TMI Blog1982 (9) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... e up to January 9, 1973, profit and loss account drawn up and the profits distributed to the accounts of the partners. The bank accounts of the firm were also closed. The finding of fact recorded by the Appellate Tribunal is that there was, in fact, a dissolution of the old firm, M/s. Shambulal Nathalal Company, upon the death of Rashiklal Nathalal. On January 10, 1973, a new partnership came into existence consisting of the 3 surviving partners of old firm and two sons, namely, Kiran Kumar and Pradeep, of the deceased partner, Rashiklal Nathalal. The new partnership is evidenced by an instrument dated January 12, 1973. The assets and liabilities of the old firm were taken over by the new firm and new books of accounts and fresh bank accounts were opened. For the previous year ended 30th June 1973, corresponding to the assessment year 1974-75, two returns were filed, one by the dissolved firm for the period between July 1, 1972, and January 9, 1973 and the other by the newly constituted firm for the period between January 10, 1973, and June 30, 1973. It was claimed that two separate assessments should be made. The ITO was apparently of the view that there was merely change in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducted in, so, however, that at least one of the partners of the firm, as previously constituted, continues in the firm as subsequently constituted. If all the partners go out, it would not be case of change in the constitution of the firm. The effect of s. 188 is that where a firm carrying on a business or profession is succeeded by another firm, separate assessments should be made on the predecessor and successor entities. Section 188 also provides that if a case otherwise falling under s. 188 also attracts s. 187, then, such a case is taken out of the operation of s. 188. While s. 187 deals with changes in the constitution of the firm, s. 188 deals with succession of one firm by another and s. 189 with dissolution of the firm or the discontinuance of its business. The question is whether though there was, factually, a dissolution of the partnership of the old firm on January 9, 1973, by the death of one of its partners and a new partnership came into being with effect from January 10, 1973, the mere circumstance that there was no distribution, in specie, of the assets of the old firm, and the assets and liabilities were taken over by the new firm which consisted of some of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r admit of the idea of a change in its constitution. Sri Prasad says that the circumstance, the words " cease to be partners " in s. 187(2)(a) of the Act might include a case of such cessation by death does not by itself affect the tenability of his argument. He says that for purposes of s. 187(2)(a) a partner can " cease to be a partner " by death if, under the terms of the contract of partnership, death, ipso facto, does not entail the consequence of dissolution and the terms of the contract or even, arguably, the course of subsequent conduct in that behalf exclude such a consequence. But when for want of necessary provisions in the partnership contract, to save the partnership from dissolution by operation of law upon death of a partner, death entails dissolution, such a case would not be a case of " ceasing to be a partner " within the meaning of s. 187(2)(a). Sri Prasad contends that in the present case there is a finding of fact recorded by the Tribunal that there was in fact a dissolution of the firm upon the death of Rashiklal-Nathalal and that, therefore, s. 187 is not attracted. There is divergence of judicial opinion on this question. The view of the provisions of ss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 17, 1968, there was no scope for the application of s. 187 and directed two separate assessments to be made. The Income-tax Appellate Tribunal, in the Department's second appeal, upheld the view of the AAC. Upon reference, the High Court by a majority decision, overruling its earlier Full Bench decision in Addl. CIT v. Visakha Flour Mills [1977] 108 ITR 466 (AP) [FB], upheld the Tribunal's order. The learned Chief justice, who spoke for the majority, referring to the scheme of ss. 187, 188 and 189, observed (p. 490 of 110 ITR) : " Sections 187, 188 and 189 deal with three different situations. Section 187 deals with a case where the firm continues to be the same as before in the eye of law, but there is a change in the constitution either because of a partner coming into or another partner going out and so long as one partner is common, there is said to be a mere change in the constitution of the firm. Section 188 deals with a situation where there is succession of one firm by another firm and in such a situation, the assessment had to be made in the light of section 170. Section 189 deals with a situation where partnership firm is dissolved or its business discontinued just b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the firm, the provisions of section 26(1) of the 1922 Act had to be invoked. But the question is whether, with the change in the provisions of section 26(1) by the dropping of the reference to " a newly constituted firm, occurring in section 26(1), the above observations of the Supreme Court have any force to the provisions of section 187(1) of the 1961 Act. We are unable to accept the contention of Mr. Rama Rao that section 187(1) would cover the case of a firm which is dissolved, but its business has been continued by a new firm, though some of the partners of the new firm may be common to the old firm as well." Referring to the concept of a " change in the constitution of a firm the learned Chief justice observed (pp. 484-485): " The very basic concept underlying section 187(1) is that one and the same firm must be continuing throughout the assessment year under consideration. But there is a change in the constitution of the firm, though the firm, as an entity, continues as one and single entity, throughout the period. If the firm ceases to exist, the relationship of partners inter se comes to an end and, therefore, the firm can no longer be said to continue as before. