Income-tax---

----Firm---Dissolution of Firm---No provision in deed of partnership that firm would continue in spite of the death of a partner---Death of a partner-- Surviving partners had no option to continue partnership---Firm was dissolved---Separate assessments to be made for periods up to date of the death of the partner, from date of death to the date of constitution of new firm and after constitution of new firm---Partnership Act, 1932, S.42(c).

Section 42(c) of the Partnership Act, 1932, provides that, subject to contract between the partners, a firm is dissolved by the death of a partner. When there is no agreement to treat the firm as continuing despite the death of a partner, there is no option with the partners to treat the firm as continuing and to carry on the business, ignoring the dissolution brought about by the operation of law. The stand taken by the firm in assessment proceedings is not decisive.

The assessee-firm consisted of five partners. During the course of the accounting year ending with March 31, 1974, relevant for the assessment year 1974-75, one of the partners died on August 4, 1973, and the remaining four partners continued the partnership up to August 31, 1973, when the accounts were closed for the period April 1, 1973, to August 31, 1973, and the profits were apportioned among the five partners including the deceased partner, though the share of profits of the deceased partner was credited to the account of his legal heir. On September 1, 1973, a new partnership deed was drawn up among the four partners admitting a minor to the benefits of the partnership. Subsequently, on March 29, 1974, on the attainment of majority by the minor admitted to the benefits of partnership a fresh partnership deed came to be executed. The Income-tax Officer treated the assessee as an unregistered firm and proceeded to assess the income between the periods April 1, 1973, to August 31, 1973, and September 1, 1973, to March 31, 1974, as such and made a single assessment. On appeal, the Appellate Assistant Commissioner directed the Income-tax Officer to make the assessment for the periods April 1, 1973 to August 4, 1973, August 5, 1973 to August 31, 1973; and September 1, 1973 to March 31, 1974, separately. The Appellate Assistant Commissioner confirmed the refusal of registration for the two periods April 1, 1973, to August 4, 1973, and August 5, 1973 to August 31, 1973. For the third period September 1, 1973 to March 31, 1974, the Income-tax Officer was directed to consider the question of registration according to law. This order was confirmed by the Tribunal. On a reference:

Held, that there was no provision in the partnership deed that the firm should continue un-dissolved despite the death of a partner. It was provided that, in all other matters, viz., matters not specifically referred to in the deeds of partnership, the provisions of the Indian Partnership Act, 1932, shall be applicable. Hence, on the death of one of the partners on August 4, 1973, the firm stood dissolved. The Income-tax Officer was not justified in making a single assessment. The assessments would have to be made for the three different periods as indicated in the order of the Appellate Assistant Commissioner affirmed by the Tribunal.

C.I.T. v. Sant Lal Arvind Kumar (1982) 136 ITR 379 (Delhi) and Wazir Ali Abid Ali v. C.I.T.(1988) 169 ITR 761(SC) fol.

Kaithari Lungi Stores v. C.I.T. (1976) 104 ITR 160 (Mad.) ref.

N.V. Balasubramaniam for the Commissioner.

R. Janakiraman for the Assessee.

JUDGMENT

RATNAM, J.---At the instance of the Revenue, under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), the following questions of law, common to both the cases, have been referred to this Court for its opinion:

"(1) Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 187(2) of the Income-tax Act, 1961, the Appellate Tribunal was right in holding that the Income-tax Officer was not justified in making a single assessment for the assessment year 1974-75 for the period April 1, 1973 to March 31, 1974, in the assessee's case?

(2) Whether, on the facts and in the circumstances of the case and having regard to the clauses of the partnership deed dated April 5, 1971, and the conduct of the partners, the Appellate Tribunal was right in holding that there was a dissolution of partnership on the death of one of the partners, Shri Loganathan, on August 4, 1973?

(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal's view that a separate assessment should be made for the period September 1, 1973 to March 31, 1974, after considering the question of grant of registration is sustainable in law?"

