JUDGMENT R.L. Gulati, J.
1. The petitioner is a partnership firm carrying on business at Sitapur in the name and style of M/s. Dahi Laxmi Dal Factory. The firm was constituted under a deed of partnership dated 28th June, 1969. There were two partners, Yashwantlal and Deep Narain, besides three minors who were admitted to the benefits of the partnership under Section 30 of the Indian Partnership Act. Prior to the formation of the firm there existed another firm of the same name and style constituted under a partnership deed dated 21st June, 1966, with two partners, Jethalal, father of Yashwant Lal, and Deep Narain. To the benefits of that partnership also the three minors had been admitted. Jethalal died on June 21, 1969, and the present partnership took over the business of the erstwhile firm. During the assessment year 1970-71, the petitioner claimed that on the death of Jethalal the old firm stood dissolved on 21st June, 1969, and on the following day the new firm took over the business and, therefore, two assessments should be made, one against the old firm and the other against the new firm for the respective periods during which they were in existence during the relevant previous year. The Income-tax Officer did not accept this claim of the petitioner and passed one assessment order for the whole year against the petitioner-firm. The petitioner's revision application to the Commissioner also failed. The petitioners have now approached this court under Article 226 of the Constitution.
2. The case of the department before the income-tax authorities as also before us is that the petitioner-firm was the result merely of the reconsti-tution of the old firm and, as such, the case was covered by Section 187 of the Income-tax Act, 1961, and one assessment had to be made against the reconstituted firm. The assessee's case is that it is a case of succession of one firm by another firm and the assessment should be made on the two firms separately under Section 188 of the Income-tax Act. When the matter came up before the Division Bench of this court, the department placed reliance upon the two decisions of this court, namely, R. B. Jessa Ram Fateh Chand v. Commissioner of Income-tax, [1971] 81 ITR 409 (All). and Civil Misc. Writ No. 5801 of 1970 (Ram Narain Laxman Prasad v. Income-tax Officer, [1972] 84 ITR 233 (All).), decided on 20th May, 1971. The Bench doubted the correctness of those decisions and referred the case to a larger Bench. That is how this matter has now come up before us.
3. Section 187 of the Income-tax Act, 1961 (hereinafter referred to as " the Act "), provides for the assessment of a firm where at the time of making assessment it is found that a change in the constitution of the firm has taken place and Section 188 of the Act provides for the assessment where a firm carrying on business is succeeded by another firm. The two provisions read as under :
" 187. Change in constitution of a firm.--(1) 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 I Provided that-
(i) the income of the previous years shall, for the purposes of inclusion in the total income of the partners, be apportioned between the partners, who, in such previous year, were entitled to receive the same, and
(ii) when the tax assessed upon a partner cannot be recovered from him, it shall be recovered from the firm as constituted at the time of making the assessment.
(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 chance in their respective shares or in the shares of some of them.
188. Succession of one firm by another firm.--Where a firm carrying on a business or profession is succeeded by another firm, and the case is not one covered by Section 187, separate assessments shall be made on the predecessor firm and the successor firm in accordance with the provisions of Section 170."
4. In essence Section 187 provides that if a firm is reconstituted before an assessment is made against it the assessment will be made upon the reconstituted firm even though income has to be divided between the partners who were actually entitled to a share in such income. The first question to be decided is as to what does the expression "reconstitution of the firm " mean. A firm in common law is not a legal entity but is merely a compendious name of persons who agree to carry on business in partnership. But under the Income-tax Act a firm has been given a legal status in a limited sense inasmuch as it is a separate taxable entity and is subject to tax which is popularly called "firm tax". But even then the words " firm " and " partnership ", etc., have to be given the same meaning as they have under the Indian Partnership Act. It is so provided in Section 2(23) of the Act which reads :
" 2. (23) In this Act,' firm ', ' partner ' and ' partnership ' have the same meanings respectively as in the Indian Partnership Act, 1932, with one difference, viz., that for the purposes of this Act ' partner ' includes a minor admitted to the benefits of partnership."
5. Therefore, we will have to refer to the Indian Partnership Act to find out as to what is understood of the expression " reconstitution of a firm " and how it is different from a firm which is newly constituted to determine the scope of Sections 187 and 188 of the Act.
