ORDER This is a reference under section 256(1) of the Income Tax Act, 1961 (herein after referred to as 'the Act') at the instance of the revenue. The Tribunal, Delhi Bench "E", has referred the following two questions for the opinion of this court:
Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was legally correct in expressing their agreement that the findings of the learned Commissioner (Appeals) that on 18-12-1976, a dissolution in law had taken place and with effect from 20-12-1976 an entirely new firm had come into existence ?
Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in upholding that the income of the two periods could not be clubbed ?"
2. The dispute pertains to the assessment year 1977-78, for which the previous year ended on 31-3-1977. On 18-12-1976, Govind Ram Khanna, a partner of the assessee firm died. With effect from 20-12-1976 the surviving partners drew up a fresh deed of partnership and decided to carry on the business in partnership. The assessee filed two separate returns, one for the period 1-4-1976 to 18-12-1976 and the other from 20-12-1976 to 31-12-1977 and claimed separate assessments for the respective periods. The Income Tax Officer, however, framed one assessment and clubbed the income of the aforesaid two periods on the view that it was a case of a change in the constitution of the firm to which section 187 of the Act was attracted. On appeal, the Assistant Commissioner did not agree with the Income Tax Officer. He held that on the death of Govind Ram Khanna, there was a dissolution of the firm. The firm constituted thereafter was a distinct and a separate firm. It was a case to which section 188 of the Act applied and two separate assessments for the two broken periods were to be made and he issued directions, according to the Income Tax Officer, to make two separate assessments. On further appeal to the Tribunal by the revenue, the view taken by the appellate authority was upheld.
2. The dispute pertains to the assessment year 1977-78, for which the previous year ended on 31-3-1977. On 18-12-1976, Govind Ram Khanna, a partner of the assessee firm died. With effect from 20-12-1976 the surviving partners drew up a fresh deed of partnership and decided to carry on the business in partnership. The assessee filed two separate returns, one for the period 1-4-1976 to 18-12-1976 and the other from 20-12-1976 to 31-12-1977 and claimed separate assessments for the respective periods. The Income Tax Officer, however, framed one assessment and clubbed the income of the aforesaid two periods on the view that it was a case of a change in the constitution of the firm to which section 187 of the Act was attracted. On appeal, the Assistant Commissioner did not agree with the Income Tax Officer. He held that on the death of Govind Ram Khanna, there was a dissolution of the firm. The firm constituted thereafter was a distinct and a separate firm. It was a case to which section 188 of the Act applied and two separate assessments for the two broken periods were to be made and he issued directions, according to the Income Tax Officer, to make two separate assessments. On further appeal to the Tribunal by the revenue, the view taken by the appellate authority was upheld.
3. We have heard the learned counsels for the parties.
3. We have heard the learned counsels for the parties.
4. The question for consideration is whether on facts found by the Tribunal, it was a case covered by section 188 or it fell within the purview of section 187.
4. The question for consideration is whether on facts found by the Tribunal, it was a case covered by section 188 or it fell within the purview of section 187.
5. Section 188 provides that where the firm carrying on 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 envisages that where at the time of making an assessment it is found that a change has occurred in the constitution of the firm, the assessment shall be made on the firm as it is constituted at the time of making the assessment. The expression 'change in the constitution of the firm 'for the purpose of section 187 has been defined in that section itself. The said provision provides, inter alia, 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. The controversy which is up for consideration before this Court was the subject-matter of consideration before the Supreme Court in CIT v. Empire Estate (1996) 218 ITR 355 (SC). The Supreme Court observed that section 187 would apply even to a case of partnership where a partner dies provided that the partnership deed provides that death shall not result in the dissolution of the partnership. It was then pointed out:
5. Section 188 provides that where the firm carrying on 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 envisages that where at the time of making an assessment it is found that a change has occurred in the constitution of the firm, the assessment shall be made on the firm as it is constituted at the time of making the assessment. The expression 'change in the constitution of the firm 'for the purpose of section 187 has been defined in that section itself. The said provision provides, inter alia, 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. The controversy which is up for consideration before this Court was the subject-matter of consideration before the Supreme Court in CIT v. Empire Estate (1996) 218 ITR 355 (SC). The Supreme Court observed that section 187 would apply even to a case of partnership where a partner dies provided that the partnership deed provides that death shall not result in the dissolution of the partnership. It was then pointed out:
'... 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.'
6. In the instant case, there is nothing to indicate in the order passed by the Tribunal or by the other authorities that there was a clause in the partnership deed that death shall not result in the dissolution of the partnership. In the paper book filed by the assessee, a copy of the partnership deed dated 4-4-1974 has been brought on record. Clause (7) of the partnership deed states that the partnership was at will. There is no clause in the partnership deed that death shall not result in the dissolution of the partnership. Indeed this position is not disputed by the standing counsel.
6. In the instant case, there is nothing to indicate in the order passed by the Tribunal or by the other authorities that there was a clause in the partnership deed that death shall not result in the dissolution of the partnership. In the paper book filed by the assessee, a copy of the partnership deed dated 4-4-1974 has been brought on record. Clause (7) of the partnership deed states that the partnership was at will. There is no clause in the partnership deed that death shall not result in the dissolution of the partnership. Indeed this position is not disputed by the standing counsel.
7. In view of the decision of the Supreme Court referred hereinabove and on the facts emerging in the case, we have no hesitation in saying that the Tribunal was right in taking the decision that on the death of Govind Ram Khanna on 18-12-1976 a dissolution of the firm in law had taken place and with effect from 20-12-1976 a new firm had come into existence when a fresh deed of partnership was executed by the surviving partners. Further, the Tribunal was also legally correct in taking the view that the income of the two periods could not have been clubbed and assessed at one place.
7. In view of the decision of the Supreme Court referred hereinabove and on the facts emerging in the case, we have no hesitation in saying that the Tribunal was right in taking the decision that on the death of Govind Ram Khanna on 18-12-1976 a dissolution of the firm in law had taken place and with effect from 20-12-1976 a new firm had come into existence when a fresh deed of partnership was executed by the surviving partners. Further, the Tribunal was also legally correct in taking the view that the income of the two periods could not have been clubbed and assessed at one place.
8. In view of the above discussion, both the questions are answered in the affirmative in favour of the assessee and against the revenue.
8. In view of the above discussion, both the questions are answered in the affirmative in favour of the assessee and against the revenue.