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of the dissolved firm has been taken over by another firm, in our view, the successor-firm will have to be assessed under s. 188. The operation of s. 188 in such a case cannot be stayed on the ground that the case might be covered under s. 187. Section 187 of the I.T. Act no doubt gives a special meaning or definition to the expression' change in the constitution of a firm', but the said section ex facie does not seek to define or interpret dissolution of firm. The concept of dissolution, therefore, has to be understood in the context of general law as also of the Indian Partnership Act." The majority decision in Nandlal Sohanlal's case [1977] 110 ITR 170 (P H) [FB] is representative of the opposite view. Referring to the consequences of the death of a partner, an event which the general law of partnership, in the absence of a provision to the contrary in the contract of partnership, entails dissolution, the majority view held (p. 196): It has already been noticed that if one of the partners dies or an additional partner is introduced in a partnership, a new partnership comes into existence, if the case is viewed strictly in accordance with the provisions of the Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one of continued existence of the firm as such and s. 187 while it provides, by necessary implication, for the continuance in cases of outgoings of old partners, and incomings of new partners, it does not either expressly or by necessary implication provide that the firm be deemed to continue where, in fact, it stands dissolved by the death of a partner. Take for instance a case, where out of, say, 9 partners of the earlier firm which stands dissolved by death of one of them, the business is bifurcated and taken over and continued by two new firms each of which consists of a couple of the old partners. Since there is no succession to the whole of the business the applicability of s. 188 may be open to question. But does s. 187 apply ? For the attraction of s. 187 something more than the mere continuance of some of the partners of the old firm in the succeeding entity and the mere non-distribution of assets in specie is required. The illustration emphasises the need for the continuity of the firm so as to make s. 187 applicable. That is the basic inarticulate premise underlying the concept of " change in the constitution of the firm ". Section 187, in my opinion, which makes for co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be added that where a firm is dissolved and a new firm is formed, the case can be left to be governed by existing section 26(2)." (vide Twelfth Report, p. 448). The view I take of the matter accords with what the Law Commission had in view. Accordingly, for the foregoing reasons, I answer the question referred in the affirmative and against the Revenue. No costs. RAMA JOIS J.-The question referred for our opinion and all the relevant facts have been set out in the order of my learned brother, Sri Venkatachalaiah J., Therefore, repetition is unnecessary. Material facts which are not in dispute are (i) On January 9, 1973, one of the partners of the firm, M/s. Shambulal Nathalal and Company died. (ii) There was no clause in the partnership agreement that the death of a partner would not bring about dissolution. Therefore, by virtue of section 42(c) of the Partnership Act the firm stood dissolved consequent on the death of a partner. (iii) On January 10, 1973, a new partnership was brought into existence under the same name consisting of the three surviving partners and the two sons of the deceased partner. As a result, three of the partners were common to the 'two fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following observations of the Supreme Court, while interpreting similar provisions in the 1922 Act, in CIT v. A. W. Figgies Co. [1953] 24 ITR 405, 409, are apposite: " The partners of the firm are distinct assessable entities, while the firm as such is a separate and distinct unit for purposes of assessment. Sections 26, 48 and 55 of the Act fully bear out this position. These provisions of the Act go to show that the technical view of the nature of partnership, under English law or Indian law, cannot be taken in applying the law of income-tax. " The Full Bench of the Punjab and Haryana High Court, repelling contention similar to the one raised for the assessee, in the case of Nandlal Sohanlal v. CIT[1977] 110 ITR 170 (P H) [FB], after referring to the judgments of the Supreme Court in C. A. Abraham v. ITO [1961] 41 ITR 425 and in CIT v. Angidi Chettiar [1962] 44 ITR 739, said thus (p. 194 of 110 ITR): "A perusal of the aforementioned authorities shows that where special provision was made in a taxing statute in derogation of the provisions of the Indian Partnership Act, the effect was given to it and where no such provision had been made, decision regarding liability fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to the business, assessment has to be made under section 26(2). The provisions relating to assessment on reconstituted or newly constituted firms, and on succession to the business are obligatory." (Underlined by me) The underlined portion of the judgment indicates that for the purpose of Indian I.T. Act, 1922, a change among the partners of a firm, brought about consequent on its dissolution, was also regarded as " change in the constitution of the firm " and in such a case single assessment alone was required to be made under s. 26(1) of the 1922 Act, if it was found that the business was not discontinued, i.e., the business of the dissolved firm was continued by the reconstituted or new firm, even in the absence of a provision like s. 187(2). Now, under that provision, the matter is placed beyond doubt by creating the specific legal fiction. Learned counsel for the assessee nevertheless maintained that any other construction, than the one suggested by him, would lead to incongruous and anomalous results. He gave the following illustration : " Take a case of firm in which A, B, C, D are partners. The firm gets dissolved in the middle of an year owing to death or retiremen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by