TMI Blog1992 (6) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... tax ( Appeals ) in this regard and restoring the order of the Income-tax Officer? " At the instance of the Revenue, the following questions have been referred : " 3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that it is not possible to find any fault with the order of the Commissioner of Income-tax (Appeals ) which forms the subject matter of ITA No. 262 (Gauhati) of 1983 and sustaining the order of the Commissioner of Income-tax (Appeals ) holding that the assessee-firm is entitled to continuation of registration for the period from April 1, 1976, to June 30, 1976 ? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Commissioner of Income-tax (Appeals ) was fully justified in holding that there was no infirmity in the deed of partnership dated September 22, 1976 ? In spite of notice, the assessee did not appear and did not file the paper book. We have heard learned counsel for the Revenue. The assessee firm, M/s. Deorah and Co., was originally constituted by two partners, Usha Devi Deorah and Gobind Prasad Deorah, under a partnership deed dated April 1, 1973. Usha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od ending June 30, 1976. The Commissioner was of the further view that, on the retirement of Usha Devi Deorah, the firm stood dissolved and that, therefore, section 187 of the Act did not apply but that section 188 applied. He directed that there should be two separate assessments, one for the period April 1, 1976, to June 30, 1976, and the other for the period July 1, 1976, to March 31, 1977. The Revenue filed three appeals before the Tribunal challenging the above orders. The Tribunal held that since Gobind Prasad Deorah was a partner of the firm as initially constituted and continued to be a partner in the firm with a new partner, section 187 of the Act was attracted and section 188 would not apply. Accordingly, the order of assessment passed by the Commissioner was set aside and that passed by the Income-tax Officer was restored. The Tribunal noticed that though in the partnership dated September 22, 1976, Gobind Prasad Deorah represented his Hindu undivided family, Suresh Kumar Deorah represented his branch of the Hindu undivided family and Mohan Lal Deorah and Sushil Kumar Deorah are described as guardians of their respective minor sons, yet qua the partnership they functio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt shall be made on the firm as constituted at the time of making the assessment Provided that (i) the income of the previous year shall, for the purposes of inclusion in the total incomes of the partners, be apportioned between the partners who, in such previous year, were entitled to receive the same ; and (ii) when the tax assessed upon a partner cannot be recovered from him, it shall be recovered from 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 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 : Provided that nothing contained in clause (a) shall apply to case where the firm is dissolved on the death of any of its partners." The principle is that assessment shall be made on the firm as constituted at the time of making the assessment under section 143 or s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 170 lays down the general rule in regard to cases of succession to business otherwise than on death. The tax liability would be on the predecessor and successor in proportion to the income up to and from the date of succession. The third contingency relates to cases where the business or profession carried on by a firm has been dissolved or business has been discontinued and is dealt with in section 189. In such a case assessment has to be made of the total income of the firm as if no dissolution or discontinuance had taken place. There is no dispute that the present is not a case attracting section 189. While the assessee contends that the case is attracted by section 188, according to the Revenue, section 187 governs the case. We have been referred to a large number of decisions of various courts arising in cases where, after the death of a partner or partners, the business of the firm had been continued taking in new partners. In some of the cases, the deed of partnership stipulated that notwithstanding the death of a partner, the partnership is to be continued taking the heir of the deceased partner as a new partner. In some other cases, the partnership deed is silent in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view are more or less common. One set of decisions holds that there is a conflict between the proviso to section 187 of the Act and the principle of partnership as found in the Partnership Act and, in case of conflict, the former would prevail over the latter, that the proviso referred to has to be given a wide connotation so as to take in every case of reconstitution including a case of death and taking new partners, that even if it is a case of dissolution under section 188, section 187 has to prevail in view of the words in section 188 to the effect " and the case is not one covered by section 187 ". The reasoning in the contrary line of decisions is that there is nothing in the provisions of the Income-tax Act and in particular in section 187 indicating a legislative intention to depart from the principles relating to partnership found in the Partnership