Surana and Co. vs Commissioner of Income Tax

Mal Lodha, J.—The Income Tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as "the Tribunal", has referred the following question for our decision :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the case of the assessee fell within the exception provided in Section 188 of the Income Tax Act, 1961, and was, therefore, covered by the provisions of Section 187(1) lead with Section 187(2) of the Income Tax Act, 1961, and that, therefore, only one assessment should have been framed on the firm for the entire accounting period corresponding to the assessment year 1970-71."

The petitioner-assessee is a firm. Its accounting year for the assessment year 1969-70 ended on Diwali 1968 and the following persons were the partners of the firm on that date :

Fatehlal

Niranjan Kumar

Nirmal Kumar

One of the partners, namely, Shri Fatehlal, died on July 14, 1969, and on his death, his widow, Smt. Asha Kumari, was taken in as a partner and she was allotted the (same) share of profit as was being held by her deceas-edhusband. This is evidenced by the partnership deed dated July 24, 1969. After the death of Fatehlal, the account books of the assessee were not closed. The balance-sheet as on the date of death of Fatehlal was not separately drawn. The books of account were closed at the end of the accounting period corresponding to the assessment year 1970-73, i.e., on Diwali 1969. Profits in the various trading accounts were also worked out up to Diwali day and no attempt was made to bifurcate the profits in two parts, i.e., one preceding the death of Fatehlal and the other succeeding his death. Before the Income Tax Officer (ITO), it was submitted that two different assessments should be framed on the firm, one for the period up to the date of death of the partner (Fatehlal) and the other after the date of death of the partner to the end of the accounting period in accordance with Section 188 read with Section 170 of the I.T. Act, 1961 (No. XLIII of 1961) (" the Act" herein). The ITO did not accept the above contention of the assessee. He, by his order dated December 7, 1972, opined that it was a case of a change in the constitution of the firm as all the surviving partners had continued to do business as usual without any break and the widow of the deceased partner had joined the partnership with the existing capital and rights of the deceased. He, therefore, assessed the assessee-firm on the total income for the entire accounting period. Aggrieved against the order dated December 7, 1972, of the ITO, the assessee preferred an appeal and the AAC, vide his order dated June 10, 1975, dismissed the appeal. While doing so, the AAC relied on a decision of the Punjab and Haryana High Court in Dharam Pal Sat Dev Vs. Commissioner of Income Tax, Dissatisfied, the assessee-firm appealed to the Tribunal. Before the Tribunal, on behalf of the assessee, Addl. Commissioner of Income Tax, Gujarat Vs. Harjivandas Hathibhai, and Dahi Laxmi Dal Factory Vs. Income Tax Officer and Another, [were cited. The Department relied on Commissioner of Income Tax Vs. Kelukutty, and Commissioner of Income Tax Vs. T. Veeraraghavulu Chetty and Sons Co., The Tribunal upheld the view taken by the ITO as well as by the AAC. An application u/s 256(1) of the Act was moved before the Tribunal and that has led to this reference.

We have heard Mr. D. S. Shishodia, learned counsel for the assessee-firrn, as well as Mr. J. P. Joshi, learned counsel for the Revenue.

Clause (11) of the partnership deed dated October 22, 1968, which was executed between Fatehlal, Niranjan Kumar and. Nirmal Kumar is as follows :

"(11) That the partnership is one at will,"

In the partnership deed dated October 22, 1968, there is no clause that after the death of one of the partners of the firm, it may be continued with the mutual consent of the surviving partners by themselves or after taking a new partner or partners. As stated above, Fatehlal died on July 14, 1969, and after his death, afresh partnership deed dated July 24, 1969, was executed by the two surviving (remaining) partners and the widow of the deceased partner. The recital in the partnership deed dated July 24, 1969, is to the effect that as Fatehlal has died on July 14, 1969, the remaining partners have decided to take Smt. Asha Kumari, wife of Fatehlal; in the partnership on the terms and conditions mentioned therein. This newly constituted partnership was made operative from July 15, 1969, i.e., the day following the death of Fatehlal who died on July 14, 1969. After the death of Fatehlal, account books were not closed. Nor the balance-sheet as on the date of death of Fatehlal was drawn. The same books of account were availed of by the newly constituted firm. Profits in the various trading accounts were worked out up to Diwali and they were not bifurcated into two parts : one preceding the death of Fatehlal and the other succeeding his death. On these facts, the question before the taxing authorities was whether the firm which was constituted by means of the partnership deed dated October 22, 1968, stood dissolved and a new partnership had come into existence, or despite the fact that a new firm was constituted by the partnership deed dated July 24, 1969, which was made operative from July 15, 1969, there was merely a change in the constitution of the firm within the meaning of Section 187(2) of the Act.