6. Under the Indian Partnership Act a firm can be said to be reconstituted when a new partner is added or ah existing partner retires or is expelled without dissolving the firm. Chapter V of the Indian Partnership Act deals with the incoming and outgoing of partners. Section 31 of that Chapter provides :
" Subject to contract between the partners and to the provisions of Section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners."
7. Thus, Section 31 provides one mode of reconstitution of a firm, namely, by the introduction of a new partner with the consent of the existing partners unless there is a contract between the partners to the contrary as a result of which a new partner may be added without the consent of all the existing partners. Section 32 similarly provides for the retirement of a partner. It enacts that a partner may retire--(a) with the consent of all the other partners; (b) in accordance with an express agreement by the partners ; or (c) where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire. As a result of retirement of a partner also a change takes place in the constitution of the firm but the firm as such continues to be in existence as before. These are the only two contingencies under the Partnership Act which provide for the reconstitution of a firm without in any way affecting its continuity. Section 187 of the Act, in my opinion, clearly contemplated the reconstitution of a firm in accordance with Sections 31 and 32 of the Indian Partnership Act where a partner may be added or a partner may retire without breaking the continuity of the firm.
8. Sub-section (2) of Section 187 does not contain a definition of the "reconstitution of a firm ". It merely, and by way of abundant caution, provides in Clause (a) that even where the reshuffling of partners is so drastic that in the reconstituted firm only one of the partners of the original firm is left, it shall still be treated to be a case of reconstitution and Clause (b) provides that where there is no change in the partners but their shares are altered that will still be a case of reconstitution. But this provision does not change the concept of reconstitution of a firm as understood in the Indian Partnership Act nor does it obliterate the distinction between reconstitution and dissolution. When it talks of a partner ceasing to be a partner it refers to Section 32 of the Indian Partnership Act and when it talks of admission of a new partner it refers to Section 31 of the Indian Partnership Act. It may be restated here that by incoming and outgoing of a partner the firm is not dissolved. But once a firm is dissolved either by agreement or by operation of law, the question of reconstitution does not arise even when the new firm has common partners and takes, over the same business. A firm in order to be reconstituted must remain, in existence. In Commissioner of Income-tax v. A. W. Piggies & Co., [1953] 24 ITR 405 (SC). the Supreme Court made the following observation at page 408 :
" It is true that under the law of partnership a firm has no legal existence apart from its partners and it is merely a compendious name to describe its partners but it is also equally true that under that law there is no dissolution of the firm by the mere incoming or outgoing of partners. A partner can retire with the consent of the other partners and a person can be introduced in the partnership by the consent of the other partners. The reconstituted firm can carry on its business in the same firm's name till dissolution. The law with respect to retiring partners as enacted in the Partnership Act is to a certain extent a compromise between the strict doctrine of English common law which refuses to see anything in the firm but a collective name for individuals carrying on business in partnership and the mercantile usage which recognizes the firm as a distinct person or quasi-corporation."
9. To similar effect are the following observations of this court in Ram Narain Laxman Prasad v. Income-tax Officer :
" There is a change in the constitution of the firm when there is a change in the number and identity of the partners. Generally, such a change takes place when a person is introduced as a partner into an already existing firm or a partner retires or is expelled or ceases to be a partner on his becoming insolvent or dies, provided that the partners are agreed to the admission of a new partner or the contract of partnership stipulates that the firm will not dissolve on one of the partners ceasing to be so by reason of any of the events mentioned above. A change in the constitution of the firm must be distinguished from the dissolution of the firm. The former assumes that the firm continues in existence and that there is merely a change in the personnel of the firm. The latter contem plates the end of the contractual relationship between all the partners."
10. In Tyresoles (India), Calcutta v. Commissioner of Income-tax, [1963] 49 ITR 515 (Mad)., the Madras High Court made a similar observation at page 529. This is what their Lordships said :
"The dissolution and reconstitution of a partnership are two different legal concepts. The dissolution puts an end to the partnership, but reconstitution keeps it subsisting, though in another form. A dissolution followed by some of the erstwhile partners taking over the assets and liabilities of the dissolved partnership and forming themselves into a partnership is not reconstitution of the original partnership. The partnership formed after the dissolution is a new partnership and not a continuation of the old partnership, for it would be a contradiction in terms to say that what ceased to exist was continued. A reconstitution of a firm of partnership necessarily implies that the firm never became extinct. What it denotes is a structural alteration of the membership of the firm, by addition or reduction of members, and an incidental re-distribution of the shares of the partners."
