TMI Blog1981 (5) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... al, and this partnership continued to carry on the business previously carried on by the firm of four partners. Shri Sant Lal had 30% shares in the firm out of which 25% was given to Arvind Kumar and 5% was added to the share of Smt. Gaitri Devi one of the three old partners. For assessment year 1969-70, two separate returns of income were filed in the name of Sant Lal Arvind Kumar. The first return of income showed the income for the period from April 1, 1968, to July 13, 1968. The second return showed the income from July 14, 1968, to March 28, 1969. The assessee's claim was that on the death of Shri Sant Lal the earlier firm had been dissolved; consequently, there were two separate and independent firms in existence for the two periods mentioned above and that these had to be assessed separately for the assessment year 1969-70. The ITO, however, took the view that what had happened on July 13, 1968, was only a change in the constitution of the firm within the meaning of s. 187 of the I.T. Act, 1961, and that the firm of Sant Lal Arvind Kumar as constituted at the time of the assessment was assessable for the assessment year 1969-70 in respect of the income of the entire period f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the old firm " stood dissolved on February 5, 1965, and that all the assets and liabilities of the old firm as on that date had been taken over by the new partnership firm. For the assessment year 1966-67, two returns of income were filed, one in respect of the accounting period ended on February 5, 1965, and the other in respect of the period from February 6, 1965, to October 23, 1965; and the ITO was requested to make separate assessments in respect of the two periods. However, the ITO was of the opinion that the case was covered by s. 187 of the I.T. Act, 1961. He, therefore, made an assessment on Gian Chand Jain Co. as a registered firm in respect of the profits of the entire period October 24,1964, to October 23, 1965. He, however, apportioned, the above income between the two periods and allocated the share income among Gian Chand Jain and his sons in the first period and among Raj Devi and her sons for the second period. On appeal preferred by the assessee, the Appellate Tribunal held that there should have been two assessments in respect of the two periods as claimed by the assessee and that the single assessment could not be upheld. The CIT applied for reference to this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t heir respective shares or in the shares of some of them. 188. Succession of one firm by another firm.-Where a firm carrying on a business or profession is succeeded by another firm, and the case is not one covered by section 187, separate assessments shall be made on the predecessor firm and the successor firm in accordance with the provisions of section 170. 189. Firm dissolved or business discontinued.-(1) Where any business or profession carried 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. (2) Without prejudice to the generality of the foregoing sub-section, if the Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B], which had, in turn, overruled an earlier decision in Addl. CIT v. Visakha Flour Mills [1977] 108 ITR 466 [FB] and the decision of the Calcutta High Court in Mathurdas Govardhandas v. CIT [1980] 125 ITR 470 (Cal). On the other hand, the Punjab and Haryana High Court took the contrary view in Dharam Pal Sal Dev v. CIT [1974] 97 ITR 302, which was followed in Jupiter Foundry and Machines (Knives) v. CIT [1977] 109 ITR 92 (P H), in a slightly different context and was approved by the Full Bench of the same High Court in Nandlal Sohanlal v. CIT [1977] 110 ITR 170 and followed in CIT v. Jagat Ram Om Parkash [1979] 116 ITR 266 (P H). There was also a decision of the Andhra Pradesh High Court in Addl. CIT v. Visakha FIour Mills [1977] 108 ITR 466 [FB], which was in favour of the construction contended for by the department but, as noted earlier, this Full Bench has been overruled by a larger Bench in Addl. CIT v. Vinayaka Cinema [1977] 110 ITR 468. Naturally, learned counsel on both sides cited all these decisions before us and also referred to various earlier decisions and provisions of the Indian Partnership Act, 1932, the Indian I.T. Act, 1922, as well as the I.T. Act, 1961, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to regard its rights and obligations as unaffected by the introduction of a new partner, or by the death or retirement of an old one. Notwithstanding such changes among its members, the firm is considered as continuing the same; and the rights and obligations of the old firm are regarded as continuing in favour of or against the new firm as if no changes had occurred. The partners are the agents and sureties of the firm; its agents for the transaction of its business ; its sureties for the liquidation of its liabilities so far as the assets of the firm are insufficient to meet them. The liabilities of the firm are regarded as the liabilities of the partners only in case they cannot be met by the firm and discharged out of its assets. This attitude is undoubtedly encouraged by certain features which characterise most partnerships, in particular the fact that partnerships frequently have a distinctive name which does not necessarily or even usually coincide with the names of the partners, that changes of partners often have no visible effect on the continuity of the partnership business and that virtually every partnership operates a separate banking account in the firm name. Partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of partnership but to the mercantile view. This distinction is well brought out in the two sets of provisions contained in Chap. V and Chap. VI of the Indian Partnership Act. Chap. V, which is headed " Incoming and outgoing partners ", envisages the introduction, and exit of partners from a firm with the consent of all other partners. be adjudicated an insolvent or he may die. Where a partner retires or is expelled from the firm, the firm itself continues as before with only what may be described as a change in its constitution. The insolvency or death of a partner does not necessarily result in the dissolution of the firm. Under Chap. VI, which sets out the circumstances in which dissolution of firm takes place, a firm may be dissolved with the