Act, that the proviso to sub-section (2) of section 187 has to be given due meaning consistent with the general principles of law relating to partnership firms, that section 187 would apply only to a reconstituted firm as contemplated in the Partnership Act, that a case of dissolution followed by taking new partners under a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent from the case of a firm consisting of three or more partners and one of them dying or retiring and the business being continued by the remaining partners with or without new partners, since in such a case the surviving partners are at least two in number and in the eye of law they can constitute a partnership by themselves. The absence of plurality of partners surviving the death or retirement or a partner, it appears to us, makes all the difference and distinguishes the present case from those cases. From the catena of decisions cited before us, we will pick out only those cases which dealt with a partnership of two partners. They are Dahi Laxmi Dal Factory v. ITO [1976] 103 ITR 517 (All) [FB] and Vinodkumar Ratilal v. CIT [1975] 100 ITR 564 (Guj). It would also be useful to refer to CIT v. Seth Govindram Sugar Mills [1965] 57 ITR 510 (SC), CIT v. Ram Bilash Purshottam Dass [1993] 200 ITR 461 (All) and CIT v. Sant Lal Arvind Kumar [1982] 136 ITR 379 (Delhi). In CIT v. Seth Govindram Sugar Mills [1965] 57 ITR 510, the Supreme Court dealt with the case of a partnership consisting of only two partners and the deed contained a contract to continue the partnership in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship Act falls in line with section 42 thereof. (emphasis supplied). The Supreme Court held that for the relevant assessment year the status of the assessee was that of a firm within the meaning of section 16(1)(b) of the Indian Income-tax Act, 1922, and the Tribunal was in error in reaching the conclusion that the parties could not be regarded as partners since the surviving partner and the new partner represented their branch of families. The decision in Dahi Laxmi Dal Factory v. ITO [1976] 103 ITR 517 (All) [FB], dealt with the case of a partnership firm of two partners with three minors admitted to the benefits of the partnership. One partner died and on the next day his son and the surviving partner took over the business and a fresh partnership deed was executed admitting the three minors to the benefits of the partnership. The High Court held that section 187 of the Income-tax Act applied only when a firm is reconstituted as per sections 31 and 32 of the Indian Partnership Act, but when a firm is dissolved either by agreement of the partners or by operation of law and another firm takes over the business, that will be a case of succession governed by section 188 of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o expand the scope of section 187 but on the other hand to restrict it. In the course of the discussion, the Delhi High Court observed (at pages 390, 391 ) : " Another instance of anomaly would be that logically the Department's interpretation should be applicable whatever the reasons for dissolution of the earlier firm might be. Thus, for instance, if there are two partners and one of them dies and the other partner continues the business by entering into a fresh partnership with another person, it would be change in the constitution. Again if partners in a firm are unable to get on with each other and as a result of quarrels among themselves get the firm dissolved compulsorily under the orders of the court, still there would be only a change in the constitution, if the business happens to continue in the hands of any one of them in partnership with some others. It should be remembered that partnership is a relationship born of an agreement It can be dissolved by agreement or where there is no agreement, by an order of the court in certain circumstances. To say that such a relationship would subsist notwithstanding the decision of the partners to put an end to its continued exis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olved and the Income-tax Officer is not entitled to ignore this consequence. There is nothing in the language of section 187, 188 or 189, according to the High Court, which precludes the application of the partnership law principles even under the Income-tax Act. It was accordingly held by the High Court that where the partnership deed of a firm did not contain any provision that the death of a partner would not dissolve the firm, one of the partners of the firm died in the middle of the accounting period and thereafter a fresh deed was executed under which the surviving partners took a fresh partner in the place of the deceased and continued to carry on the business, the case was one of succession and not one of change in the constitution and separate assessments had to be made in regard to the incomes. With respect, we agree that where in a case, there is a: change in the constitution of the firm by the taking of a new partner and the old firm is succeeded by a new firm then, in such a case, there might be succession and there could be two assessments as contemplated under section 188 of the Act. We accept the reasoning of that decision." In the present case, one of the two par ..... X X X X Extracts X X X X X X X X Extracts X X X X
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