Section 42 of the Partnership Act deals with dissolution on the happening of certain contingencies. The relevant part of Section 42 of the Partnership Act is as follows :

"Section 42. Dissolution on the happening oj certain contingencies.--Subject to the contract between the partners, a firm is dissolved,--...

(c) by the death of a partner ; and..."

Dissolution u/s 42 of the Partnership Act is subject to the contract between the partners. If the partnership deed provides for the continuance of the partnership after the death of a partner, then the firm will not be dissolved. From the partnership deed dated October 22, 1968, no such contract for the continuance of the partnership after the death of a partner can be inferred.

Mr. D. S. Shishodia, learned counsel for the asses see-firm, has relied on Venkateswara Stone Co. Vs. Commissioner of Income Tax, , Ganesh Dal Mills Vs. Commissioner of Income Tax, , Addl. Commissioner of Income Tax Vs. M.K.M. Moosa Bhoy Amin, Commissioner of Income Tax Vs. Hind Agencies, and Additional Commissioner of Income Tax Vs. Emery Stone Mfg. Co., The latter three decisions are the decisions of the Division Benches of this court. On the other hand, Mr. J. P. Joshi, learned counsel for the Revenue, has cited GHELLA DAYAL Vs. COMMISSIONER OF Income Tax, BOMBAY., , R.B. Jessa Ram Fateh Chand Vs. Commissioner of Income Tax, , Dharam Pal Sat Dev Vs. Commissioner of Income Tax, Kaithari Lungi Stores Vs. Commissioner of Income Tax, , Jupiter Foundry and Machines (Knives) Vs. Commissioner of Income Tax, Nandlal Sohanlal, Jullundur Vs. The Commissioner of Income Tax, Patiala, and Vimal and Amar Talkies Vs. Commissioner of Income Tax, .

In Addl. Commissioner of Income Tax Vs. M.K.M. Moosa Bhoy Amin, on behalf of the Revenue, reliance was placed on Nandlal Sohanlal, Jullundur Vs. The Commissioner of Income Tax, Patiala, wherein it was held by a majority relying on the Supreme Court''s judgments in C.A. Abraham, Uppoottil, Kottayam Vs. The Income Tax Officer, Kottayam and Another, and Commissioner of Income Tax, Madras, and Another Vs. S.V. Angidi Chettiar, as under (p. 92 of 148 ITR):

"...that where a special provision was made in a taxing statute in derogation of the provisions of the Partnership Act, effect should be given to it and where no such provision had been made, liability for payment of tax could be determined by taking into consideration the general provisions of the Partnership Act. Therefore, where the provisions of the I.T. Act are clear, resort cannot be had to the provisions of another statute like the Partnership Act. Therefore, Section 187 of the I.T. Act overrides the provisions of Section 42 of the Partnership Act and, therefore, the Tribunal was wrong in holding that there should be two assessments."

