JUDGMENT
1. This is a reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax, Lucknow. The Income-tax Appellate Tribunal has referred the following two questions for the opinion of this court :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that where there was a change in the constitution of a firm, two assessments have to be made, one for the period prior to the change in the constitution of the firm and another for the period after the change in the constitution of the firm ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in upholding the direction of the Appellate Assistant Commissioner that in respect of the period October 5, 1973, to September 11, 1974, covered by the first return, the claim for continuation of registration as claimed by the declaration filed along with the return, should be allowed as per law ?"
In the previous year relevant to the assessment year 1975-76 to which the dispute relates, the assessee-firm up to September 11, 1974, consisted of ten partners. On that date one of the partners, Smt. Padma Devi, died. On September 13, 1974, the remaining nine partners along with two more partners, Arun Gupta and Anil Gupta, entered into a fresh agreement of partnership, under which Alok Gupta was also admitted to the benefits of partnership. Two separate returns of income were filed, one for the period October 5, 1973, to September 11, 1974, accompanied by the declaration for continuation of the registration and another for the period September 13, 1974 to October 24, 1974, for which separate application for registration was filed in due course. It was claimed before the Income-tax Officer that two separate assessments should be made in respect of each of the two periods as claimed in the returns. The Income-tax Officer, however, made one assessment for both the periods and refused to register the firm. The assessee felt aggrieved and went up in appeal. The Appellate Assistant Commissioner held that separate assessments should be made for each of the two periods and the assessee's claim for continuation of registration for the period October 5, 1973, to September 11, 1974, as claimed by the declaration filed along with the return for that period should also be allowed as per law. On further appeal to the Income-tax Appellate Tribunal at the instance of the Revenue, the order passed in appeal was upheld.
2. It is in this background that the aforesaid two questions have been referred for the opinion of this court. Section 188 provides that where a firm carrying on a business is succeeded by another firm, and the case is not covered by Section 187, separate assessments have to be made on the predecessor-firm and the successor-firm. Section 187 provides for the contingency requiring one assessment when there is only a change in the constitution of the firm. It states 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. In CIT v. Empire Estate [1996] 218 ITR 355, the Supreme Court has held as under (page 359) :
'"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. 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 Section 42 of the Partnership Act contemplates it. If there is no such provision and a partner dies, the partnership stands dissolved. The partnership does not then survive upon the death of the partner. The case is not one of a change in the constitution of the partnership. It falls outside the scope of Section 187. When the surviving partners in such a case continue the business in partnership, Section 188 is attracted for there is a succession of one by another partnership."
In the instant case, there was no clause in the partnership deed to the effect that in the event of death of a partner; the firm will not stand dissolved. In view of the above decision of the Supreme Court and in the absence of any clause in the partnership agreement that the partnership business will continue despite the death of the partner, in our opinion, it was a case of succession of one firm by another. The Income-tax Appellate Tribunal on the facts of the case was simply right in directing that the two assessments should be made for the two broken periods and it also rightly directed the grant of continuation of the registration for the period October 5, 1973, to September 11, 1974, as claimed by the declaration filed along with the return for that period.
3. In the result, both the questions are answered in the affirmative, in favour of the assessee and against the Revenue.