JUDGMENT B.P. Jeevan Reddy, C.J.
1. The Income-tax Appellate Tribunal, Allahabad, has referred the following two questions under Section 256(1) of the Income-tax Act, 1961 :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that, on the retirement of the two partners, namely, S/Shri Jagjiwan M. Patel and Rashik Lal G. Singhavi, there would be succession and not a change in the constitution of the firm ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in holding that there should be two separate assessments for the assessment year 1972-73, one for the period April 1, 1971 to June 30, 1971 and the other for the period July 1, 1971 to March 31, 1972 ?"
2. The assessee is a firm. Prior to June 30, 1971, it comprised three partners, viz., S/Shri Jagjiwan M. Patel, Rasik Lal G. Singhavi and Kirti Kumar Shah. On that date, the first two partners retired and the firm was reconstituted under a new partnership deed, consisting of Sri Kirti Kumar Shah and Smt. Ele Ben R. Singhavi. Two returns were filed, one for the period April 1, 1971 to June 30, 1971, and the other for the period July 1, 1971 to March 31, 1972. The Income-tax Officer, however, held that there ought to be one assessment and assessed accordingly.
3. On appeal, the Appellate Assistant Commissioner directed that there ought to be two assessments. He was of the opinion that since after retirement of two partners, only one partner remained, the partnership firm came to an end and that the one constituted later was a new firm which succeeded to the old firm. The Department appealed. The Tribunal held, following the decisions of this court in CIT v. Shiv Shanker Lal Ram Nath [1977] 106 ITR 342 ; [1974] UPTC 644 as well as Dahi Laxmi Dal Factory's case [1976] 103 ITR 517 [FB] ; [1974] UPTC 630, that it is a case of succession falling under Section 188 and, accordingly, dismissed the appeal to that extent. Thereupon, the Revenue obtained the reference of the above questions.
4. It may be noticed from the facts stated above that, on June 30, 1971, on the retirement of two partners no deed of dissolution was executed ; a new partnership deed was executed taking in a new partner. The question is whether this is a case of reconstitution within the meaning of Section 187 or of succession within the meaning of Section 188. For this purpose, Sub-section (2) and, in particular, Clause (a) of Section 187 are of crucial significance. Sub-section (2) reads as follows :
"(2) For the purposes of this section, there is a change in the constitution of the firm-
(a) If one or more of the partners cease to be partners or one or more new partners are admitted, 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 ; or
(b) where all the partners continue with a change in their respective shares or in the shares of some of them :
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."
5. Clause (a) of Sub-section (2) clearly says that where one or more 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, it will be a case of reconstitution of the firm.
6. The present case falls within the said clause. We must reiterate that there was no dissolution of partnership on June 30, 1971, when two partners retired. May be that, under the partnership law, the partnership came to an end with the retirement of two partners but in the light of Subsection (2)(a) of Section 187 of the Income-tax Act, we cannot but say that it is a case of reconstitution. Had there been a deed of dissolution of partnership on June 30, 1971, and a new partnership deed executed there after between Kirti Kumar Shah and Smt. Ele Ben R. Shinghavi, it would probably have been a case of succession. In this view of the matter, the Tribunal was not right in holding that it was a case of succession.
7. The two cases relied upon by the Tribunal are cases of death of a partner. In the case of death of a partner, the firm gets dissolved as provided by Section 42(c) of the Partnership Act. In fact, that contingency is now provided for'by the proviso to Sub-section (2).
8. We are, therefore, of the opinion that the instant case was a case of reconstitution.
9. For the above reasons, the questions referred to us are answered in the negative, i.e., in favour of the Revenue and against the assessee.