Commissioner Of Income-Tax vs Delhi Metal Store
1994 Latest Caselaw 711 Del

JUDGMENT

D. K. Jain, J.

1. At the instance of the Revenue, the Income-tax Appellate Tribunal has referred under section 256(1) of the Income-tax Act, 1961 (for short, "the Act"), the following question for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the present was not a case of change in the constitution of the firm, and in directing that separate assessments be made on the two firms, instead of one consolidated assessment ?"

2. The material facts as found and narrated by the Tribunal in the statement of the case are as follows :

Originally, the assessed-firm consisted of five partners with a minor admitted to the benefits of the partnership. With effect from January 1, 1969, there were certain changes in the constitution of the firm, with which we are not concerned, except to mention that the deed of partnership contained the following three clauses :

"17. That if any party desires to retire from the partnership business, he shall have to give at least three months' notice to the remaining partners and can retire while settling his accounts at the close of the accounting year and in so doing the outgoing party shall not be entitled to the rights or value of the goodwill of the partnership business.

18. That the partnership being at will, it may be dissolved by the mutual consent of all the partners hereto.

19. That in the event of death of any party, the partnership shall not be dissolved, but the heirs of the deceased partner shall be entitled to step into his place in the partnership business."

3. It appears from the preamble of the deed of dissolution dated May 2, 1969, that on account of some differences between the partners, they decided to dissolve the firm. Accordingly, on May 2, 1969, the partners of the firm drew two deeds - one of them was the deed of dissolution of the firm with effect from April 30, 1969. By this dissolution deed, all the assets and liabilities of the firm were to be taken over by the two partners and the other partners were to be paid the amount standing to their credit in the balance-sheet. The other deed was an instrument of partnership by which a new partnership firm was formed with the above two partners along with two other persons. In addition, two minors were also admitted to the benefits of the firm. The terms and conditions of the newly constituted firm were set out in the new partnership deed. The name of the firm and the nature of the business, however, continued to be the same as before. The new firm commenced its business from May 1, 1969. The accounting period of the original as well as the new firm was the calendar year.

4. For the assessment year 1970-71, for which the accounting period ended on December 31, 1969, the assessed-firm filed two returns of income claiming that during the previous year there were two firms in existence; (i) from January 1, 1969, to April 30, 1969, and (ii) from May 1, 1969, to December 31, 1969, when the newly constituted firm carried on the business. The Income-tax Officer did not accept this claim. He took the view that it was merely a change in the constitution of the firm during the previous year as contemplated by section 187(2) of the Act. He, therefore, assessed the entire income for the period from January 1, 1969 to December 31, 1969, in the hands of the newly constituted firm. On appeal, the Appellate Commissioner held that the old firm had been dissolved and that the second firm could not be treated as a reconstitution of the previous firm and, therefore, the assessed's case did not fall under section 187(2) of the Act. He, accordingly, directed separate assessments in respect of the income for the two periods, viz., January 1, 1969, to April 30, 1969, and May 1, 1969 to December 31, 1969.

5. Aggrieved by the decision of the Appellate Assistant Commissioner, the Revenue preferred an appeal to the Tribunal. There was a difference of opinion between the Judicial Member and the Accountant Member. The Judicial Member took the view that in view of the provisions of section 187 of the Act, the Income-tax Officer was justified in making a single assessment for both the said periods. On the other hand, the Accountant Member was of the view that the provisions of section 187(2) came into operation only where, in the eye of law, the same firm continued to exist but that where a firm stood dissolved in law and in terms of the contract concerning the partnership, the language of section 187(2) could not be considered to be wide enough to authorise a single assessment on the successor-firm under section 187(1) of the Act. On account of this difference of opinion, the matter was referred to the Third Member, who agreed with the view taken by the Accountant Member. Thus, by a majority view, the Tribunal held that the income of the old and the newly formed firm should be assessed separately for the aforesaid two periods and the tax liability determined accordingly. Hence, the present reference.

6. On the above facts, the point referred for our opinion is whether the income earned by the old dissolved firm is to be clubbed with the income of the newly constituted firm and assessed as such in the hands of the reconstituted firm.

7. To us, the matter appears to be simple in the that it is not a case of continuation of the old firm, to which only section 187 of the Act would be attracted but of the old firm on execution of the dissolution deed and the emergence of a new distinct firm under a new partnership deed executed on May 2, 1969. As such the answer to the question has to be in the affirmative. We also feel that after the decision of the Supreme Court in Wazid Ali Abid Ali v. CIT [1988] 169 ITR 761 and of this court in CIT v. Sant Lal Arvind Kumar [1982] 136 ITR 379, the controversy involved in the case has been laid to rest.

