JUDGMENT H.N. Seth, J.
1. At the instance of the Commissioner of Income-tax, Lucknow, the Income-tax Appellate Tribunal, Delhi Bench, has referred the following questions for the opinion of this court:
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the firm as reconstituted within the meaning of Section 187(2) of the Income-tax Act, 1961, was entitled to choose its own accounting period, as a new assessee, from the date of its reconstitution, in its own right ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in directing exclusion from the assessment under consideration of the income relating to the period ending March 31, 1961, for making another assessment in respect of profits of the old firm on the basis of the previous year of that firm ?"
2. The assessee in this case is a partnership firm carrying on business under the name and style of Messrs. Shiv Shanker Lal Ram Nath. The two questions mentioned above arise in connection with its assessment for the year 1962-63. Earlier, seven persons carried on the partnership business under the name and style of Messrs, Shiv Shanker Lal Raghunath Das with their head office at Bareilly and branch at Lucknow. The accounting period of that firm ended on Dusehra of each year. With effect from 1st April, 1961, the constitution of the firm underwent a change. Two of the partners, viz., Ram Krishna Das and Sri Krishna Das, retired and, in their place, two other persons, viz., Radhey Shiam and Ghanshyam Das, were admitted as partners. In addition, two minors were also admitted to the benefits of the firm. Thereafter, the firm carried on the business in the name of Messrs. Shiv Shanker Lal Rain Nath. For facility of reference the firm as it stood before its reconstitution will hereinafter be referred to as "the old firm" whereas the firm as it stood after its reconstitution will be referred to as "the new firm".
3. For the assessment year 1962-63, the assessee filed two income-tax returns, one in respect of the old firm, showing the income earned by it during the period September 30, 1960, to March 31, 1961, and the other in respect of the new firm showing income derived by it in the previous year ending 31st March, 1962, i.e., for the period April 1, 1961, to March 31, 1962. The Income-tax Officer held that this was a case merely of change in the constitution of the firm as contemplated by Section 187(2) of the Income-tax Act, 1961. The assessee was not competent to change its accounting year to the financial year without obtaining the permission of the Income-tax Officer. Since the assessee had changed the accounting year without such permission, the reconstituted firm was liable to be assessed on the basis of the income earned during the period September 30, 1960, to March 31, 1962, in one assessment. He, accordingly, determined the total income of the reconstituted firm at Rs. 1,46,789 as made up of Rs. 63,497, income derived by the old firm during the period September 30, 1960, to March 31, 1961, and Rs. 83,292, the income derived by the new firm during the financial year 1961-62. He treated the firm as unregistered for the period ending 31st March, 1961, and registered for the period 1st April, 1961, to 31st March, 1962. In appeal, the Appellate Assistant Commissioner upheld the action of the Income-tax Officer in including the income of both the firms in one assessment made on the reconstituted firm. He, however, directed that the firm was entitled to registration for both the periods. He reduced the income of both the firms to some extent. The assessee then took the matter up in appeal before the Income-tax Appellate Tribunal and urged that while completing its assessment for the year 1962-63, the income-tax authorities erred in making an assessment on the basis of income earned in a period of 18 months, i.e., September 30, 1960, to March 31, 1962. According to the assessee the relevant previous year of the firm could in no case exceed 12 months and the assessment should have been confined only to the profits derived by it during a period of 12 months. The Income-tax Appellate Tribunal took the view that after reconstitution the assessee-firm was a new taxable entity, different from the firm before its reconstitution. This new entity had not been assessed to income-tax earlier. Accordingly, it was free to opt for a previous year which synchronised with the financial year immediately preceding the assessment year and it could be assessed only on the basis of the previous year chosen by it, i.e., on the basis of profits derived by it during the financial year ending March 31, 1962. However, in view of the provisions of Section 187 of the Income-tax Act, it could be separately assessed in respect of the income derived by the old firm during the period September 30, 1960, to March 31, 1961. It accordingly directed that the profit relating to the period ending 31st March, 1961, be excluded from the assessment of the new firm. The effect of the Tribunal's order was that after reconstitution, for the assessment year 1962-63, separate assessments in the hands of the new firm had to be made, one in respect of the income derived by the old firm, on the basis of the previous year opted by that firm, and the other in respect of the income derived by the new firm on the basis of the previous year opted by it.
4. Section 187 of the Income-tax Act provides that where at the time of making an assessment under Section 143 or Section 144, it is found that a change has occurred in the constitution of a firm, assessment shall be made on the firm as it exists at the time of making the assessment. In other words, just as in the case of an individual assessee dying, his income is assessed in the hands of his legal representative as provided in Section 159, in the same way, the income of the firm before its reconstitution is to be assessed in the hands of the firm as reconstituted in the manner provided in Section 187. The fact that after the constitution of a firm undergoes a change of the nature described in Section 187 of the Income-tax Act, 1961, corresponding to Section 26 of the Indian Income-tax Act, 1922, the reconstituted firm becomes an assessable entity different from the firm as it stood before such reconstitution, would become obvious from the following observations made by the Mysore High Court in the case of Commissioner of Income-tax v. Bharat Engineering and Construction Co. [1958] 67 ITR 273, 280 (Mys):
"Even though under the Act an unregistered firm is assessable as such but, as could be seen from Section 26(1), in the matter of assessment, it is the firm as constituted at the time of making the assessment that has to be assessed. In other words, if it is found that a change has occurred in the constitution of the firm, assessment will have to be made on the firm as constituted at the time of making the assessment and not on the firm that was in existence earlier. From this it follows, for the purpose of assessment, every change in the constitution of a firm brings into existence a new firm."