11. It is not correct to say that Section 187 is merely a machinery section and is not a charging section. It may not be charging section in the sense . that it does not by itself authorise the imposition of tax but nevertheless it does affect the liability of a person to pay the tax. By virtue of this section the reconstituted firm which in a sense is a new firm becomes liable to pay the tax for the whole year even though a part of the tax would be payable by the erstwhile firm. As the liability to pay the tax of a firm is joint and several of all the partners, the new partners who are introduced will become liable to the payment of tax on profits in which they had no share. In a way this provision casts a vicarious liability upon a person who, in fact, is not liable to pay the tax. This, being the position this provision has to be construed very strictly. It must also be borne in mind that the dissolution of a firm takes place not only by a voluntary act of the partners but by operation of law over which the partners have no control. For instance, Section 41 of the Partnership Act provides that a firm is compulsorily dissolved:--
(a) by the adjudication of all the partners or of all the partners but one as insolvent; or
(b) by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership.
12. Similarly, Section 44 of that Act provides that on a suit by a partner the court may dissolve a firm on any of the grounds mentioned in Clauses (a) to (g). It is not, therefore, possible to accept the argument that by virtue of Sub-section (2) of Section 187 a firm becomes liable to be assessed for the profits of the whole year even though a part of the profit was earned by another firm and the new firm has been formed after the dissolution of the old firm, provided one of the partners in the two firms is common. There appears to be no ground for accepting such a contention either in equity or in law.
13. Now, let us turn to Section 188 of the Act. This section deals with succession of one firm by another which means that when the business of a firm is taken over by another firm as a going concern. The expression in this section " and the case is not covered by Section 187 " presents no difficulty. In a sense a reconstituted firm is also a new firm but where the new firm comes into existence as a result of a change in its constitution, as explained above, assessment may be made under Section 187 on the reconstituted firm. But where the new firm comes into existence after the dissolution of a firm such a case would not be covered by Section 187 and it would be a case of a new firm succeeding to the old firm. The same opinion has been expressed by Mr. N. A. Palkhivala in his book on Income-tax at page 895 of the 6th edition. The learned author has observed :
" Likewise, if a firm is dissolved and some of the partners take over the firm's business or carry on a similar business with or without new partners, this (section 187) would not apply, although there would be some common partners between the old firm and the new firm ; in such a case the new firm may be held to succeed to the old firm attracting, the application of Section 188."
14. He has supported this opinion with reference to Bhausa Ganusa Pawar & Co. v. Commissioner of Income-tax, [1966] 62 ITR 75 (Bom)., Jittanram Nirmalram v. Commissioner of Income-tax, [1953] 23 ITR 288 (Pat). and Kaniram Ganpatrai v. Commissioner of Income-tax, [1953] 23 ITR 314 (Pat)..
15. Now, in the present case, the old firm was constituted by two partners. One of them died and there was no stipulation in the partnership deed that the firm shall not stand dissolved on the death of a partner. Indeed, even if there had been such a stipulation the firm could not have been saved from dissolution because after the death of Jethalal only one partner was left and one man cannot constitute a firm. The firm automatically came to an end. Moreover, an agreement between the partners that on the death of one of them his legal heir would be taken as a partner does not make the legal heir automatically a partner, because he is not bound by a contract to which he was not a party. This proposition admits of no doubt after the following pronouncement by the Supreme Court in the case of Commissioner of Income-tax v. Seth Govindram Sugar Mills Ltd., [1965] 57 ITR 510, 514, 515 (SC). :
" Partnership, under Section 4 of the Partnership Act, is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Section 5 of the said Act says that the relation of partnership arises from contract and not from status. The fundamental principle of partnership, therefore, is that the relation of partnership arises out of contract and not out of status. To accept the argument of the learned counsel is to negative the basic principle of the law of partnership. Section 42 cannot be interpreted without doing violence either to the language used or to the said basic principle. Section 42(c) of the Partnership Act can appropriately be applied to a partnership where there are more than two partners. If one of them dies, the firm is dissolved ; but if there is a contract to the contrary, the surviving partners will continue the firm. On the other hand, if one of the two partners of a firm dies, the firm automatically comes to an end and, thereafter, there is no partnership for a third party to be introduced therein and, therefore, there is no scope for applying Clause (c) of Section 42 to such a situation. It, may be that pursuant to the wishes or the directions of the deceased partner the surviving partner may enter into a new partnership with the heir of the deceased partner, but that would constitute a new partnership. In this light Section 31 of the Partnership Act falls in line with Section 42 thereof. That section only recognises the validity of a contract between the partners to introduce a third party without the consent of all the existing partners : it pre-supposes the subsistence of a partnership : it does not apply to a partnership of two partners which is dissolved by the death of one of them, for, in that event, there is no partnership at all for any new partner to be inducted into it without the consent of others."