8. However, Mr. B. Gupta, learned counsel for the Revenue, has raised the three contentions as below : (i) When on May 2, 1969, the reconstituted firm came into existence, it was a case of retirement of some partners and induction of some others with four partners continuing in the partnership as before, and, therefore, when the deed did not say that retirement will result in dissolution, it was in any case a case of change in the constitution of the firm under section 187(2) read with section 188 of the Act; (ii) the special provisions of sections 187(2) and 188 having been enacted to prevent tax evasion, these should be interpreted in such a way that these are not rendered nugatory or otiose; and (iii) the decision of the five-judge Bench of the Allahabad High Court in Vishwanath Seth v. CIT [1984] 146 ITR 249 having not overruled by the Supreme Court in Wazid Ali's case [1988] 169 ITR 761, it continues to be good law even today and should be applied to the facts in hand. In support of the last contention, reliance is placed on a Division Bench decision of the Allahabad High Court in CIT v. Basant Behari Gopal Behari and Co. [1988] 172 ITR 662. He also submits that although in Sant Lal Arvind Kumar's case , there are certain observations which go against the standpoint of the Revenue, but in so far as the question of applicability of sections 187 and 188 of the Act to the facts of the present case is concerned, its ratio cannot apply because all the decisions relied upon in that cases of death of a partner. He asserts that the concept of firm under section 187 is different from the one under the Partnership Act.

9. The first contention is fallacious. It is not a case of mere retirement but of dissolution of the firm and formation of a new firm under a new partnership agreement. Retirement is severance of relationship by some partner(s) from the other partners continuing the said business as before. Dissolution of a firm is between all the partners on which heretofore relationship ceases between all. In the present case, the preamble of the deed of dissolution negatives the contention that it was a case of mere retirement. The prime question is not whether some of the old partners also happen to be partners in the newly constituted firm but whether the old firm continued to exist or is finished and instead of a new firm came into existence. Merely because some partners of the old dissolved firm also became partners in the new firm, it cannot be said that it is a continuation of the old firm. The old firm stood dissolved on execution of the dissolution deed. A partnership is a relation between the persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. The relationship between them is essentially contractual. On dissolution of the firm on May 2, 1969, this relationship terminated. It could not continue. Of course, it was open to some of them, as in the instant case, along with others to enter into a new relationship constituting a new firm. Such a firm cannot be said to be a continuation of the old dissolved firm or to have been reconstituted under section 187(2) of the Act but the formation of a new firm succeeding the old firm, falling within the ambit of section 188 of the Act.

10. The second contention, we feel has to be stated to be rejected. In the light of the view taken by this court in Sant Lal Arvind Kumar's case with which we are in respectful agreement, we feel that there being no conflict between section 187 and the general provisions of the Partnership Act, the argument does not survive for consideration. Even otherwise, it was never the case of the Revenue that in the present case change in constitution of the firm was effected, with effect from May 1, 1969, with a view to avoid law. Right from the assessment stage till the second appeal before the Tribunal, the only legal issue raised was with reference to the applicability of section 187 and nothing else. We cannot permit the Revenue to raise this issue in these proceedings at this late stage, particularly, when it would involve fresh investigation into facts.

11. Coming to the third contention of Mr. Gupta, which is based on the decision of the Allahabad High Court in Basant Behari Gopal Behari and Co.'s case [1988] 172 ITR 662, (which is otherwise distinguishable being confined to its own facts not available here), wherein the Division Bench of that court has taken the view that in Wazid Ali's case [1988] 169 ITR 761, the Supreme Court had not overruled its five-judge Full Bench decision in Vishwanath Seth's case [1984] 146 ITR 249. According to the Division Bench, there was no occasion for the Supreme Court in Wazid Ali's case [1988] 169 ITR 761 to overrule the decision in Vishwanath Seth's case [1984] 146 ITR 249 (All) [FB], and, therefore, in that view of the matter, the Full Bench decision in Vishwanath Seth's case [1984] 146 ITR 249 (All) continued to be a binding decision despite the decision of the Supreme Court in Wazid Ali's case [1988] 169 ITR 761.

