Commissioner of Income Tax vs Sri Hanuman Industries

At the instance of the revenue, the Tribunal referred the following question relating to the assessment year 1978-79 for the opinion of this Court :

Whether, on the facts and in the circumstances of the case, there should be two separate assessments for the two periods in question, as claimed by the assessee, or one consolidated assessment, as framed by the ITO ?

The facts, as stated by the Tribunal, are that the assessee-firm was constituted by several partners. One of the partners, namely, Shri Chiranji Lal, died on 11-4-1977 and the remaining erstwhile partners having inducted one more partner, namely, Shri Ashok Kumar, continued the business in the same name and style. The ITO clearly stated that in paragraphs 10 & 11 of the partnership deed dated 1-10-1974, it was clearly stated that death would not result into dissolution of the partnership. Therefore, the factual position is that there was an agreement to the contrary in the partnership deed that despite death of one of the partners the firm will not dissolve. The Assessing Officer, therefore, held that there was no dissolution of the firm upon the death of one of the partners and that there was only a change in the constitution. He, accordingly, made a single assessment for the entire accounting period on the assessee-firm.

On appeal, the Commissioner (Appeals) and the Tribunal both relying on a Full Bench decision of this Court in the case of BADRI NARAIN KASHI PRASAD Vs. ADDL. COMMISSIONER OF INCOME TAX. FANCY STORES v. COMMISSIONER OF INCOME TAX. R. C. GUPTA and SONS v. COMMISSIONER OF INCOME TAX. BENI PD. SIDGOPAL v. COMMISSIONER OF INCOME TAX., held that though there was change in the constitution, yet two separate assessments for the two different periods would have to be made.

The only question for consideration is whether two separate assessments are required to be made in a case where there was an agreement to the contrary that the firm will not stand dissolved despite death of one of the partners. This legal position is fully concluded by the Supreme Court in COMMISSIONER OF INCOME TAX Vs. EMPIRE ESTATE., . In this case, the Supreme Court observed as under :

Section 187 of the income tax Act, 1961, says that where, at the time of making an assessment, it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as it is constituted at the time of making the assessment. "Change in the constitution of the firm" is defined for the purpose. The relevant part of the definition states 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. These provisions would apply to a firm which survives upon the death of a partner. They would apply to the case of a 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, 1932 contemplates it....

The Tribunal having recorded a clear finding that there was a change in the firm and the record of the case having clearly indicated that there was an agreement to the contrary in the partnership deed, we are of the view that the firm was not dissolved upon the death of one of the partners and, therefore, only one assessment was required to be made for the whole accounting year. We, therefore, answer the aforementioned question in the negative, that is, in favour of the revenue and against the assessee.