16. To sum up, the legal position that emerges is that Section 187 applies only where a firm is reconstituted in accordance with Sections 31 and 32 of the Indian Partnership Act, namely, when a new partner is taken or an existing partner retires with the consent of all the partners or without their consent if the contract of partnership so provides. But where a firm is dissolved either by agreement of the partners or by operation of law and another firm takes over the business that will be a case of succession governed by Section 188 of the Act even though some of the partners of the two firms are common. In the instant case, since the erstwhile firm stood dissolved on the death of one of the partners, the petitioner-firm which took over the same business could be assessed only in accordance with Section 188 and a single assessment for the whole year was not valid.
17. Now, I turn to the decision of the Supreme Court in the case of Shivram Poddar v. Income-tax Officer, [1964] 51 ITR 823 (SC)., which, I must confess, has presented a good deal of difficulty. In that case the Supreme Court was concerned with the interpretation and application of Section 44 of the Indian Income-tax Act, 1922, before its amendment in 1958. Section 44 provides :
" Where any business, profession or vocation carried on by a firm or association of persons has been discontinued, or where an association of persons is dissolved, every person who was at the time of such discontinuance or dissolution a partner of, such firm or a member of such association shall, in respect of the income, profits 'and gains of the firm or association, be jointly and severally liable to assessment under Chapter IV and for the amount of tax payable and all the provisions of Chapter IV shall, so far as may be, apply to any such assessment."
18. In the case before the Supreme Court a partner of a dissolved firm challenged the assessment proceedings against him in respect of the profits earned by the firm on the ground that no assessment could be made against the firm as such after its dissolution. Section 44 applies only where the business of a firm is discontinued and not where a firm has merely been dissolved. Now this argument was clearly untenable because the firm had not merely been dissolved but its business had also been discontinued and, as such, Section 44 was applicable in terms. The fact that the business of the firm had been discontinued has been stated by the Supreme Court at two places. In the opening paragraph it has been observed :
" The firm, which consisted of four partners, one of whom was Shivram Poddar, appellant in this appeal, was dissolved in February, 1950, and it appears that thereupon its business was discontinued."
20. On these facts the contention raised on behalf of the petitioner in that case could have been rejected straightaway and it was not necessary for the Supreme Court to say anything more. But the Supreme Court attempted to explain as to why in Section 44 a firm and association of persons were treated differently. It is apparent from a reading of the section that assessment under Section 44 can be made in the case of a firm, when its business is discontinued but in the case of an association of persons, an assessment can be made both when the association is dissolved and when its business is discontinued. Not only Section 44 provides for the manner of assessment but also provides that every partner or member of association against whom an assessment has been made with the help of Section 44 will be jointly and severally liable for the tax assessed. The Supreme Court examined the scheme of the Act to find out an explanation as to why no provision had been nude for assessment under Section 44 on the income of a firm which had merely been dissolved and whose business had not been discontinued. The Supreme Court found that whenever there was a change of ownership of a business of a firm the Act provided the machinery for assessment under Section 26(1) on the reconstituted firm if it was a case of reconstitution or on the successor under Section 26(2) if it was a case of succession. It is only where the business is totally discontinued that a provision like Section 44 was necessary. Section 44 of the Act provides for two things. In the first place it ensures the continuity of the application of the machinery provided for the assessment and imposition of tax liability under Chapter IV as is apparent from the following observation of the Supreme Court in the case of C. A. Abraham v. Income-tax Officer, Kottayam, [1961] 41 ITR 425, 430 (SC) :
" In effect, the legislature has enacted by Section 44 that the assessment proceedings may be commenced and continued against a firm of which business is discontinued as if discontinuance has not taken place. It is enacted manifestly with a view to ensure continuity in the application of the machinery provided for assessment and imposition of tax liability notwithstanding discontinuance of business of firms."