12. On a careful perusal of the decision of the Supreme Court in Wazid Ali's case [1988] 169 ITR 761, we are unable to persuade ourselves to read the said decision, the way the Allahabad High Court has read it in Basant Behari Gopal Behari's case [1988] 172 ITR 662. One of the Judgments noticed and clearly approved by the Supreme Court in Wazid Ali's case [1988] 169 ITR 761 was the Bench decision of Allahabad High Court in CIT v. Shiv Shaker Lal Ram Nath [1977] 106 ITR 342 which had been reversed by the five-judge Full Bench in Vishwanath Seth's case [1984] 146 ITR 249 (All). The Supreme Court dealt with this decision and the said two Full Bench decisions of the same High Court as under (at page 777) :

"CIT v. Shiv Shanker Lal Ram Nath [1977] 106 ITR 342 is a Bench decision of the Allahabad High Court which held that in a case where a firm is reconstituted, the old firm ceases to exist. It was observed by the court that section 187 of the Act even by implication does not create a fiction that the income derived by the old firm becomes the income of the reconstituted firm. The High Court held that the Tribunal was right in holding that after reconstitution, it becomes a separate assessable unit. The same High Court in a Full Bench decision of five judges held that it was well settled that on the death of a partner, the constitution of the firm changes. It observed that if a partner dies and is replaced by a legal representative, there is a change in the constitution of the firm and the new firm will be liable in respect of the income derived from the old firm. The Full Bench suggested that after the reconstitution, the firm becomes a distinct assessable entity, different from the firm before its reconstitution.. It observed that two different assessment orders had to be passed, one in respect of income derived by it before reconstitution and the other in respect of income derived after its reconstitution. The decision under appeal here was overruled by the said Full Bench decision. But the Full Bench of the Allahabad High Court consisting of five learned judges in Vishwanath Seth v. CIT [1984] 146 ITR 249 overruled the previous decision of that court in CIT v. Shiv Shanker Lal Ram Nath [1977] 106 ITR 342 and Badri Narain Kashi Prasad v. Addl. CIT [1978] 115 ITR 858 (All) [FB]. This Full Bench ruled that under the general law of partnership under the Indian Partnership Act as well as under section 187 of the Act in the case of reconstitution of a firm, it retains its identity and is assessable in respect of the entire previous year. In view, however, of the scheme of Chapter XVI of the Act, we are unable to agree; if we were left with the general position under the Indian Partnership Act, we might have agreed."

13. The above paragraph leaves little room for doubt in our mind that the Supreme Court has, in clear terms, approved the decision of the Division Bench in Shiv Shaker Lal Ram Nath's case [1977] 342 (All), which was also approved by the three-judge Full Bench of the same court in Badri Narain Kashi Prasad's case [1978] 115 ITR 858 (All) and did not agree with the contrary view taken by the five-judge Bench in Vishwanath Seth's case [1984] 146 ITR 249 (All). It is clear from the fact that the Supreme Court has categorically disapproved the view taken by the Full Bench of the Madhya Pradesh High Court in Girdharilal Nannelal v. CIT [1984] 147 ITR 529, which was similar to the one taken in Vishwanath's case [1984] 146 ITR 249 (All) [FB] and contrary to the view taken by the Division Bench in Shiv Shanker Lal Ram Nath's case .

14. The facts of the case in hand are similar to the facts in Shiv Shanker Lal Ram Nath's case . That was also a case where two partners had quit and gone out and in their place two others were taken in as partners along with two minors, who were admitted to the benefits of the partnership and in these facts, it was held that notwithstanding the provisions of section 187 of the Act, the firm, after it underwent change in its constitution, became an assessable entity which, for the purpose of assessment, was distinct from the firm as it stood before reconstitution and that the income derived by the old firm ought to be assessed in the hands of the new firm separately and without clubbing it with the income derived by it after reconstitution. The said decision having been dealt with specifically and then approved by the Supreme Court, we are of the opinion, that it must be accepted as laying down the correct law and is on all fours to the facts of the present case. Even otherwise, the ratio of the judgment of the Supreme Court in Wazid Ali's case [1988] 169 ITR 761 supports the majority view taken by the Tribunal.

15. Before parting with the case, we may also deal with the last contention urged by Mr. Gupta, that the ratio of the decision in Sant Lal Arvind Kumar's case is not applicable on the facts of instant case. The pronouncement of the Supreme Court in Wazid Ali's case [1988] 169 ITR 761, wherein the decision of this court in Sant Lal Arvind Kumar's case has also been considered and approved, is very clear and leaves no scope for any doubt that the point in issue, viz., whether in a situation, as prevailing in the instant case, it would be a case of succession governed by section 188 or a case of mere change in constitution to which section 187 of the Act is applicable, is no longer res integra and that there is no merit in the contention. We, therefore, feel that it is not necessary for us to reanalyze the provisions of sections 187 to 189 of the Act, which deal with the procedure to be adopted for assessment of the firm in the event of change in the constitution, succession and dissolution in greater detail.

