the appeal following the decision of the Full Bench in Badri Narain Kashi Prasad v. Addl. CIT [1978] 115 ITR 858 (All)... A perusal of section 187(2)(a) of the Income-tax Act shows that by legal fiction for the purposes of the Income-tax Act, if even one of the partners continues to remain in the firm then the firm will not be deemed to be dissolved. Hence, even if the partnership deed says that the firm will stand dissolved on the retirement of a partner, for the purposes of the Income-tax Act, it will not be deemed to be dissolved in view of section 187(2)(a) of the Act." Sri V.B. Upadhayay learned senior counsel for the assessee, howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to what happens when there is a death of a partner within a previous year in case of a registered firm. The Supreme Court held that the High Court was in error in the view it took and the Tribunal was right. It is, therefore, clear that the decision is in the context of the provisions of section 184 of the 1961 Act. In the instant case we are concerned with the provisions of section 187 of the Act and as seen above, for the purposes of this section, the "change in the constitution of the firm" has been defined. This apart, the effect of the introduction of the proviso to section 187(2) of the 1961 Act was not under consideration in this case as it was introduced by the Taxation Laws (Amendment) Act, 1984, with retrospective effect from April 1, 1975, since the assessment related to the year 1965-66. It may further be pointed out that while interpreting section 187(2) of the 1961 Act, this court in the cases of CIT v. Basant Bihari, Gopal Bihari & Co. [1988] 172 ITR 662 ; CIT v. Indralok Picture Palace [1991] 188 ITR 730 distinguished the aforesaid decision of Wazid Ali Abid Ali [1988] 169 ITR 761. Sri V.B. Upadhyay, learned senior counsel for the assessee also placed reliance u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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