JUDGMENT
1. In pursuance of the direction of this court under Section 256(2) of the Income-tax Act, 1961 (for short "the Act"), the Income-tax Appellate Tribunal, Delhi Bench "A", New Delhi, has referred at the instance of the Revenue, the following two questions 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 there was a dissolution of the first partnership on the death of Shri B.G. Mathur on February 16, 1976, and that the second partnership consisting of Smt. Daya Pyari Mathur and Sri G. C. Mathur, which took over the business could be assessed in accordance with 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 upholding the Appellate Assistant Commissioner's view that the income of the two periods could not be clubbed and that two separate assessments should be made for the two periods ?"
2. The facts are that at the beginning of the previous year relevant to the assessment year 1977-78 with which we are concerned, the firm, Kohinoor Jewellers, was constituted by two partners. On February 16, 1976, one of the partners died when the firm was constituted afresh by the surviving partner along with Smt. Daya Pyari Mathur. The assessee claimed that the income of the two periods was liable to be assessed separately in the hands of the respective firms in terms of Section 188 of the Act. The Income-tax Officer, however, framed one assessment clubbing the income of both the periods on the view that it was a case of change in constitution of the firm within the meaning of Section 187 of the Act and, therefore, one assessment was called for.
3. On appeal, the Appellate Assistant Commissioner of Income-tax did not agree with the view taken by the Income-tax Officer and relying upon a Full Bench decision of this court in Dahi Laxmi Dal Factory v. ITO [1976] 103 ITR 517, held that when one of the two partners constituting a firm dies, the firm dissolves by operation of law and another firm constituted by the remaining partner is a separate firm and the income of the two firms could not be clubbed. Accordingly, he directed the Income-tax Officer to make two separate assessments--one in the hands of the predecessor firm and the other in the hands of the successor firm. On further appeal at the instance of the Revenue, the appellate order was upheld by the Income-tax Appellate Tribunal.
4. We have heard learned counsel for the parties.
5. At the outset it may be observed that it is not the case of the Revenue that there was any Clause in the partnership deed that the firm will not dissolve despite the death of a partner. No such case was taken up at any stage either before the Tribunal or other authorities. The question that falls for consideration is whether, on the facts of the case, it is a case covered by Section 188 of the Act or a case to which Section 187 will apply. Section 188 of the Act states 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, inter alia, provides 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 will 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" occurring in Section 187 for the purposes of that Section means that if one or more of the partners cease(s) to be the 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 change, there is a change in the constitution of the firm. In CIT v. Empire Estate [1996] 218 ITR 355 (SC), the Supreme Court has pointed out that the provisions of Section 187 would apply to a case of 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. Thereafter, it was observed as under (page 359) :
"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. As already stated, the instant case is not one where there was any agreement to the contrary in the partnership deed that the partnership firm will not dissolve despite the death of a partner.
7. Now, there is another aspect from which the case can also be looked into. Once a firm is dissolved either by an agreement or by operation of law, the question of reconstitution does not arise even where the new firm has a common partner or partners and takes over the same business. A firm in order to be reconstituted must remain in existence. In the present case, the firm was constituted only by two partners. One of them had died during the currency of the previous year relevant to the assessment year in question. The legal consequence was that upon the death of a partner out of the two only one partner was left and one man cannot constitute a firm. The firm automatically came to an end. In an identical situation the Full Bench of this court in Dahi Laxmi Dal Factory [1976] 103 ITR 517 had taken the view that it would be a case governed by Section 188 of the Act where two separate assessments are called for and it would be a case of succession of one firm by another.
8. For what has been stated above, we agree with the view taken by the Tribunal that the income of the two periods could not be clubbed and two separate assessments should have been made for the two broken periods. Further, on the death of Sri B. G. Mathur, a partner of the firm, there was a dissolution of the first partnership and upon the constitution of the second partnership, the firm could be assessed in accordance with Section 188 of the Act.
9. In the result, both the questions are answered in the affirmative against the Revenue and in favour of the assessee.