5. Section 187, even by implication, does not create a fiction that the income derived by the old firm becomes the income of the reconstituted firm. Normally, it is various items of income that accrue to a particular assessee which alone can, for the purpose of computing the income-tax payable by him, be aggregated. Chapter V of the Income-tax Act, however, provides for situations in which while determining the total income of an assessee liable to be taxed, the income derived by someone else may also be included in his income. This Chapter does not contain any provision that for the purpose of computing income-tax payable by a firm, the income derived by it has to be added to the income of the firm as it stands after reconstitution. Accordingly, even though the reconstituted firm may be liable to be assessed in respect of the income derived by the firm before its reconstitution, i.e., the income of the old firm cannot be added to the income of the new firm. It necessarily follows that in such a case it becomes necessary to pass different, assessment orders, though against the newly constituted firm, in respect of income derived by the old firm and that derived by the new firm.
6. Our attention was invited to Section 188 of the Income-tax Act which provides that in a case where a firm carrying on a business or profession 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 in accordance with the provisions of Section 170. Learned counsel for the department urged that whereas Section 188 provides for separate assessments to be made in a case where a firm carrying on business or profession is succeeded by another firm, Section 187, which deals with reconstitution of a firm, does not make any provision for separate assessment. Accordingly, it should be taken that under Section 187 there has to be only one assessment against the reconstituted firm. We are unable to accept this submission. As stated earlier, Section 187 merely makes the new firm liable to be assessed in respect of the income derived by the old firm. In a case where a firm is reconstituted the old firm ceases to exist. Accordingly, in such a case, no question of making a provision for assessment of two different persons, arises. Merely because, as in Section 188, no similar provision for assessing two different persons has been made in Section 187, it does not follow that this section contemplates only one assessment being made on the new firm after clubbing the income derived by it and that derived by the old firm during the accounting year relevant to the assessment year in question. Section 188 contemplates a case where a firm carrying on business or profession is succeeded by another firm, i.e., it postulates two different assessable entities on which separate assessments could under the law be made. Provisions of Section 187 make it clear that in a case of reconstitution, the firm before its reconstitution does not for purposes of assessment exist as a separate assessable entity. The case where the business itself is discontinued or the firm is dissolved and there is no person who has succeeded to the firm either by reconstitution as provided in section 187 or otherwise would be governed by Section 189.
7. The Income-tax Appellate Tribunal, therefore, was right in holding that notwithstanding the provisions of Section 187 of the Income-tax Act, 1961, the firm after it underwent a change in its constitution on 1st April, 1961, became an assessable entity which, for the purposes of assessment, was distinct from the firm as it stood prior to 1st April, 1961, and that the income derived by the old firm had to be assessed in its hands separately and without clubbing it with the income derived by it during the relevant accounting year.
8. Section 187, which provides that where at the time of making an assessment under Section 143 or Section 144, it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment, does not in any way affect the right of the new firm to choose its own previous year as provided in Section 3 of the Act. Relevant portion of Section 3 reads thus :
"3. (1) For the purposes of this Act, 'previous year' means--(a) the financial year immediately preceding the assessment year ; or (b) if the accounts of the assessee have been made up to a date within the said financial year, then, at the option of the assessee, the 12 months ending on such date; or.........
(4) Where in respect of a particular source of income or in respect of a business or profession newly set up, an assessee has once exercised his option under Clause (b)... ...then, he shall not, in respect of that source, or, as the case may be, business or profession, be entitled to vary the meaning of the expression 'previous year' as then applicable to him, except with the consent of the Income-tax Officer and upon such conditions as the Income-tax Officer may think fit to impose."
9. It is obvious that after undergoing a change in its constitution, the new firm, which was a distinct assessable entity, different from the old firm, never opted to be assessed on the basis of the previous year as contemplated by Section 3(1)(b). Instead, it made up its accounts up to a date ending with the financial year immediately preceding the assessment year. This new firm could not be compelled to elect the previous year which had been elected by the old firm. Accordingly, no question of the assessee changing its previous year without obtaining the consent of the Income-tax Officer arises.
10. In the result, we hold that after a firm undergoes a change in its constitution a new firm, though for certain purposes reflecting the personality of the erstwhile firm, comes into existence. This new firm is a distinct assessable entity different from the firm before its reconstitution. The Tribunal was right in its view that two different assessments had to be made against the assessee-firm, one in respect of the income derived by it during the accounting year ending 31st March, 1962, and the other derived by the old firm during the relevant previous year ending on 30th September, 1961. While dealing with the assessment of the new firm in respect of the income derived by it during the year relevant to the assessment year 1962-63, it was justified in excluding the income derived by the old firm during the accounting period 30th September, 1960, to March 13, 1961.
11. In the result both the questions referred to this court are answered in the affirmative and in favour of the assessee. The assessee will be entitled to receive from the Commissioner of Income-tax costs of this reference which are assessed at Rs. 200.