In T.C. No.116 of 1980, the assessee is a firm, viz., Nalli Silk Emporium. The firm consisted of five partners. During the course of the accounting year ending with March 31, 1974, relevant for the assessment year 1974-75, one of the partners died and the remaining four partners continued the partnership up to August 31, 1973, when the accounts were closed for the period April 1, 1973 to August 31, 1973, and the profits were apportioned to the five partners including the deceased partner, though the share of Profits of the deceased partner was credited to the account of his legal heir. For this period, a return disclosing an income of Rs.98,800 was filed. On September 1, 1973, a new partnership deed was drawn up among the four partners, admitting a minor, viz., the widow and legal heir of the deceased partner, to the benefits of the partnership with effect from September 1, 1973. For the period September 1, 1973 to March 31, 1974, another return declaring an income of Rs.1,29,960 was filed. Subsequently, on March 29, 1974, on the attainment of majority by the minor admitted to the benefits of the partnership, a fresh partnership deed also came to be executed. In the course of the assessment proceedings, it was claimed by the assessee that the first partnership stood dissolved and a new partnership came into being and that necessitated the passing of two separate assessments. Later, in the course of the assessment proceedings, by a letter dated March 5, 1976, the assessee maintained that there was only a change in the constitution and not a dissolution as claimed by it earlier on the ground that, by a codicil, the surviving partners were enabled to continue the business as before for the period August 5, 1973 to August 31, 1.973, and that an opportunity should also be given to the firm to file an application for the period from August 5, 1973 to August 31, 1973. The Income-tax Officer rejected the stand of the assessee and found that, as per the materials available on record, no accounts were taken and no rights and liabilities of the partners were determined and no dissolution took place, but the business had been carried on up to August 31, 197,3, and that established that there was no dissolution on the death of one of the partners. The conduct of the surviving partners in continuing the partnership business subsequently, according to the Income-tax Officer, also made out that there was no dissolution of the partnership. The codicil had been signed only by three of the signatories to the original instrument of partnership and that was found by the Income-tax Officer to be of no avail to the assessee. Referring to the declaration filed under section 184(7) of the Act that there was no change in the constitution during the period April 1, 1973 to August 31, 1973, signed by the four surviving partners and the heir of the deceased partner, the Income- tax Officer was of the view that the declaration was a false one and had no force. In respect of the period August 5, 1973 to August 31, 1973, the assessee did not file any partnership deed; nor did it file any application for registration. The Income-tax Officer also found that the subsequent deed of partnership entered into on September 1, 1973, did not mention anything about the dissolution of the firm or the codicil or the admission of the legal heir of the deceased partner with effect from August 5, 1973, and that the partnership deed was a fresh one unconnected with the earlier ones. Ultimately, the Income-tax Officer, in view of the absence of .the deeds of the partnership operative for the entire period and the false declaration, treated the assessee as an unregistered firm and proceeded to assess the income between the periods April 1, 1973 to August 31, 1973, and September 1, 1973 to March 31, 1974, as such. On appeal by the assessee to the Appellate Assistant Commissioner, placing reliance upon Kaithari Lungi Stores v. CIT (1976) 104 ITR 160 (Mad.), it was held that the original firm stood dissolved on August 4, 1973, when one of the partners died, and a fresh firm came into existence on August 5, 1973, which carried on business till August 31, 1973, when the accounts were closed and that, on September 1, 1973, another partnership came into being with the remaining four partners along with the minor admitted to the benefits of the partnership. According to the Appellate Assistant Commissioner, the entire period between April 1, 1973. and March 31, 1974, fell into three different periods, viz., April 1, 1973 to August 4, 1973, August 5, 1973 to August 31, 1973, and September 1, 1973 to March 31, 1974. Regarding the first period referring to the application under section 184(7) of the Act, wherein it was stated that there was no change in the constitution, the Appellate Assistant Commissioner agreed with the Income-tax Officer that the declaration was a false one and cannot be acted upon. It. was also further pointed out that the assessee chose to close the accounts only on August 31, 1973, and that there was no division of the profits as envisaged in the deed of partnership and that, therefore, the firm was not entitled to registration for the period April 1, 1973 to August 4,1973. Adverting to the second period August 5,1973 to August 31, 1973, the Appellate Assistant Commissioner noticed that the assessee had not filed any partnership deed nor any application for registration and, therefore, the question of granting registration for that period did not arise. and agreed with the Income-tax Officer that no case for grant of registration was made out, but, however, directed the Income-tax Officer to verify whether the provisions of section 183(b) of the Act would apply and determine the question of grant of registration for the period. In so far as the third period September 1, 1973 to March 31, 1974 was concerned, the Appellate Assistant Commissioner took the view that a new firm had come into being and the question of its registration has to be considered afresh and the Income-tax Officer was directed to consider the question afresh for the period September 1, 1973 to March 31, 1974, in accordance with the relevant provisions of the Act. Finally, a direction was given to the Income-tax Officer to tax the income in respect of the assessment under consideration for the period April 1, 1973 to September 4, 1973, and the refusal of registration for that period was affirmed and the assessment for the period August 5, 1973 to August 31, 1973, and August 1, 1973 to March 31, 1974, was directed to be done separately. In view of the conclusions so arrived at, the Appellate Assistant Commissioner allowed the appeal in part. On further appeal by the Revenue before the Tribunal, contending that there was no dissolution of the firm and the business was continued and the assessee had admitted that there was only a change in the constitution of the firm and not a dissolution, the Tribunal, on a consideration of the terms of the partnership deed and the provisions of the Act, found that the firm stood dissolved on the death of one of the partners and the question of change in the constitution could at all arise only if the firm continued to exist and that the firm which came into existence after the death of one of the partners was a new firm and, upholding the direction given by the Appellate Assistant Commissioner, dismissed the appeal. That is how the three questions of law earlier set out have arisen.