21. Secondly, it provides for the joint and several liability of the partners of a firm whose business is discontinued, a provision which is not found anywhere else in the Income-tax Act. The provision for joint and several liability of the partners was necessary only where the business of the firm had been discontinued. It was not necessary where there was merely a change in the ownership because liability could be fastened upon the reconstituted firm or the successor-firm in accordance with the provisions of Sections 26(1) and 26(2) of the Act. It is in that connection that their Lordships made the following observation at page 827 :
"Under the ordinary law governing partnerships, modification in the constitution of the firm in the absence of a special agreement to the contrary, amounts to dissolution of the firm and reconstitution thereof, a firm at common law being a group of individuals who have agreed to share the profits of a business carried on by all or any of them acting for all, and supersession of the agreement brings about an end of the relationship. But the Income-tax Act recognises a firm for purposes of assessment as a unit independent of the partners constituting it; it invests the firm with a personality which survives reconstitution. A firm discontinuing its business may be assessed in the manner provided by Section 25(1) in the year of account in which it discontinues its business ; it may also be assessed in the year of assessment. In either case it is the assessment of the income of the .
firm. Where the firm is dissolved but the business is not discontinued, there being change in the constitution of the firm, assessment has to be made under Section 26(1) and if there be succession to the business, assessment has to be made under Section 26(2). "
22. The Supreme Court was not called upon to decide as to what are the cases of reconstitution of a firm falling under Section 26(1) and cases of succession falling under Section 26(2) of the Act. There is a well-known distinction between a reconstitution and dissolution and the Supreme Court has not obliterated that distinction. Indeed, as has already been pointed out, the Supreme Court in the case of Commissioner of Income-tax v. A. W. Piggies & Company has laid down clearly that under the Partnership Act there is no dissolution of the firm by the incoming and outgoing of the partners if it takes place according to the agreement between the partners. The observation " where the firm is dissolved but the business is not discontinued, there being change in the constitution of the firm, assessment has to be made under Section 26(1) and if there be succession to the business, assessment has to be made under Section 26(2) " has, therefore, to be understood in the context in which it was made.
23. The case of the Kerala High Court in Excel Productions v. Commissioner of Income-tax, [1971] 80 ITR 356 (Ker). presents no difficulty. In that case it had been admitted before the High Court, as well as before the Tribunal, that there was a change in the constitution of the firm and not succession. Obviously, Section 167 would apply to such a case. The case of R, B, Jessa Ram Fateh Chand v. Commissioner of Income-tax has been decided on the basis of the observations quoted above in the case of Shivram Poddar. In my opinion, the learned judges did not notice the context in which these observations were made and were clearly misled. That decision, in my opinion, does not lay down the law correctly. As regards the other case of Civil Misc. Writ No. 5801 of 1970 (Ram Narain Laxman Prasad v. Income-tax Officer), decided on 20th May, 1971, the correctness of which was also doubted, the same is distinguishable. That was a case dealing with the registration of a firm. There two minors had been admitted to the benefits of partnership and the firm did not execute a fresh deed of partnership when the minors became major. Their Lordships held that the minors were not partners previously and they became partners when they became major and, as such, there was a change in the constitution of the firm and it was necessary for the firm to execute a fresh partnership deed. A renewal could not be granted on the basis of the origininal partnership deed.
24. Clearly, this case does not deal with the question with which we are faced and it is not at all necessary to make any comment on it.
25. The result is that the order of assessment and the revisibnal order of the Additional Commissioner cannot be sustained and have to be quashed.
26. The writ petition is accordingly allowed and the impugned orders of assessment and the revisional order dated August 25, 1970, and May 24, 1972, are quashed. In the circumstances of the case, the parties are directed to bear their own costs.
27. H. N. sETH J.--Full facts leading to the filing of the present petition have been stated in the judgment prepared by brother, Gulati J., and it is not necessary for me to repeat them here.
28. Main, questions that arise for consideration in this case are whether in a case where one of the two partners, constituting a partnership firm, died and subsequently a fresh partnership deed, with the object of carrying on the business of the erstwhile firm, is executed by the surviving partner and the heir of the deceased partner, the new firm is to be assessed under Section 187 or separate assessments in respect of the dissolved and the new firms to be made in accordance with Section 188 of the Income-tax Act, 1961, and in case the assessment is to be made under Section 187 of the Act whether the income of the reconstituted firm and that earned by it before its reconstitution can be clubbed together in one single assessment.
