JUDGMENT R.K. Gulati, J.
1. At the instance of the Commissioner of Income-tax, Meerut, the Income-tax Appellate Tribunal, Delhi Bench "D", has referred the following question for the opinion of this court, under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act").
"Whether the Tribunal was legally correct in upholding the order of the learned Appellate Assistant Commissioner directing the Income-tax Officer to make two separate assessments for the two periods on the basis of the two returns filed by the assessee ?"
2. Brief facts giving rise to the aforesaid question are these : The respondent, Messrs. Doon Jewellers, a partnership firm (for short "the assessee") for the previous year relevant to the assessment year 1981-82 claimed two separate assessments on the basis of two returns filed by it, one for the period from April 1, 1980, to June 30, 1980, and the other for the period from July 1, 1980, to March 31, 1981. The assessee based its claim relying on the provisions of Section 188 of the Act. That section provides that separate assessments shall be made on the predecessor firm and the successor firm in accordance with the provisions of Section 170, where a firm carrying on a business or profession is succeeded by another firm and the case is not covered by Section 187 of the Act, According to the assessee, the firm as it existed during the first period, which consisted of four partners was dissolved by mutual consent on June 30, 1980. In the second period, with effect from July 1, 1980, a new firm was brought into existence which had as its partners all the four persons who were the partners of the previous firm and also one Sri R.C. Jain who was not a partner earlier. The case set up was that it was a case of succession of one firm by another firm and, therefore, two assessments had to be made for the two broken periods. For this proposition, the assessee relied upon a Pull Bench decision of this court in Dahi Laxmi Dal Factory v. ITO [1976] 103 ITR 517.
3. The claim made by the assessee did not find favour with the Income-tax Officer. He held that it was a case of a mere change in the constitution of the firm within the meaning of Section 187(2)(b) of the Act. He remarked :
"Actually this is a case of reconstitution of the firm, the business is the same, assets and liabilities are the same, sundry creditors and debtors are the same and the business had continued in the same premises. Therefore, this is nothing but a change of constitution on account of one new partner, Sri Ramesh Chand Jain. This is, therefore, a clear case of change in the constitution of the firm as provided in Section 187(2)(b) of the Income-tax Act, 1961."
4. In view of the above, the Income-tax Officer brought to tax the entire income earned during the two broken periods at one place in the hands of the assessee, though he made separate computation of the taxable income derived in the two periods. In taking the view that one assessment was called for, the Income-tax Officer relied upon a Full Bench decision of the Punjab and Haryana High Court in Nandlal Sohanlal v. CIT [1977] 110 ITR 170 in preference to the decision of this court in Dahi Laxmi's case [1976] 103 ITR 517 [FB] by saying that the decision relied upon by the assessee has been dissented from by the Punjab and Haryana High Court. Proceeding along and on the strength of Nandlal's case [1977] 110 ITR 170 (P & H) [FB], the Income-tax Officer also observed that Section 187(2) provides a new definition of the expression "change in the constitution of the firm", different from the one in which that concept is understood or known in the Indian Partnership Act. Further, the purport of Section 187(1) is that the assessment of the firm which has undergone a change in its constitution has to be made as it stands reconstituted at the time of making the assessment and the. Legislature has succeeded in introducing a fiction by which a dissolved firm is deemed to continue and, therefore, there should be no reason to whittle down the effect of the wide and all-embracing phraseology employed in Section 187 of the Income-tax Act, 1961, which allows only one assessment to be made on a reconstituted firm.
5. Suffice it to notice for the present that a Full Bench of the Madhya Pradesh High Court in Girdharilal Nannelal v. CIT [1984] 147 ITR 529 also took a similar view as in Nandlal's case [1977] 110 ITR 170 (P & H) [FB], and the same has not been approved by the Supreme Court in the case of Wazid Ali Abid Ali v. CIT [1988] 169 ITR 761.
6. Being aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). A perusal of the appellate order shows that while disputing the correctness of a single assessment for the two broken periods, the assessee specifically challenged the finding of the Income-tax Officer that, on facts, it was a case of a mere change in the constitution of the firm. The case pleaded was that the provisions of Section 187(2) had no application, inasmuch as the previous firm was dissolved on June 30, 1980, and, thereafter, a new firm was brought into existence which maintained separate account books in respect of the business carried on by it.
