JUDGMENT
1. This is a reference of the Commissioner of Income-tax, Agra, under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), and relates to the assessment year 1977-78.
2. The question for determination is whether Section 187 has any application to the case of a firm, where on the death of one of its partners, it is dissolved and the business of that firm is taken over by a new firm in which one or more partners of the dissolved firm are also partners, that is to say, there are some partners who are common between the erstwhile firm and the new firm.
3. The brief facts are that the respondent-assessee-firm, B. M. Jain and Co., was constituted under a deed of partnership dated April 1, 1971, with three partners. One of the partners, Bengali Mal Jain, died on December 26, 1976, during the previous year relevant to the assessment year in question. The surviving partners, along with four others, constituted a new firm with effect from December 27, 1976, and a new partnership deed was drawn up on January 7, 1977. The new firm took over the business of the erstwhile firm. For the assessment year in question, two returns were filed, claiming two separate assessments. In the first return, an income of Rs. 75,940 was disclosed for the period April 1, 1976 to December 26, 1976, and for that period, continuation of registration was claimed on the strength of a declaration under Section 184(7) in form No. 12, which was filed on May 11, 1977. In the second return, an income of Rs. 62,612 was disclosed for the period December 27, 1976 to March 31, 1977, i.e., for the remaining period of the previous year after the business was taken over by the new firm. For this period, the assessee claimed registration on the basis of the fresh deed of partnership mentioned earlier.
4. On the above facts, the Income-tax Officer held that there was only a change in the constitution of the firm as contemplated by Section 187(2)(a) of the Act. Accordingly, on that view, he made a single assessment clubbing the income of both the periods. He, however, granted registration to the firm on the basis of the new partnership deed and allocated the profits amongst the respective partners who constituted the firm in the two different periods as aforesaid in proportion to their shares .
5. On appeal, the Commissioner of Income-tax (Appeals) reversed the decision of the Income-tax Officer and held that two separate assessments for the respective periods were called for. He noticed that, vide Clause 9 of the partnership deed dated April 1, 1971, the duration of the firm was at will and there was no clause in the deed which provided for continuation of the firm on the death of its partners. Accordingly, he annulled the assessment order passed by the Income-tax Officer observing that he would be well within his jurisdiction to frame two separate assessments for the two respective periods on the two firms. On appeal to the Income-tax Appellate Tribunal at the instance of the Revenue, the decision of the first appellate authority was upheld. At the instance of the Commissioner of Income-tax, Agra, the following two questions have been referred for the opinion of this court.
"1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that it was not a case of change in the constitution of the firm within the meaning of Section 187(1) of the Income-tax Act, 1961, and that it was a case of succession of one firm by another within the meaning of Section 188 of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that two separate assessments should be framed on the basis of the two returns of income filed by the' assessee ?"
6. The assessee is not represented in this case. We have heard learned standing counsel.
7. It was argued before us that the Income-tax Appellate Tribunal erred in law in taking the view that the case of the assessee fell within the purview of Section 188 of the Act and it was not a case to which Section 187(2) applied.
8. The scheme of assessment of firms and their registration, etc., is provided in Chapter XVI of the Act which contains Sections 182 to 189 with the caption "Special provisions applicable to firms."
9. The answer to the question referred to us depends on the determination of the scope of the provisions of Section 187(2) of the Act. Subsection (2) of Section 187 deals with the change in the constitution of a firm, whereas Section 188 deals with the case of succession of a firm by another firm. We need not detain ourselves in considering the various aspects arising from the consideration of Section 187(2) or 188 as these matters are no longer res integra and had been the subject-matter of consideration before this court on several occasions as well as before the other High Courts.
10. A Full Bench of this court in Dahi Laxmi Dal Factory v. ITO [ 1976] 103 ITR 517, by a majority, held that under the Partnership Act, reconstitution of a firm and dissolution of a firm are two different legal concepts which are distinct from each other. Section 187 of the Income-tax Act applies only where a firm is reconstituted in accordance with Sections 31 and 32 of the Indian Partnership Act, namely, when a new partner is taken or an existing partner retires with the consent of all the partners or without their consent, if the contract of partnership so provides. It was held that Sub-section (2) of Section 187 does not contemplate a definition of recon-stitution of a firm. It merely, and by way of abundant caution, provides in Clause (a) of Sub-section (2) that even where the reshuffling of partners is so drastic that in the reconstituted firm, only one of the partners of the original firm is left, it shall still be treated to be a case of reconstitution and Clause (b) provides that where there is no change in the partners but their shares are altered, that will still be a case of reconstitution. It was emphasised that Section 187(2) does not change the concept of reconstitution of a firm as understood in the Indian Partnership Act, nor does it obliterate the distinction between reconstitution and dissolution. The reference to the admission of a new partner in Section 187 has a reference to the relevant provisions in that behalf in the Indian Partnership Act. The incoming and outgoing of a partner in a firm does not have the effect of dissolving the firm. Commenting Upon Section 188 of the Act, it was observed thus (p. 525) :
"This section deals with succession of one firm by another which means that the business of a firm is taken over by another firm as a going concern. The expression in this section 'and the case is not covered by Section 187' presents no difficulty. In a sense a reconstituted firm is also a new firm but where the new firm comes into existence as a result of a change in its constitution, as explained above, assessment may be made under Section 187 on the reconstituted firm. But where the new firm comes into existence after the dissolution of a firm, such a case would not be covered by Section 187 and it would be a case of a new firm succeeding the old firm."
