ORDER BY THE COURT:
At the instance of the Revenue, the Tribunal referred the following question for the opinion of this Court ..
'Whether on the facts and in the circumstances of the case, was the Tribunal legally correct in deleting the addition of Rs. 72,758 representing income worked out on pro rata basis for the period 19th May, 1975, to Diwah, 1975 ?
2. The case relates to the asst. yr. 1976-77 accounting year of which is a Diwah year, commencing from 14th Nov., 1974. The firm was originally constituted on 9th Nov., 1970, and it was reconstituted w.e.f. 16th Nov., 1974, when a fresh partnership deed was executed. Under this deed the firm was constituted by 7 partners and in addition to them six minors were admitted to the benefit of the partnership. Clause 16 of such partnership deed clearly provided that the partnership would not dissolve on the death of any partner. On 18th May, 1975, one of the partner namely, Chunnilal Jain died. The assessee-firm filed return for the period commencing from 14th Nov., 1974 to 18th May, 1975, contending that the firm stood dissolved on 18th May, 1975, upon the death of Chunnilal Jain.
The question arose whether in view of cl. 16 of the partnership deed dt. 16th Nov., 1974, the firm will stand dissolved. Clause 16 of the partnership deed contains an agreement to the contrary that the firm will not dissolve upon the death of any partner.
The AO, therefore, assessed the income of the entire accounting year in the hands of the assessee-firm.
On appeal, the appellate authority relying on the decision of this Court, held that there was dissolution upon the death of one, of the partners on 18th May, 1975, and, therefore, income of the period subsequent to 18th May, 1975 was excluded from the income of the assessee-firm. On further appeal, the Tribunal affirmed the order of the AO.
This question is squarely covered by a decision of the Supreme Court in the case of CIT vs. Empire Estate (1996) 132 CTR (SQ) 221 : (1996) 218 ITR 355 (SQ) in which the Court held as under:
'Sec. 188 states that where a firm carrying on a business is succeeded by another firm and the case is not covered by s. 187, separate assessments have to be made on the predecessor firm and the successor firm the constitution of the firm' is defined for the purpose. The relevant part of the definition states that if one or more of the Partners cease to be partners in such circumstances that one or more of the persons who are partners of the firm before the change continue as partner or partners after the change, there is a change in the constitution of the firm. These provisions would apply to a firm which survives upon the death of a partner. They would apply to the case of a partnership where a partner dies and the partnership deed provides that death shall not result in the dissolution of the partnership. Such provision is lawful because s. 42 of the Partnership Act contemplates it. If there is no such provision and a partner dies, the partnership stands dissolved."
[Emphasis, italicised in print, by the Court]
4. Following the aforesaid decision we are of the view that in view of cl. 16 of the partnership deed containing an agreement to the contrary the assessee-firm did not stand dissolved on 18th May, 1975, when one of the partners died. Therefore, it was not a case of succession within the meaning of s. 188 but merely a case of change in the constitution as envisaged by s. 187. Sec. 187 clearly says that where at the time of making an assessment it is found that a change has occurred in the constitution of the firm, the assessment shall be made on the firm as it is constituted at the time of making an assessment. This being so the AO was right in making a single assessment for the entire accounting period of the assessee-firm.
5. We, therefore, answer the aforementioned question in the negative i.e. in favour of the Revenue and against the assessee.