a firm has been discontinued or where a firm is dissolved, the Income-tax Officer shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken place, and all the provisions of this Act, including the provisions relating to the levy of a penalty or any other sum chargeable under any provision of this Act, shall apply, so far as may be, to such assessment. (Underlined by me) In my view the key for the clear understanding of the three sections is in the words is succeeded by another firm used in s. 188. Thus, s. 188 applied only to a case in which a firm is succeeded by another firm, which means the latter firm has taken over and continued the business of the former, there being no winding up of its business by the partners and settlement of accounts in exercise of such right available to them, after the dissolution under s. 46 of the Partnership Act. Though s. 187 does not use the expression " is succeeded by another firm " that section also applied to a case where a firm is succeeded by another is evident from the wording of s. 188, namely, " where a firm carrying on a business or profession is succeeded by another firm and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been agreed upon in the partnership deed, it makes no difference. If the argument of the assessee is conceded, by adding a clause in a partnership deed that any change in the constitution of the firm (sic), the provisions of s. 187 could be set at naught which, as pointed out by this court in Sangam Silks v. CIT [1980] 122 ITR 479, was intended to prevent such manipulations. To put it briefly, the interpretation yields the following results: (i) A firm succeeding to the business (i.e., taking over and continuing the business without interruption) of another firm, whether dissolved or not, one or more partners being common to both, is governed by s. 187. (ii) A firm succeeding to the business (i.e., taking over and continuing the business without interruption) of another firm, dissolved or not, none of the partners being common, would be governed by. s. 188. (iii) A firm whose business comes to an end, owing to discontinuance or dissolution (i.e., no firm succeeds to its business), it would be governed by s. 189. (iv) If a new firm is constituted by some or all the partners of pre-existing firm, after closing down the business, with or without new partners (there being no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is a divergence of opinion. The reasons in support of either view are set out in the respective opinions. The records may be placed before the Hon'ble Chief justice for orders as to posting the matter before a third judge or a larger Bench, as the case may be. JUDGMENT D. M. CHANDRASHEKHAR C. J.-This reference has come before me under sub-s. (2) of s. 259 of the I.T. Act, 1961 (hereinafter referred to as the Act), on a difference of opinion between Venkatachaliah J. and Rama Jois J., who constituted the Bench, which heard, in the first instance, the reference under s. 256 of the Act. I have heard the learned standing counsel for the Revenue and Sri K. R. Prasad for the assessee In the separate opinions of my learned brothers, the question referred to by the Income-tax Appellate Tribunal, the material facts of the case, the relevant statutory provisions, i.e., ss. 187, 188 and 189 of the Act, have all been set out and it is unnecessary to repeat them here. Suffice it to state that in the present case a partnership firm stood dissolved by the death of a partner as there was no provision in the deed of partnership that the firm should continue in spite of the death of a pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law as also of the Indian Partnership Act. " The reasoning for the view that such a case comes within the scope of s. 187(1) and not s. 188, has been elucidated thus by the High Court of Punjab Haryana in Nandlal Sohanlal v. CIT [1977] 110 ITR 170 (P H) [FB], at p. 196: " The purport of section 187(1) is that assessment on the firm which undergoes change in its constitution has to be made as it stands reconstituted at the time of the making of assessment, provided of course one of its old partners continues to be its member at the time of framing the assessment. In a way it gives a special definition of the expression 'reconstituted firm ', it implies that if the same business continues and at least one of the old partners continues as partner, the change in the remaining personnel of the firm, whether one or more partners cease to remain partners or some new ones are added, the firm continues to have a legal entity as a unit of assessment. " There is much to be said in favour of each of these two divergent views. There is one difficulty in accepting the reasoning in Mathurdas Govardhandas's case [1980] 125 ITR 470 (Cal), namely, that due effect is not given to the word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scontinuance of persons and bodies, assessment may be made as if such death, dissolution or discontinuance had not taken place. Shri Prasad, however, gave an illustration in which the result of taking the view that the dissolution of a firm and succession of its business by a new firm consisting of one or more partners of the old firm, should be regarded as a reconstitution of the earlier firm, would lead to an anomalous result. Suppose a firm, A, having 4 partners is dissolved and its business is bifurcated and each portion of business is taken over by two new firms, B and. C, each having two partners of the old firm and two new partners. If the above view should be followed, the case should be regarded as a mere change in the constitution of the firm, A, and it would continue to be assessed and the firms, B and cannot be assessed. Sri Prasad argued that this illustration would be sufficient to demonstrate that the continued existence of the firm under the general law of partnership, is a condition precedent for applying s. 187 and that, where a firm has ceased to exist by dissolution, s. 187 can have no application to it in any circumstances. For the purpose of this case, it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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