In T.C. No. 117 of 1980 also, one of the partners of the assessee firm (who appears to have been a common partner for both the firms) died and the very same events that had taken place in relation to the firm Nalli Silk Emporium upon the death of one of the partners took place with reference to the assessee-firm in this case also and the Income-tax Officer treated the firm as an unregistered 'firm and completed the assessment. On appeal, the Appellate Assistant Commissioner gave similar direction as in the case of the assessee in T.C. No. 116 of 1980 with reference to the three different periods mentioned earlier. On further appeal by the Revenue, the Tribunal made a reference to its order in the case of the assessee in T.C.No.116 of 1980 and upholding the order of the Appellate Assistant Commissioner, dismissed the appeal. That is how, even with reference to the assessee in T.C. No. 117 of 1980, the three questions earlier referred to have arisen.

We may first take up for consideration the second question, as it is not in dispute that the answers to the other questions would depend upon the answer to that question. Learned counsel for the Revenue strenuously contended that, on the facts and circumstances of these cases, there was no dissolution of the firms as such, but at best there was only a change in the constitution of the firms, even as claimed by the assessees at the later stage of the assessment proceedings, though a different stand was taken earlier by stating that there was a dissolution consequent upon the death of one of the partners. Support for this was also sought to be drawn by learned counsel from clause 14 of the deed of partnership as well as the conduct of the parties in carrying on the business between August 5, 1973, and August 31, 1973. On the other hand, learned counsel for the assessee submitted, referring to the provisions of the deeds of partnership and section 42(c) of the Indian Partnership Act, that, on the terms found in the partnership deeds and the application of the provisions of the Indian Partnership Act, the conclusion was irresistible that the firm stood dissolved on the death of one of the partners and that the stand taken later by the assessees in-their letter that there was a change in the constitution of the firm would not matter at all. Even the conduct attributed to the surviving partners, viz., the carrying on of the business after the death of a partner, would not, according to counsel, enable the Revenue to contend that there was no dissolution of the firm. Reliance was also placed by learned counsel upon the decisions reported in Kaithari Lungi Stores v. CIT (1976) 104 ITR 160 (Mad.), CIT v. Sant Lal Arvind Kumar (1982) 136 ITR 379 (Delhi) approved in. Wazid Ali Abid Ali v. CIT (1988) 169 ITR 761 (SC) and S.K. Sundararamier & Sons v. Second ITO (T. C. No. 1.77 of 1977, dated March 5, 1985).