7. The appellate authority allowed the assessee's appeal but on different considerations. No effort whatsoever was made to decide the appeal on the lines it was argued for the assessee. No finding was recorded either way on whether there was any dissolution or not preceding the reconstitution or formation of the new firm, as asserted by the assessee. The appeal was allowed on the short ground that even if it was a case covered under Section 187(2) of the Act, one assessment could not be sustained in view of another Full Bench decision of this court in the case of Badri Narain Kashi Prasad v. Addl. CIT [1978] 115 ITR 858. There, the view taken, inter alia, is that Section 187 merely makes the reconstituted firm liable to be assessed in respect of the income derived by the old firm but that section, even by implication, does not create a fiction that the income derived by the old firm becomes the income of the reconstituted firm and hence the income of the old firm cannot be clubbed with that of the reconstituted firm. Further, after the reconstitution, the firm becomes a distinct assessable entity, different from the firm before its reconstitution and, therefore, two different assessment orders have to be passed against the reconstituted firm--one in respect of the income derived by it before reconstitution and the other in respect of the income derived by it after reconstitution. The Commissioner of Income-tax (Appeals) felt bound by the decision of this court and, accordingly, he allowed the assessee's appeal directing the Income-tax Officer to delete the income relating to the first period from the hands of the appellant firm with liberty to pass a separate assessment order in the hands of the erstwhile firm.
8. The second appeal preferred by the Revenue against the appellate order was dismissed by the Income-tax Appellate Tribunal. The Tribunal also disposed of the appeal on that very short ground which had appealed to the first appellate authority. It also did not go into the basic question, namely, whether there was any dissolution of the old firm followed by succession by another firm.
9. It is in this background that the question set out earlier has been referred for the opinion of this court.
10. We have heard learned standing counsel appearing for the Revenue. The assessee is, however, not represented despite notice.
11. The only argument addressed to us by standing counsel was that the question referred to this court may be answered in the negative, as the decision relied upon by the appellate authorities in Badri Narain's case [1978] 115 ITR 858 (All) [FB] is no longer good law and the same has been overruled by this court in Vishwanath Seth v. CIT [1984] 146 ITR 249 [FB]. Our attention was also drawn to the decision of the Supreme Court in Wazid Ali's case [1988] 169 ITR 761, and a recent Division Bench decision of this court in CIT v. Basant Behari Gopal Behari and Co. [1988] 172 ITR 662. It was emphasised that the decision in Wazid Ali's case [1988] 169 ITR 761 (SC) is distinguishable and it has no bearing on the correctness of the view taken in Vishwanath's case [1984] 146 ITR 249 (All) [FB], and it has also been so held in Basant Behari's case [1988] 172 ITR 662 (All).
12. On due consideration of the matter, we feel that it is not necessary for us to express any opinion on the merits or demerits of the contention advanced on behalf of the Revenue. In our opinion, the question referred to this court is liable to be returned unanswered. The relevant tax authorities have failed to record their factual findings on an important aspect of the case which has a vital and material bearing for a complete decision of the case. We have seen that the assessee's case throughout had been that it was a case of succession and not a case of reconstitution, in view of the dissolution having intervened before the reconstruction of the firm, and, hence, the provisions of Section 188 of the Act applied to its case. Admittedly, the appellate authorities have not examined the case on these lines. As stated, it was not considered necessary in view of the decision of this court in Badri Narain's case [1978] 115 ITR 858 (All) [FB]. In our opinion, if there was, in fact or in law, dissolution of the previous firm as claimed by the assessee, the fate of the case may not be the same if we were to accept the contention of learned standing counsel based on the decisions relied upon by him.
13. Under the law of partnership, there is a well-marked distinction, and too well-known to be ignored, between a going concern, which is reconstituted and a firm which is dissolved and then reconstituted. In Tyresoles (India) v. CIT [1963] 49 ITR 515, 529, a Division Bench of the Madras High Court highlighting the distinction between the two concepts observed :
"The dissolution and reconstitution of a partnership are two different legal concepts. The dissolution puts an end to the partnership, but reconstitution keeps it subsisting, though in another form. A dissolution followed by some of the erstwhile partners taking over the assets and liabilities of the dissolved partnership and forming themselves into a partnership is not reconstitution of the original partnership. The partnership formed after the dissolution is a new partnership and not a continuation of the old partnership, for it would be a contradiction in terms to say that what ceased to exist was continued. A reconstitution of a firm of partnership necessarily implies that the firm never became extinct. What it denotes is a structural alteration of the membership of the firm, by addition or reduction of members, and an incidental redistribution of the shares of the partners."