The Punjab High Court followed its earlier view in Hoshiarpur Electric Supply Co. Vs. Commissioner of Income Tax, and also relied on Karupukula Suryanarayana Shetty and Sons Vs. Commissioner of Income Tax, Mysore, and Addl. CIT v. Visakha Flour Mills [1977] 108 ITR 466 and dissented from the Allahabad High Court decisions in Commissioner of Income Tax Vs. Shiv Shanker Lal Ram Nath, and Dahi Laxmi Dal Factory Vs. Income Tax Officer and Another, . In Addl. Commissioner of Income Tax Vs. M.K.M. Moosa Bhoy Amin, on behalf of the. assessee, reliance was. placed on Commissioner of Income Tax Vs. Sant Lal Arvind Kumar, , which has taken a contrary view and in which earlier decisions reported as Dahi Laxmi Dal Factory Vs. Income Tax Officer and Another, , Commissioner of Income Tax Vs. Kunj Behari Shyam Lal, , Addl. Commissioner of Income Tax Vs. Dilsukh Rai Madho Prasad, , Kaithari Lungi Stores Vs. Commissioner of Income Tax, , MAVUKKARAI (N) ESTATE TEA FACTORY Vs. ADDITIONAL COMMISSIONER OF Income Tax, MADRAS-II., , Additional Commissioner of Income Tax Vs. Thyagasundara Mudaliar and Munuswami Mudaliar and Co., , The Additional Commissioner of Income Tax, (Andhra Pradesh, Hyderabad) Vs. Vinayaka Cinema, Nellore, and Mathurdas Govardhandas Vs. Commissioner of Income Tax, were relied on and dissent has been expressed from the earlier view of the Punjab High Court in Dharam Pal Sat Dev Vs. Commissioner of Income Tax, Jupiter Foundry and Jupiter Foundry and Machines (Knives) Vs. Commissioner of Income Tax, Visakha Flour Mills'' case [1977] 108 ITR 466 and Nandlal Sohanlal, Jullundur Vs. The Commissioner of Income Tax, Patiala,

In Commissioner of Income Tax Vs. Satya Deo Omprakash, , it was held that where a firm is dissolved either by agreement of partners or by operation of law on ,the death of a partner and another firm takes over the business, Section 187(2) will not come into operation and two separate assessments will have to be made. The same view has been taken by the Madhya Pradesh High Court in Ganesh Dal Mills Vs. Commissioner of Income Tax, in which they have dissented from the view of the Punjab High Court in Nandlal Sohanlal, Jullundur Vs. The Commissioner of Income Tax, Patiala, and relied on the, decisions of the Andhra Pradesh, Allahabad and Madras High Courts. The Orissa High Court in I. RAMAKRISHNAIAH and SONS Vs. COMMISSIONER OF Income Tax, ORISSA., has also taken the same view and has agreed with the view expressed by the Delhi and Allahabad High Courts and taken a contrary view from that of the Punjab High Court. In Addl. Commissioner of Income Tax Vs. M.K.M. Moosa Bhoy Amin, the view taken by the Punjab High Court in Nandlal Sohanlal, Jullundur Vs. The Commissioner of Income Tax, Patiala, was dissented.

The facts in this case are similar to the facts in Ganesh Dal Mills Vs. Commissioner of Income Tax, and Venkateswara Stone Co. Vs. Commissioner of Income Tax, . The decisions in Venkateswara Stone Co.''s case, Ganesh Dal Mills'' case, Moosa Bhoy Amiris case, Commissioner of Income Tax Vs. Hind Agencies, and Additional Commissioner of Income Tax Vs. Emery Stone Mfg. Co., are applicable to the case on hand and after considering them, we are of the opinion that the firm constituted by the partnership deed dated October 22, 1968, stood dissolved on the death of Fatehlal who died on July 14, 1969, and after that, a new firm by means of the partnership deed dated July 24, 1969, came into existence which was to be operative from July 15, 1969. The new firm constituted by means of the partnership deed dated July 24, 1969, is a successor firm and two assessments will have to be made u/s 188 of the Act.

On the facts and in the circumstances of the case, the Tribunal was not eight and justified in holding that the case was covered by the provisions of Section 187(1) read with Section 187(2) of the Act and, therefore, only one assessment should have been framed on the firm for the entire accounting period corresponding to the assessment year 1970-71.

The aforesaid question is answered in the negative, i.e., in favour of the assessee and against the Revenue.

In the circumstances of the case, we leave the parties to bear their own costs of this reference.

Let the answer be returned to the Tribunal in accordance with Section 260(1) of the Act.