ORDER BY THE COURT:
At the instance of the Revenue, the Tribunal referred the following question relating to the asst. yrs. 1976-77 and 1977-78 for the opinion of this Court : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that where a firm is reconstituted two assessments should be made, one for the period prior to the reconstitution of the firm and another for the post-reconstitution period :
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the reconstituted firm being a separate and distinct assessable entity different from the firm before its reconstitution was entitled to elect its previous year in the first year of its assessment independently of what was the previous year of the old firm?"
2. The facts as found in the statement of the case are that the assessee, a registered firm, consisted of eight partners. The previous year of the assessee firm was financial year. On 2nd Nov., 1975, three of the partners retired from the firm and the remaining five partners continued the business of the firm w.e.f. 3rd Nov., 1975. After 3rd Nov., 1975, the previous year of the firm was changed from the financial year to the Dewali year.
On these facts, the Tribunal found as follows.
"...we hold that in a case where a firm is reconstituted the old firm ceases to e~dst and the firm after its reconstitution is a separate and distinct entity from the firm which e~dsted prior to its reconstitution and the reconstituted firm, which is a separate and distinct entity from the firm prior to its reconstitution, cannot be compelled to elect the same previous year which was adopted by the old firm. This means that the reconstituted firm was entitled to choose its previous year independently of what was the previous year of the old firm. The CIT(A) therefore, in our view, was perfectly justified in holding that the assessments should be made on the firm upto the date of its reconstitution for the asst. yr. 1976-77 and on the firm after its reconstitution for the asst. yr. 1977-78 according to the previous year elected by the reconstituted firm and the relief given on this basis was correct".
3. From the abovestated facts, it is manifest that three of the eight partners retired and the remaining five partners continued the business of the firm w.e..f. 3rd Nov., 1975.
On these facts, there would be only a change in the constitution of the firm and a single assessment was required be made on the firm as it was constituted at the time of making the assessment. This view is fully fortified by the decision of the Supreme Court in the case of CIT vs. Empire Estate (1996) 132 CTR (SC) 221 : (1996) 218 ITR 355 (SC) in which the Supreme Court enunciated as follows..
"Sec. 187 of the IT Act, 1961, says that where, at the time of making an assessment, it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as it is constituted at the time of making the assessment, "Change in 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 were 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".
Following the aforesaid authority, question no. 1 deserves to be answered against the assessee.
4. Turning to the second question, the controversy for consideration is whether the assessee-firm was entitled to elect the Dewali year in place of financial year w,e.f. 3rd Nov., 1975. The Tribunal proceeded on the footing that after retirement of the three partners, absolutely a new and distinct entity came into being and, therefore, the distinct entity was at liberty to elect the Dewali year. The approach of the Tribunal was that upon retirement of the three partners from the firm, the predecessor firm was succeeded by absolutely a new entity, which was at liberty to elect a new previous year either the Dewali year or some other year. It is not the finding of the Tribunal that any firm is entitled to elect a new previous year at any time during the accounting period. We, therefore, proceed by the reasoning of the Tribunal. In view of the decision of the Supreme Court in the case of Empire Estate (supra), it must be held that no new and distinct entity came into being upon retirement of the three partners after 2nd Nov., 1975, but the assessee-firm continued the business after being reconstituted. This being so, the reasoning of the Tribunal that after retirement of the three partners, absolutely a new entity came into being which was at liberty to elect a new previous year of its own, is faulty and cannot be sustained. The reconstituted firm could not have elected a new previous year, except in accordance with law.
From a perusal of - the Tribunal's order, it appears that the assessing authority had completed the assessment for ihe asst. yrs. 1976-77 and 1977-78 taking the financial year as the previous yeai of the assessee-firm, which, on the facts and circumstances of the case, seems to be correct.
We, therefore, answer both the questions in the negative, i.e., in favour of the Revenue and against the assessee.
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