14. In Dahi Laxmi's case [1976] 103 ITR 517 (All) [FB], by a majority, this court held that Section 187(2) does not contain a new definition of the phrase "change in the constitution of the firm". That provision does not change the concept of reconstitution of a firm as is understood in the Partnership Act nor does it obliterate the distinction between reconstitution and dissolution.
15. Section 187 applies only when a firm is reconstituted in accordance with the provisions of Sections 31 and 32 of the Indian Partnership Act, but where the firm is dissolved either by agreement 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, A similar view was expressed by the Delhi High Court in CIT v. Sent Lal Arvind Kumar [1982] 136 ITR 379. The Bench observed (headnote) :
"Section 187 of the Income-tax Act, 1961, comes into operation and applies only when there is in the eye of law a firm with continued existence and not to a case where under the law one firm has ceased to exist and another has come into existence, The purpose of Sub-section (2) of Section 187 is not one of expansion of the normal concept of a change in the constitution of a firm but is really one of limitation : the purpose is 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, Sub-section (1) will not apply if the partners before and after the change are not common. It is not correct to say that Section 187(2) contemplates a change in all cases where the business continues though in the hands of a different firm provided there are common partners. Though creating a mild ambiguity, the language of Section 188 is not only inconsistent or contradictory but is intended to clarify the meaning of Section 187 and to exclude the possibility of the common law doctrine regarding the personality of a firm even in cases of a mere change in the constitution."
16. The above decision of the Delhi High Court has been approved by the Supreme Court in Wazid Ali's case [1988] 169 ITR 761 observing (at p. 779) :
"... 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."
17. Thus, where the claim (as in the instant case) is that the old firm became extinct on account of its dissolution and the formation of the new firm was not a continuation of the old firm or it is not a mere case of structural alteration in the personnel constituting the firm and incidental redistribution of the shares amongst the partners, the question which should require consideration of the adjudicating authority would be whether the firm carrying on the business is succeeded by another firm, in other words, whether there is a change in the ownership from one entity to another, notwithstanding that the nature and extent of the business of the old firm have been preserved intact. Succession connotes that there is a change of ownership from one entity to another, the former coming to an end and the latter taking over the same business in continuity as a going concern. In other words, the successor business must be the continuation of the original business. For a succession to take place it is essential that the identity and continuity of the business must be maintained, i.e., substantial identity and substantial continuity of the business must be preserved, In CIT v. K.H. Chambers [1965] 55 1TR 674, the Supreme Court observed (headnote) :
"Succession involves change of ownership ; that is, the transferor goes out and the transferee comes in ; it connotes that the whole business is transferred ; it also implies that substantially the identity and the continuity of the business are preserved. If there is a transfer of a business, any arrangement between the transferor and the transferee in respect of some of the assets and liabilities not with a view to enable the transferor to run a part of the business transferred but to enable the transferee to run the business unhampered by the load of debts or for any other appropriate collateral purpose cannot detract from the totality of the succession."
18. The finding of the Income-tax Officer which we have extracted earlier, namely, that the assets and liabilities are the same, sundry creditors and sundry debtors are all the same and the business is continued in the same premises, does not help the Revenue's case. Likewise, the other findings which are based on the decision of Nandlal's case [1977] 110 ITR 170 (P & H) [FB] are of no avail as that decision has been overruled by the Supreme Court. The deciding factor between the change in the constitution of the firm and the succession is the factum of dissolution of the earlier firm. Where there is, in fact and in law, a dissolution of the earlier firm preceding the constitution of the new firm, the two firms should be taken to be separate entities and the assessment for the two periods cannot be clubbed in one assessment. In other words, in such a case, Section 188 will be applicable.
19. With the coming into being of the decision in Vishwanath's case [1984] 146 ITR 249 (All) [FB] which was not there when the matter was decided by the Tribunal, the question whether the previous firm was, in fact, dissolved or not, has assumed importance in order to give a complete answer to the question referred to us. This question had been left uninvestigated by the appellate authorities. In a given case, whether, on facts, there was dissolution or not requires a factual investigation which can appropriately be investigated by the Income-tax Appellate Tribunal or other tax authorities. Unless this aspect of the case is gone into, we do not consider it advisable to record any answer to the question referred to us.
20. For the reasons given above, we return the question unanswered with a direction to the Income-tax Appellate Tribunal to rehear the appeal and to decide the same afresh in the light of the observations made above and in accordance with law. It will be open to the Tribunal, if necessary, to remand the matter to the first appellate authority in case the Tribunal considers it necessary to do so and if the circumstances of the case so warrant.
21. There shall be no order as to costs.