Commissioner Of Income-Tax vs Sant Lal Kanhaya Lal And Co.
1992 Latest Caselaw 214 Del

JUDGMENT

B.N. Kirpal, J.

1. At the instance of the Commissioner of Income-tax, the Tribunal has referred the following question to this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the present case is a case of succession under section 188 of the Income-tax Act, 1961, and not continuation of the firm as contemplated under section 187 of the Act ?"

2. In the statement of case, the Tribunal has recited the facts as given by the Commissioner of Income-tax (Appeals) which are as follows

"For the year under consideration, two returns were filed by the assessed-firm, one for the period ending February 6, 1971, and the second for the period ending October 19, 1971. Admittedly, the assessed-firm for the first period, was constituted under a partnership deed dated November 7, 1970. There were eight major partners having diverse interests in the profits and losses of the firm. Four minors stood admitted to the benefits of that partnership. The said partnership deed contained a clause that, in the event of the death of any partner, the firm shall then be deemed to have been dissolved and it shall be mutually decided amongst the remaining partners and their legal successors in regard to the actual business terms, licenses, quota rights agencies etc. which stood at the time of the retirement or the death of the partner. Partner Kanhaya Lal, died on February 6, 1971. Pursuant to the said clause in the partnership deed and in view of the retirement of another partner, Inder Kumar, a deed of dissolution was excited on February 8, 1971, whereby the said firm was dissolved on the terms and conditions mentioned in the said deed. After this dissolution deed, another partnership deed was excited on February 8, 1971, effective from February 6, 1971. there under, the firm had six major partners having diverse shares different from the shares held by them in the dissolved firm. Five minors having different shares were also admitted to the benefits of the said partnership. This partnership deed also provided that, in the event of the death of a partner, the firm shall be deemed to have been dissolved then and there. It also provided that, in case of death of any of the partners, his legal heirs or successors shall not claim any share in the partnership business as the deceased partner had no right to claim an share of goodwill, etc. For the two different periods mentioned above for which the assessed-firm with different constituents came to be there, separate books of account have been kept. On these facts, the assessed, in its assessment for the year under consideration claimed that it should be assessed separately for those two periods, the present case being a case succession under section 188 of the Act. This was not acceptable to the Income-tax Officer. According to him, for the reasons stated below, the present case was a case of continuation and succession of the firm :

"According to section 187 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. Further, a change in constitution has been defined in clause (a) of sub-section (2) of section 187, according to which, 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. It would be seen that there is a change in the constitution of the firm within the meaning of section 187 during the year under consideration. Since the same business was continued to be carried on notwithstanding the death of one partner and the retirement of a second partner, it is a case of change in the constitution. The circumstances of the case do not show that it was either a case of discontinuance or succession within the meaning of section 188. According to section 188, separate assessments have to be made if the case is not covered by section 187. Since the instant case is fully covered by the provisions of section 187, inasmuch as six of the partners who were partners in the previous firm had continued to be partners in the present firm, it is only one single assessment that has to be made under section 187."

3. The Department filed an appeal and the Tribunal upheld the decision of the Commissioner of Income-tax (Appeals) and it came to the conclusion that, in the present, case the provisions of section 188 of the Act applied and it was not a case with regard to change in the constitution of the firm. The Tribunal, accordingly, directed the Income-tax Officer to make assessments for two periods as had been contended by the assessed. At the instance of the Department, the aforesaid reference has been made to this court.

4. The point in issue, viz., whether this is a case of a succession or a case to which the provisions of section 187 of the Act are applicable is no longer res integra. In somewhat similar facts, a Division Bench of this court in the case of CIT v. Sant Lal Arvind Kumar [1982] 136 ITR 379 came to the conclusion that, with the death of the partner, the firm stood dissolved and thereafter a new firm came into existence. In the present case also, the provision in the partnership deed was that on the death of a partner, the firm would stand dissolved. Furthermore, a fresh partnership deed was executed on February 8, 1971, which clearly shows that a new firm had come into existence and it is not a case of continuation of the old firm. The decision of this court in Sant Lal's case [1982] 136 ITR 379, was affirmed by the Supreme Court in the case of Wazid Ali Abid Ali v. CIT [1988] 169 ITR 761. In that case, the partnership deed provided that notwithstanding the death of a partner, the firm shall not be dissolved but nevertheless the Supreme Court came to the conclusion that when the partner had died during the year and his accounts had been closed and the amount due to him had been credited, then it was a case where section 188 applied and separate assessments had to be made.

5. Following the aforesaid decision, our answer to the question referred is in the affirmative and in favor of the assessed.

6. There will be no order as to costs.