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TMI Blog1983 (11) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... ent reference, the question is of levy of penalty u/s. 271(1)(c) of the I.T. Act, 1961. The submission on behalf of the assessee was that since a new assessable entity comes into existence after reconstitution of partnership firm, penalty cannot be levied on the reconstituted firm for the default committed by the old firm. Before we deal with this question we may state the material and relevant facts. Initially M/s. Vishwanath Seth carried on business in silver, bullion and speculation, etc. Their income was assessed to tax in the status of HUF. After a partition in the family the business was converted into partnership firm with effect from August 1, 1955, relevant to the assessment year 1957-58. This partnership consisted of Vishwanath Seth and his three sons as partners. His two minor sons were admitted to its benefits. The two minor sons became major in 1958. They elected to remain as partners. The firm, thereafter, consisted of six partners, Vishwanath Seth and his five sons. Vishwanath Seth died in 1964. His five sons continued the partnership business in the same firm name. No outsider was, at any stage, a partner in this firm. The business premises of the firm were raide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istence. Section 271 of the I.T. Act, 1961, postulates imposition of penalty on any " person " who has, inter alia, concealed the particulars of his income. If after the reconstitution of a partnership firm a different assessable person comes into existence then it may be argued that penalty cannot be imposed on such a person in respect of default committed by some other person, namely, the old firm, which was in existence before the reconstitution. The position under the partnership Act has been discussed in several decided cases. In Keshavlal Lallubhai Patel v. Patel Bhailal Narandas, AIR 1968 Guj 157, Bhagwati J. (as he then was) observed (p. 160): "It is undoubtedly true that under the law of partnership in India, as in England, a firm has no legal existence apart from the partners composing it and it is merely a compendious name to describe the partners collectively and, therefore, according to the strict view of the law, on any change amongst the partners comprising a firm, there would in fact be new firm. " His Lordship then went on to hold (p. 160): "But the law has, in conformity with mercantile usage which recognizes a firm as a distinct person or quasi-corporation, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove. The Supreme Court while dealing with s. 25(4) of the Indian I.T. Act, 1922, held (p. 408) : " It follows from the provisions of the section that a mere change in the constitution of the partnership does not necessarily bring into existence a new assessable unit or a distinct assessable entity .... " In the case of Shivram Poddar [1964] 51 ITR 823, the Supreme Court reiterated the principle. It held (p. 827): " ...... by reconstitution of the firm no change is brought about in the personality of the firm. " Later on, it observed (p. 828): " But the Income-tax Act recognises a firm for the purposes of assessment as a unit independent of the partners constituting it, it invests the firm with the personality which survives reconstitution. " Thus, under the I.T. Act, on reconstitution of a firm the personality of the firm does not change. It remains the same person. Hence, penalty u/s. 271 of the I.T. Act, 1961, could be imposed on the firm after its reconstitution for defaults committed by it prior to its reconstitution. Section 187 of the I.T. Act, 1961, provides for the assessment of firm where at the time of making the assessment it is found that a change in the constitut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lier. From this it follows that, for the purposes of assessment, every change in the constitution of the firm brings into existence a new firm. It follows that after a firm undergoes a change in its constitution, new firm, though for certain purposes reflecting the personality of the erstwhile firm, comes into existence. This new firm becomes a distinct assessable entity different from the firm before its reconstitution." The learned judge basing himself on this fundamental principle went on to hold that even in the case of reconstitution, different assessment orders should be passed in respect of the income derived by the old firm and the new firm. A Division Bench of this Court in Shiv Shankar Lal [1976] 106 ITR 342, took the same view as was expressed by the minority judgment in Dahi Laxmi's case [1976] 103 ITR 517 (All) [FB]. Unfortunately the attention of the Bench was not invited to the Full Bench decision in Dahi Laxmi's case. In this decision relying upon the Mysore High Court decision in Bharat Engineering Co's case [1968] 67 ITR 273, it was held that the reconstituted firm becomes a distinct assessable entity different from the firm before its reconstitution. In the F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in Excel Productions [1971] 80 ITR 356 (Ker), for the proposition and held that if the case falls under s. 187 separate assessment under s. 188 was ruled out. In Sangam Silk's case [1980] 122 ITR 479, the Karnataka High Court (successor to the Mysore High Court) held (p. 486) : " Section 187 treats the firm before its reconstitution and as reconstituted as one and the same 'person' for purposes of making the assessment. Thus, under the provisions of the Act, the firm is treated as separate and distinct entity and independent from its partners and it continues to exist notwithstanding the change in its composition if such change is one of the types mentioned in section 187(2). " It dealt with its earlier decision in Bharat Engineering Co.'s case [1968] 67 ITR 273 (Mys), especially to the observation that every change made in the constitution of a partnership brings into existence a new firm. Referring to this observation, it held (p. 488): "We do not think that the said observation is of any assistance to the assessee. Sub-section (2) of s. 187 specifically states the circumstances which should be treated as bringing about only a change in the constitution of the firm. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difficulty. The person being the same, penalty could be imposed on the person, namely, the firm after its reconstitution. This is what has been done in the present case. The Tribunal has submitted a statement of the case and referred the following question of law for the opinion of this court: " Whether the Tribunal is right in confirming the penalty levied on the reconstituted firm when the concealment was by the previous firm ? " Our answer to the question is in the affirmative in favour of the Revenue and against the assessee. The Commissioner shall be entitled to his costs, which are assessed at Rs. 1,000. The fee of the learned counsel for the Department is certified at Rs. 200. R. M. SAHAI J.