29. Sections 187, 188 and 189 of the Income-tax Act, 1961, run thus:
"187. Change in constitution of a firm.--(1) 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 :
Provided that-
(i) the income of the previous year shall, for the purposes of inclusion in the total incomes of the partners, be apportioned between the partners who, in such previous year, were entitled to receive the same; and
(ii) when the tax assessed upon a partner cannot be recovered from him, it shall be recovered from the firm as constituted at the time of making the assessment.
(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, "
" 188. Succession of one firm by another firm.--Where a firm carrying on a business or profession is succeeded by another firm, and the case is not one covered by Section 187, separate assessments shall be made on the predecessor firm and the successor firm in accordance with the provisions of Section 170."
30. Relevant portion of Section 189 runs thus :
" 189. (1) Where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the Income-tax Officer shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken place, and all the provisions of this Act, including the provisions relating to the levy of a penalty or any other sum chargeable under any provision of this Act, shall apply, so far as may be, to such assessment."
31. These sections provide for special mode of making assessments in the circumstances specified in each of them. Section 187 deals with a case where at the time of making assessment under Section 143 or 144 of the Act, it is found that there has been a change in the constitution of a firm as defined therein. Section 188 applies to a case of succession which does not amount to a change in the constitution of the firm as defined in Section 187. Section 189 of the Act provides for the manner of making assessment in a case where a business or profession carried on by a firm has been discontinued. What amounts to change in the constitution of a firm is laid down in Sub-section (2) to Section 187 in the following words :
" For the purposes of this section there is a change in the constitution of the firm 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."
32. Accordingly, while considering whether a particular case is covered by Section 187 of the Act or not we have to look to the definition of " change in the constitution of the firm ", as given therein. Section 2(23) merely provides that the expressions "firm", " partner " and " partnership " as used in the Income-tax Act will have the meaning assigned to them in the Indian Partnership Act, 1932, but the expression "partner" shall also include any person who, being a minor, has been admitted to the benefits of the partnership. This section has absolutely no bearing on the question as to the meaning of the expression " change in the constitution of a firm" when used in Section 187 of the Income-tax Act, 1961. In my opinion it will serve no useful purpose to consider whether in the circumstances of this case either under the Partnership Act or under the general law, the firm in question can be said to have been reconstituted or not. Any reference to the Partnership Act in this connection would be irrelevant.
33. Section 188 provides for the manner of making assessment in cases where one firm carrying on business or profession is succeeded by another firm and the case is not covered by Section 187 of the Act. This means that Section 187 of the Act applies also to a case where the business of a firm is taken over by another firm. It follows that for the purpose of making assessment under Section 187, even a case, where one firm is succeeded by another firm, can be regarded as a case of change in the constitution of the firm, provided that the new firm is constituted in the manner described therein.
34. Section 26 of the Indian Income-tax Act, 1922, also made a similar provision regarding the manner in which assessment was to be made in cases where there was a change in the constitution of a firm or where the business of a firm was succeeded by another firm. This section, though not identicalto Sections 187 and 188 of the Income-tax Act, 1961, was intended to cater to similar situation and ran thus :
" 26. (1), Where, at the time of making an assessment under Section 23, it is found that a change has occurred in the constitution of a firm or that a firm has been newly constituted, the assessment shall be made on the firm as constituted at the time of making the assessment.....
(2) Where a person carrying on any business, profession or vocation has been succeeded in such capacity by another person, such person and such other person shall, subject to the provisions of Sub-section (4) of Section 25, each be assessed in respect of his actual share, if any, of the income, profits and gains of the previous year."
35. While dealing with the scope of Section 26 of the Indian Income-tax Act, 1922, the learned judge of the Supreme Court made the following observations in the case of Shivrani Poddar v. Income-tax Officer :
" Under the ordinary law governing partnerships, modification in the constitution of the firm in the absence of a special agreement to the contrary amounts to dissolution of the firm and reconstitution thereof, a firm at common law being a group of individuals who have agreed to share the profits of a business carried on by all or any of them acting for all, and supersession of the agreement brings about an end of the relation. But the Income-tax Act recognises a firm for purposes of assessment as a unit independent of the partners constituting it; it invests the firm with a personality which survives reconstitution..................Where the firm is dissolved, but the business is not discontinued, there being change in the constitution of the firm, assessment has to be .made under Section 26(1), and if there be succession to the business, assessment has to be made under Section 26(2). The provisions relating to assessment on reconstituted or newly constituted firms and on succession to the business are obligatory. Therefore, even when there is change in the ownership of the business carried on by a firm on reconstitution or because of a new constitution, assessment must still be made upon the firm."