We have carefully perused the terms contained in the deeds of partnership relating to the assessees in these cases. We may observe that there is no provision in the partnership deeds to the effect that the firm shall continue un-dissolved despite the death of a partner. It is also provided that, in all other matters, viz. matters not specifically referred to in the deeds of partnership, the provisions of the Indian Partnership Act shall be applicable. In other words, there is, under the terms of the partnership, no contract to the contrary, as envisaged in section 42(c) of the Indian Partnership Act, Section 42(c) of the Indian Partnership Act provides that, subject to contract between the partners, a firm is dissolved by the death of a partner. We have already pointed out that there is no contract contra and, by the force of the operation of section 42(c) of the Indian Partnership Act, on the death of one of the partners on August 4, 1973, the firms stood dissolved. The stand taken by the assessee earlier or later in the course of the assessment proceedings cannot be decisive when dissolution is brought about by the operation of law. It may be that the assessee had taken different and even contradictory stands that there was a dissolution or even a change in the constitution of the firm. The assessee might have adopted such a stand for a variety of reasons, but that would not finally decide the question whether there was a dissolution or a change in the constitution which would depend, not upon the opinion entertained by the assessee, but on a consideration of the provisions in the deed of partnership as well as the impact of the relevant legislation on partnership such as section 42(c) of the Indian Partnership Act. We are, therefore, unable to countenance the argument of learned counsel for the Revenue that the assessee should be held bound by its later stand that there was a change in the constitution of the firm. Likewise clause 14 of the deed of partnership also does not in any manner assist the Revenue to establish that there was no dissolution, but only 'a change in the constitution, for, thereunder, a provision was made for the payment of amounts to the retiring partner or those left behind by a deceased partner and also the manner of ascertaining the quantum thereof and the mode of payment. The provision thus made was to safeguard the interest of a retiring partner or heirs of a deceased partner and it is difficult to spell out therefrom that the parties to the deed of partnership contemplated continuing the business despite the death of a partner. The so-called conduct, as establishing a change in the constitution and not a dissolution, consisted of the carrying on of the business by the surviving partners after the death of one of them: The assessee relied upon 'the codicils for the purpose of making out that the' surviving partners had decided to carry on the business as before despite the death of one of the partners. However, it has now been found that all the surviving partners had not authorised the conduct of the business under the codicils and it cannot, therefore, be taken that it was the consensus of the partners that the business should be carried on even after the death of one of the partners. Further, what is important is, when there is-no agreement to treat the firm as continuing despite the death of a partner, there is no option in the partners to treat the firm as continuing and carry on the business, ignoring the dissolution brought about by the operation of law. Merely, therefore, from the circumstances that the surviving partners purported to carry on the business between August 5, 1973, and August 31, 1973, it cannot be concluded that there was no dissolution on August 4, 1973, but there was only a change in the constitution. We may in this connection also point out that the dissolution brought about by operation of law, as in these cases, sets at large the contractual obligations entered into by individual partners at the time of the formation of the partnership and renders them free. Our attention has riot been drawn, to any provision of the Act which compels us to depart from the well-understood concepts in the partnership law for purposes of the Act. Even under section 2(23) of the Act provision is made to the effect that the expressions "firm", "partner" and "partnership" have the same meanings as they have under the Indian Partnership Act which, in our view, means and includes that, even for resolving questions arising under the Act, the ordinary concepts of partnership law have application, unless there is a compelling provision contra. We, therefore, hold on a consideration of the terms of the deed of partnership and the provisions of the Indian Partnership Act that, on the death of one of the partners of the assessee-firms on August 4, 1973, the firms stood dissolved and the Tribunal was right in taking that view.

We may now make a brief reference to the decisions relied on by learned counsel for the assessee. In Kaithari Lungi Stores v. CIT [1976] 104 ITR 160 (Mad.), the argument of the Revenue that, for the purposes of section 187 of the Act, even in cases where there is no contract to the contrary against the dissolution of the firm by the death of a partner, it will amount to a change in the constitution of the firm within the meaning of section 187(2) of the Act, was rejected. We have earlier found, on the terms of the deeds of partnership and the application of the provisions of the Indian Partnership Act and also on a consideration of the so-called conduct of the surviving partners, that it is difficult to spell out a contract to the contrary and that too against the dissolution of the firm on the death of one of the partners and, under those circumstances, on the ratio of the decision in Kaithari Lungi Stores v. CIT (1976) 104 ITR 160 (Mad.), the claim of the Revenue that there is a change in the constitution of the firm, is rendered unacceptable. In CIT v. Sant Lal Arvind Kumar (1987) 136 ITR 379 (Delhi), in the partnership deed, there was no provision that the death of a partner would not dissolve the firm and one of the partners died. Whether the firm stood dissolved or there was a change in the constitution of the firm was the controversy. The Income-tax Officer took the view that there was a change in the constitution of the firm within the meaning of section 187 of the Act. But the Tribunal accepted the plea of the assessee that the firm stood dissolved. In considering the question whether the Tribunal was right in the view it took, the Court pointed out that if there is no agreement to treat the firm as continuing notwithstanding the death of a partner, the partners really do not have the option to treat the firm as continuing, but the firm gets dissolved and the Income-tax Officer is not entitled to ignore this consequence. Referring to the applicability of the normal legal concepts relating to partnership law to proceedings under the Act, the Court ruled that such concepts would be applicable, unless any particular provision compelled the taking of a contrary view and, therefore, where the deed of partnership did not contain a provision that the firm, on the death of one of the partners, would not stand dissolved and one of the partners died and thereafter a fresh deed was executed under which the surviving partners took a fresh partner in the place of the deceased and continued to carry on the business, the case was one of succession and not change in the constitution and that separate assessments had to be made in regard to the incomes for the period from the first day of the accounting period up to the date of the death and for the rest of the accounting period up to the last day of the accounting period. We are, therefore, of the view that the principle of this decision would be squarely applicable to these cases justifying the direction of the Appellate Assistant Commissioner concurred in by the Tribunal that the question of assessment has to be considered in relation to the three periods aforesaid. We may, in this connection, also refer to Wazid Ali Abid Ali v. CIT (1988) 169 ITR 761 (SC), which approved the decision in CIT v. Sant Lal Arvind Kumar (1982) 136 ITR 379 (Delhi), at page 778, in the following terms:

"------Where there is, however, no agreement to treat the firm as continuing notwithstanding the death of a partner, the partners have no option to treat the firm as continuing. Under the Indian Partnership Act, 1932, the firm gets dissolved and the Income-tax Officer is not entitled to ignore this consequence. There is nothing in the language of section 187, 188 or 189, according to the High Court, which precludes the application of the partnership law principles even under the Income-tax Act. It was accordingly held by the High Court that where the partnership deed of a firm did not contain any provision that the death of a partner would not dissolve the firm, and one of the partners of the firm died in the middle of the accounting period and thereafter a fresh deed was executed under which the surviving partners took a fresh partner in the place of the deceased and continued to carry on the business, the case was one of succession and not one of change in the constitution and separate assessments had to be made in regard to the incomes. With respect, we agree that where in a case, there is a change in the constitution of the firm by taking of a new partner and the old firm is succeeded by a new firm then, in such a case, there might be succession and there could be two assessments as contemplated under section 188 of the Act. We accept the reasoning of that decision."

In view of the above observations of the Supreme Court, no exception can be taken by the Revenue to the directions given by the Appellate Assistant Commissioner and affirmed by the Tribunal in these cases. The principle that where the deed of partnership does not provide that the death of a partner would not dissolve the firm, the firm would stand dissolved on the death of a partner has also been reiterated in S.K. Sundararamier and Sons v. Second ITO (T.C.No.177 of 1977, dated March 5, 1985): It has also been further laid down therein that the dissolution of a partnership and a continuance of a partnership are contradictory and a partnership which stands dissolved either as a result of operation of law or by act of .parties cannot be said to be continuing partnership in spite of its dissolution and, where there is a dissolution of a partnership firm on account of the death of a partner and the remaining partners reconstitute themselves into a new firm with or without a new partner, it is not a case of a mere change in the constitution of a firm. On the death of one of the partners of the firms in these case, the firms stood dissolved and, thereafter, there was no question of the firms having continued, in which there was a change in the constitution by the happening of one or more of the events leading to a change in the constitution. We, therefore, answer the second question referred to us in the affirmative and against the Revenue.

We now proceed to consider questions Nos.l and 3. While considering the second question, we have pointed out how the firms stood dissolved on August 4, 1973, on the death of one of the partners and, thereafter, the business was continued by the surviving partners till August 31, 1973, and thereafter, another firm had come into being from September 1, 1973. In view of what we had earlier stated regarding the dissolution of the firms on August 4, 1973, and the coming into being of another firm from September 1, 1973, it follows that the Income-tax Officer was not justified in making a single assessment, but the assessments will have to be made for the three different periods as indicated in the order of the Appellate Assistant Commissioner and affirmed by the Tribunal. For the same reasons, the view of the Tribunal with reference to the third question referred to us has also to be upheld. We, therefore, answer questions Nos. 1 and 3 in the affirmative and against the Revenue. The assessee will be entitled to the costs of these references. Counsel's fee Rs.500, one set.

M.BA./1256/FOrder accordingly.