-Vishwanath Seth and his five sons were partners of a firm. In 1964 Vishwanath died. His sons entered into fresh agreement and executed a new partnership deed. The question is if this reconstituted firm could be penalised u/s. 271 of the I.T. Act (hereinafter referred to as the Act ") for concealment of income or filing of inaccurate particulars, etc., by the firm of which the father was one of the partners. It was urged before the Tribunal that " after the death of the father in 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stence a totally different person and entity for purposes of assessment. And relying on two decisions of the Supreme Court in CIT v. A. W. Figgies and Co. [1953] 24 ITR 405 and Shivram Poddar v. ITO [1964] 51 ITR 823 observed: " that for purposes of assessment under the I.T. Act, a firm is a distinct entity and has its own personality which does not undergo any change as a result of its reconstitution by incoming of new partners or by outgoing of its partners ". But as these observations even in a case where reconstitution was preceded by death of one of the partners ran counter to two Full Bench decisions of this court in Dahi Laxmi Dal Factory v. ITO [1976] 103 ITR 517 (All) and Badri Narain Kashi Prasad v. Addl. CIT [1978] 115 ITR 858 (All) [FB] and further, according to the Bench, as those decisions had not considered the impact and implication of, the observation made by the Supreme Court in Figgies' case [1953] 24 ITR 405, the papers of the case were directed to be laid down before the Hon'ble Chief Justice for constituting a larger Bench. In Dahi Laxmi's case [1976] 103 ITR 517 (All) [FB], one of us (Hon'ble H. N. Seth J.) was in minority. Relying on Shivram Poddar v. ITO [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xistence a distinct and separate assessable entity. From what has been narrated above it is apparent that reference has been made because of the view taken by this court that even in reconstitution of a firm there should be two assessment orders. As firm and partners under the I.T. Act have to be understood in the sense assigned to it under the Indian Partnership Act (s. 2(23) of the I.T. Act), it may be examined whether a firm stands reconstituted or dissolved on death of a partner. Section 4 of the Indian Partnership Act defines partners and firm thus : " persons who have entered into partnership with one another are called individually, 'partners' and collectively, 'a firm '." Therefore, a firm has no legal existence apart from its partners and it is merely compendious name to describe its partners: CIT v. A. W. Figgies and Co. [1953] 24 ITR 405 (SC). Reconstitution, according to dictionary, means to constitute again. The question is how should it be understood in relation to a firm. As a firm is a compendious name for its partners only, its constitution and reconstitution depends on their incoming, outgoing, death, etc. All this, however, is subject to agreement, as a partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but its effect in law is different. Reconstitution, under Chap. V, maintains the continuity of the firm. But if after death of one of the partners the surviving partners resolve to continue the business and reconstitute themselves then merely because the partners are the same as they were in the earlier firm the reconstitution cannot be taken as a reconstitution as visualised in Chap. V. A.W. Figgies' case [1953] 24 ITR 405 (SC) or Keshavlal's case, AIR 1968 Guj 157 or Sohan Lal's case, AIR 1954 Cal 179, or Meenakshi's case, AIR 1957 Mad 8, were not concerned with the business carried on by the remaining partners after death. In these cases, reconstitution was as a result of incoming or outgoing of partner, that is, reconstitution contemplated in Chap. V of the Act. Reconstitution after death brings into being a different firm as what has been dissolved disrupts the unity and continuity. The reconstitution of a firm after dissolution cannot be considered to be reconstitution under Chap. V. It would be contrary to law. In reconstitution under Chap. V personality continues. But reconstitution under Chap VI is only a reflection of earlier personality. Business may continue, surviving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t contain a definition of the reconstitution of a firm. It merely, and by way of abundant caution, provides in clause (a) that even where the reshuffling of partners is so drastic that in the reconstituted firm only one of the partners of the original firm is left, it shall still be treated to be a case of reconstitution and clause (b) provides that where there is no change in the partners but their shares are altered that will still be a case of reconstitution. But this provision does not change the concept of reconstitution of a firm as understood in the Indian Partnership Act nor does it obliterate the distinction between reconstitution and dissolution." Similarly in Sant Lal's case [1982] 136 ITR 379 (Delhi), it was observed (p. 390): "In our opinion the purpose of sub-s. (2) is not by way of expansion of the normal concept of a change in the constitution. It appears to be really a purpose of limitation. The purpose of the definition in sub-section (2) appears to be not to say that a firm will continue in spite of dissolution but rather to say that even in a case where there is only a change in the constitution the provisions of sub-s. (1) will not apply even if the partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on contemplated in s. 187, the assessable unit is one. But reconstitution of the firm preceded by death of one of the partners, in the absence of any agreement, brings into being another firm irrespective of the business and partners being the same. Coming to the facts of the case after death of Vishwanath Seth his sons who were partners reconstituted the firm, and continued the business In 1965, business premises and residential houses of partners were searched Lot of incriminating material was found. Investigation revealed huge suppression and unexplained deposits. Assessee, therefore, made a settlement petition which was accepted by the Commissioner and the concealed income was spread over between 1957-58 to 1966-67. The assessee's request for not levying any penalty was not accepted. As noticed earlier, this reference is concerned only with penalty. Penalty u/s. 271(1)(c) of the Act could be levied for concealment of income by a person. In view of the legal position discussed above the person on whom penalty is being levied is not the same who had concealed the income. The Tribunal has no doubt held that the firm was reconstituted. But this was erroneous. Even if the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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