36. These observations in my opinion clearly bring out that for the purposes of the Income-tax Act, there can be change in the constitution of a firm even after its dissolution. Such reconstitution can take place by reshuffling of the partners or their shares as a result of a new agreement between the parties concerned. In such a case even though the new firm which is an entity different from the dissolved firm, can still be considered to be a firm which for the purpose of the Income-tax Act is a reconstituted firm and it will be deemed that the personality of the old, firm survived its dissolution so as to be reflected in the reconstituted firm. I am accordingly unable to agree that merely because a firm stands dissolved on the death of one of the partners constituting it, its constitution cannot undergo a change for the purposes of Section 187 of the Income-tax Act.
37. Section 187(2) lays down that for purposes of that section, there is a change in the constitution of a firm if one or more of the partners cease to be partners or one or more 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. This means that where a firm is dissolved and its business is carried on by another firm it will be considered to be a case of change in the constitution of the firm if even a single partner is common to the constitution of the two firms. This provision clearly negatives the argument that Section 187 applies only to a case where the firm is not dissolved and that a change in the constitution of a firm occurs only as a result of partners being added or ceasing to be partners in the firm as provided in Sections 31 and 32 of the Partnership Act. If all the partners except one go out, there can never be a firm as contemplated by the Partnership Act in existence ; still Section 187 of the Income-tax Act contemplates that there will be a change in the constitution of the firm even if a single partner is common to both the erstwhile and the newly constituted firm.
38. Since Gulati J., with whom C. S. P. Singh J., agrees, has come to a conclusion that the present case is governed by Section 188 of the Income-tax Act, he has not gone into the question whether while proceeding to assess an erstwhile firm in the hands of the reconstituted firm, the income of both the firms has to be clubbed together in one assessment. However, as I have come to a conclusion that the present is a case of reconstitution of a firm as envisaged by Section 187 of the 1961 Act, it becomes necessary for me to discuss whether in such circumstances the income of the erstwhile and the newly constituted firm can be clubbed together in, one assessment.
39. It is now well settled that for the purposes of the Income-tax Act a partnership whether registered or not is an assessable entity distinct from the partners constituting the same. The question whether after the constitution of a firm undergoes a change of the nature described in Section 187 of the Income-tax Act, 1961, which corresponds to Section 26 of the 1922 Act, the newly constituted firm is the same firm or not, is concerned, the Supreme Court in the case of Commissioner of Income-tax v. Bharat Engineering and Construction Co., [1968] 67 ITR 273, 280 (Mys). observed :
" 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 that, for the purposes of assessment, every change in the constitution of the firm brings into existence a new firm."
40. It follows 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 becomes a distinct assessable entity different from the firm before its reconstitution.
41. 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 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 representatives, 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 prescribed in Section 187. This section 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 the 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 some one 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 a firm prior to its reconstitution has to be added to the income of the firm as it stands after reconstitution. Accordingly, even though the firm after its reconstitution may be liable to be assessed in respect of the income derived by the firm before reconstitution, 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 it.
42. Our attention was invited to Section 188 of the Income-tax Act which provides that in a case where a firm carrying on 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 assessments. Accordingly, it should be taken that under Section 187 there has to be only one assessment against the reconstituted firm. I am 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, no question of assessing two persons separately arises. However, 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 can 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.
43. In view of the aforesaid discussion I am of opinion that the assessment order dated August 25, 1970, inasmuch as it clubs the income of the erstwhile and the reconstituted firm is vitiated and is liable to be set aside.
44. The petition, therefore, succeeds though for reasons different from that mentioned in the judgment of Gulati J. and the assessment order dated August 25, 1970, and demand notices following it, are quashed. The petitioner is not entitled to a mandamus, directing the respondent No. 1 not to enforce a levy or assessment of tax in respect of the firm as it stood prior to its constitution. The relief is accordingly refused. Parties are directed to bear their own costs.
By the Court
45. In view of the majority judgment the writ petition is allowed. The impugned orders of assessment and the revisional order dated August 25, 1970, and May 25, 1972, respectively are quashed. The parties are directed to bear their own costs.