16. Suffice, it to say that section 187(1) of the Act lays down that where, at the time of making an assessment under section 143 or 144, it is found that a change has occurred in the constitution of a firm, assessment shall be made on the firm as it exists at the time of making the assessment. Sub-section (2) of section 187 merely clarifies as to what a change in constitution would mean for the purpose of section 187. Section 188 provides for assessment in the case of succession of one firm by another and provides that 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, which deals with the procedure of assessment, etc., in the case of succession of the business or profession otherwise than on death. Section 189 lays down the manner of assessing a firm which has been dissolved or where the business of the firm has been discontinued. It provides that the assessment has to be made of the total income of the firm as if no such dissolution or discontinuance had taken place.

17. From the language of section 187, it is clear that it speaks of the firm on whom the assessment is to be made in the event of a change in the constitution of the firm. The section, thus, identifies the person on whom assessment is to be made in the case of change in the constitution as envisaged under section 187(2) of the Act. It merely lays down that it is the firm as constituted at the time of making the assessment who shall be liable for assessment and no further. In Sant Lal Arvind Kumar's case , dealing with the question as to whether the terms of sections 186 to 189 carry any implication that even where a firm gets dissolved, under the provisions of the partnership law it should be deemed to continue for the purposes of assessment to income-tax, it was held as follows (at page 389) :

"The Legislature could have easily said, but did not say, that the firm in the circumstances set out in section 187(2) shall be deemed to continue to exist with only a change in the constitution notwithstanding that under any other law in force it may be considered to have got dissolved on the death of a partner, etc.

Not only is there no deeming provision contained in section 187, the language of that section, particularly, sub-section (2), clearly envisages the continued existence of a 'firm'. It talks of 'a' firm and 'the' firm and it also postulates that there are common partners before or after the change that is referred to there. This language clearly envisages that the provision comes into operation and applies only where there is in the eye of law a firm has ceased to exist and another has come into existence. It appears to us that to import any such concept in section 187 would be to travel beyond the ordinary and natural meaning of the words used in the context of the partnership law that is clearly applicable and that has not been excluded by reason of any specific provision. The judicial decisions deciding to the contrary appear to have read into the language of sub-section (2) of section 187 an implication that what all has to be done is to compare the partners before a particular even and the partners after the particular event irrespective of whether the firm has continued or not and to have envisaged the definition in section 187(2) as intended to transcend dissolutions of firms under the partnership law. In our opinion, the purpose of sub-section (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-section (1) will not apply even if the partners before and after the change are not common."

18. Then again, considering the effect of the words "of succession not being a case falling under section 187", appearing in section 188, on which much emphasis has been laid by Mr. Gupta, the court observed as under (at page 391) :

"....... In our opinion, however, too much of significance cannot be attached to these words. In the first place, the language of section 187 has to be interpreted on its own and section 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 Chapter 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 , 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 exemption in section 25(4), that these were not mere changes in the constitution but really a case of repeated succession, there having been a dissolution on each of the occasions of one firm and the formation of a new firm. It is in order to avoid contentions of that type that section 188 appears to have used the words above referred to. The intention of these words is that merely because there is a change in the constitution of the firm, it should not be argued that there is a succession of one set of persons by another because such a case would be really covered by section 187. We, therefore, think that the language of section 188, though creating a mild ambiguity, is not merely not consistent or contradictory but is only intended to clarify the meaning of section 187 and to exclude the possibility of the applicability of the common law doctrine regarding the personality of a firm even in cases of mere change in the constitution."

19. While considering this decision in Wazid Ali's case [1988] 169 ITR 761, the Supreme Court observed thus (at page 779) :

"With respect, we agree that where in a case, there is a change in the constitution of the firm by 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."

20. From the above observations of the Supreme Court, it is evident that it has approved the approach of this court in Sant Lal Arvind Kumar's case . Its ratio would apply. We, therefore, reject the contention that the law laid down in Sant Lal Arvind Kumar's case is not applicable to the facts of the present case.

21. In view of the foregoing discussion, we have no hesitation in endorsing the view taken by the Tribunal that the income derived by the old firm from January 1, 1969, to April 30, 1969, should be assessed in the hands of newly constituted assessed-firm separately from the income derived by it for the period from May 1, 1969, to December 31, 1969, and income for both the periods should not be clubbed together for the purpose of assessment on the assessed-firm. We would, accordingly, answer the question referred to us in the affirmative, that is, in favor of the assessed and against the Revenue.

22. Since the assessed is not represented, there will be no order as to costs.