11. The legal position was summed up by the majority decision in the following terms (at p. 526) :
"To sum up, the legal position that emerges is that Section 187 applies only where a firm is reconstituted in accordance with Sections 31 and 32 of the Indian Partnership Act, namely, when a partner is taken or an existing partner retires with the consent of all the partners or without their consent if the contract of partnership so provides. But where a firm is dissolved either by agreement of partners or by operation of law and another firm takes over the business, that will be a case of succession governed by Section 188 of the Act, even though some of the partners of the two firms are common."
12. Another Full Bench of this court in CIT v. Kunj Behari Shyam Lal [1977] 109 ITR 154 has, by a majority, reiterated the same view, observing that where the partnership deed of an erstwhile firm did not contain any stipulation that the firm would not be dissolved on the death of one of the partners, but, by virtue of Section 42(c) of the Indian Partnership Act, 1932, the firm stood dissolved, the firm which took over the business after the dissolution of the erstwhile firm could not be said to be a reconstituted firm and Section 188 and not Section 187 of the Income-tax Act, 1961, would apply in such a case, and two separate assessments should be made on the two firms.
13. The view expressed by the aforesaid two Full Bench decisions of this court has been assented to by a Division Bench of the Gujarat High Court in Addl. CIT v. Harjivandas Hathibhai [1977] 108 ITR 517 and by a Full Bench of the Andhra Pradesh High Court in Addl. CIT v. Vinayaka Cinema [1977] 110 ITR 468.
14. Thus, the dividing line between a change in the constitution of a firm and a succession is the factum of dissolution of the earlier firm. In the case of succession, there is a change in the ownership of the business from one entity to another notwithstanding that the continuity of the business and the nature of the firm are preserved intact. To put it differently, Section 188 contemplates the existence of two separate distinct entities owned by two different groups of persons whereas in the case of change in the constitution of the firm, the firm as an entity continues as one single unit throughout
15. Coming to the facts of the instant case, the findings recorded by the Income-tax Appellate Tribunal are that it is a case of succession within the meaning of Section 188 of the Act. It has been found that the duration of the firm was at will and there was no clause in the original partnership deed providing that the firm shall not be dissolved on the death of its partners. The findings of the Commissioner of Income-tax (Appeals) to the effect that on the death of Bengali Mal Jain, the erstwhile firm was dissolved and a new firm was constituted thereafter, has been upheld by the Income-tax Appellate Tribunal. On the findings recorded by the Income-tax Appellate Tribunal and in view of the two Full Bench decisions of this court, it must be held that Section 187 has no application and the Income-tax Appellate Tribunal was right in concluding that the provisions of Section 188 of the Act applied and two separate assessments were called for in respect of the two periods.
16. It must also be observed that when the Income-tax Appellate Tribunal decided the appeal giving rise to the present reference, the proviso to subsection (2) of Section 187 which was inserted by the Taxation Laws (Amendment) Act, 1984, with effect from April 1, 1975, was not there on the statute book. The proviso inserted by the said amending Act is to the following effect :
"Provided that nothing contained in Clause (a) shall apply to a case where the firm is dissolved on the death of any of its partners."
17. As the aforesaid proviso has been given retrospective operation with effect from April 1, 1975, it would apply to the assessments for the years 1975-76 onwards and would be applicable to the present case since the year involved is 1977-78. The effect of the proviso newly insertedas that if a firm is dissolved on the death of a partner, the provisions of Clause (a) of Sub-section (2) of Section 187 will have no application. In other words, such a case would not be caught within the mischief contemplated by Section 187(1) of the Act and it will not be a case of change in the constitution of the firm as contemplated by the said provisions. The findings in the instant case regarding the dissolution of the firm on the death of Bengali Mal Jain have not been challenged before us, nor is such a challenge possible within the scope of the question referred to us. Considering the case from either of the two angles, i.e., before or after the insertion of the proviso to Sub-section (2) of Section 187, the provisions of Section 187 are not applicable to the instant case.
18. Consequently, we answer question No. 1 referred to us in the affirmative, in favour of the assessee by saying that it was a case of succession of one firm by another within the meaning of Section 188 and it was not a case of change in the constitution of the firm as contemplated by Section 187. The second question, is also answered in the affirmative and in favour of the assessee by saying that the Tribunal was correct in its view that two separate assessments should be made on the basis of the two returns of income filed by the assessee.
19. Both the questions are answered in the affirmative, in favour of the assessee and against the Revenue.
20. There shall be no order as to costs.