consent of all the partners or in accordance with the contract between them. It is dissolved if all the partners or except one are adjudicated insolvent or an event happens which makes it unlawful for the firm to be carried on. A firm is dissolved, but only subject to a contract between the partners, on the expiry of the term for which it was formed, on the completion of an adventure or undertaking for which it was formed or by the dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der s. 35 rather than s. 42(c) of the Partnership Act. The question that next arises is as to whether there is anything in the I.T. Act, 1961, which compels the introduction of a different concept for the purposes of the I.T. Act. We agree with the decisions earlier referred to that there is nothing in the language of s. 187, 188 or 189 which preclude the application of the partnership law principles even under the I.T. Act. In the first place, the definition section of the I.T. Act, s. 2, specifically enacts in cl. 23 that for the purposes of the I.T. Act, the expression " firm," " partner " and " partnership " have the same meaning as they have under the Indian Partnership Act. This necessarily means that for any question arising under the I.T. Act, the concepts of partnership law have fall application unless there is something in any particular provision which compels a contrary 'View. The decision of the Supreme Court in Malabar Fisheries Co. v. CIT [1979] 120 ITR 49, where their Lordships have approved the decision of the Privy Council in Bhagwanji Morarji Goculdas [1948] 18 Comp Cas 205 earlier referred to make it clear that, even under the I.T. Act, the concept of a firm w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication that what all has to be done is to compare the partners before a particular event and the partners after the particular event irrespective of whether the firm has continued or not and to have envisaged the definition in s. 187(2) as intended to transcend dissolutions of firms under the partnership law. 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. s. (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 before and after the change are not common. That apart, we may also point out that the interpretation to the contrary may lead to a number of anomalous results. To give an instance if A and B constitute a firm and subsequently they dissolve the firm after which A enters into partnership with C and B enters into a partnership with D, the result of the department's interpretation would be that there is only a change in the constitution of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being case falling under section 187 ". Section 188 talks of a case of succession and it seems to suggest that even a case where one firm is succeeded to by another may, in certain cases, be a case covered by s. 187(2). In our opinion, however, too much of significance cannot be attached to these Words. In the first place, the language of s. 187 has to be interpreted on its own and s. 188 does not put any further meaning into it. It will be remembered here that under the common law doctrine, which we have already referred to, a firm has no legal personality at all apart from the partners. Under that common-law doctrine even an ordinary change in the constitution which would normally fall within Chap. V of the Indian Partnership Act would result in a case of succession. In fact it will be appropriate to notice that this was exactly the difficulty that arose in the case of A, W. Figgies and Company (1953] 24 ITR 405 (SC) considered by the Supreme Court. In that case there were many changes in the constitution of the firm and it was argued by the department, notwithstanding a specific exception in s. 25(4), that these were not mere changes in the constitution but really a case of rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 44 did not refer to a case of dissolution of a firm. Those observations of the Supreme Court were really made in a totally different context and in an attempt to explain the absence of reference to the dissolution of a firm in s. 44 of the Act as it then stood. It may also perhaps be of some significance that when the Indian I. T. Act, 1922, was enacted, the law relating to partnership was contained in the Indian Contract Act and that it was only subsequently that the Indian Partnership Act, 1932, came into force adopting, as we have already pointed out, the mercantile understanding of a firm rather than its strict legal connotation. The Act of 1961 does not effect any change in this position. It completely lifts into the I.T. Act the concept of a " firm " as under the Partnership Act. It provided in s. 187 only for a change in the constitution of a firm though the legislature was well aware of the distinction between a change in constitution and dissolution; it did not incorporate any legal fiction to overcome the effects of operation of the partnership law. Section 189 of the present Act is much wider than s. 44 of the 1922 Act and even a case of dissolution of a firm will com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have to be confined to the period of its existence. It is only this aspect that works to the disadvantage of the revenue. It is no doubt true that if the answer propounded by us is the correct one, it may be possible for the partners to divide their income into various segments by the simple process of dissolving the firm and then reconstituting it with a small change (either in share or in partners) rather than by calling it a change in constitution. But as already pointed oat the concept of partnership is one of agreement between the partners. If the partners agree not that one partner should go out and another should come in but that on a particular event happening the firm should be treated as dissolved, they are entitled to say so and what the partners have disrupted it is not for the department to unite unless there is a specific authorisation in the Act. We may only point out that in the two cases presently under consideration it is not the case that the partners have deliberately purported to have dissolved the firm in order to reduce their liability to tax; the dissolution has occurred on account of the death of one of the partners. It was possible in the present case to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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